New SBA Information: Simplifying the Paycheck Protection Program Loan Forgiveness Process

For most churches, the new law H.R. 7010, The Paycheck Protection Program Flexibility Act of 2020 will simplify the PPP loan forgiveness process and greatly increase the amount of the forgiveness received. CapinCrouse, a national full-service CPA and consulting firm devoted to serving churches and other nonprofit organizations whose outcomes are measured in lives changed, has published an article Unpacking the Paycheck Protection Program Flexibility Act to provide an in-depth look into these very significant and generally beneficial changes. Below is the article.

The new law makes the following key changes to the PPP loan program:

  • Extends the minimum maturity of loans entered into after enactment from the two years set forth by the Small Business Administration (SBA) to five years.
  • Extends the PPP loan program from June 30, 2020 to December 31, 2020.
  • Expands the eight-week Covered Period for capturing forgivable PPP loan expenses to 24 weeks.
  • Extends the time to rehire workers from June 30, 2020 to December 31, 2020.
  • Creates a new exemption to the application of the proportional reduction in loan forgiveness arising from a reduction in full-time equivalent employees.
  • Replaces the SBA’s 75% payroll cost requirement with a new statutory 60% payroll cost requirement.
  • Extends the period of loan deferral to coincide with the date of loan forgiveness.
  • Permits recipients of a PPP loan to defer the payment of payroll taxes as otherwise allowed by CARES Act section 2302(a).

Now let’s review each of these changes in further detail.

Extension of the Minimum Loan Maturity

In its First Interim Final Rule, the SBA exercised its authority to set the minimum maturity for PPP loans at two years. As noted above, the Act extends the minimum loan maturity on any loan entered into after enactment to five years.

While the Act only directly affects new loans, Congress made it clear that nothing in the Act, the CARES Act, or the Paycheck Protection Program and Health Care Enhancement Act (the act that provided the second tranche of funding for PPP loans) is to “be construed to prohibit lenders and borrowers from mutually agreeing to modify the maturity terms of a [previously issued PPP loan] to conform with requirements of this section.” Thus the minimum maturity of existing loans may be modified by mutual agreement of the lender and the borrower to have a five-year minimum maturity and still meet the definition of a PPP loan.

Extension of the PPP Loan Program

The PPP loan program as it was originally envisioned in the CARES Act only contemplated making loans through June 30, 2020. The program was to no longer authorize new loans after that date. The Act extends the PPP loan program through December 31, 2020.

Despite this change, on June 8, 2020, the SBA and the U.S. Department of Treasury issued a statement about the Act that included confirmation that June 30, 2020 “remains the last date on which a PPP loan application can be approved.”

Expansion of the Loan Forgiveness Covered Period

The CARES Act created an eight-week Covered Period during which forgivable expenses are captured. The Act redefines the Covered Period to be the period that begins on the date the PPP loan originates (which the SBA has interpreted to be the date the loan funds are distributed) and ends on the earlier of:

  1. the date that is 24 weeks later; or
  2. December 31, 2020.

Note that this change notwithstanding, if your organization received a PPP loan prior to the enactment of the Act you may choose to use the original eight-week Covered Period.

Extension of Time to Rehire Workers

The CARES Act provided an exemption to the application of the full-time equivalent (FTE) employee reduction quotient for employers who rehired employees by June 30, 2020. The Act now extends the time to rehire employees until December 31, 2020. While this gives employers more time to restore their workforce, it also creates a potential delay in applying for loan forgiveness for employers seeking to use this exemption, as they will not be able to apply for loan forgiveness until after December 31, 2020.

New Exemption from Proportional Reduction in Loan Forgiveness Amount

The CARES Act includes a provision that reduces loan forgiveness by a fraction that compares an employer’s FTE headcount during the Covered Period to its FTE headcount during one of two reference periods:

  1. February 15, 2019 through June 30, 2019; or
  2. January 1, 2020 through February 29, 2020.

Seasonal employers are permitted to select either of the above reference periods or any 12-week consecutive period between May 1, 2019 and September 15, 2019. The CARES Act provided an exemption from this reduction if an employer restored its FTE headcount by June 30 (now December 31; see section above) to the same level or higher.

The Act now creates a second form exemption. The language of this new exemption reads:

(7) EXEMPTION BASED ON EMPLOYEE AVAILABILITY.—During the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness under this section shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith—

(A) is able to document—

(i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and

(ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or

(B) is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

This new exemption sets aside the FTE reduction quotient where an employer can document the inability to rehire workers employed by the employer on February 15, 2020 or the inability to hire similarly qualified replacement workers on or before December 31, 2020. The term “inability” is not yet defined. For example, does this mean the employer is unable because the employer lacks the financial means to pay the workers? Does it mean the workers are unavailable? Or does it mean some combination of these or other factors?

In addition, the Act provides this exemption applies if, during the period of March 1, 2020 through December 31, 2020, an employer is able to document an inability to return to the same business level at which it was operating on February 15, 2020 because of compliance with certain government requirements or guidance related to sanitation, social distancing, or any other worker or customer-safety requirement related to COVID-19. The Act does not define the manner in which an employer’s “business level” is to be measured for comparison. The Act also does not address the availability of this exemption to businesses that have not been directly affected by the government-mandated safety standards, but nonetheless have experienced a decline in the level of their business because their customers are impacted by the government-mandated safety levels.

It is possible that this exemption will aid schools, camps, conference and retreat centers, and other similar employers whose activity levels have been impacted by stay-at-home orders and other similar pronouncements.

Reduction of the Payroll Costs Expenditure Threshold to 60%

In its First Interim Final Rule, the SBA announced a requirement that at least 75% of forgivable loan costs be payroll costs. The Act changes this threshold to 60%.

The statute states that “to receive loan forgiveness… , an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs.” The June 8 statement from the SBA and Treasury included clarification that partial PPP loan forgiveness remains if the 60% threshold is not met, noting:

If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.

Extension of the Loan Deferral Period to Coincide with the Date of Loan Forgiveness

The Act replaces the reference in the CARES Act to a loan deferral period of not less than six months or longer than one year. The new loan deferral period begins with the disbursement of the loan funds and ends with “the date on which the amount of forgiveness… is remitted to the lender.”

In addition, because the loan forgiveness application process may now extend much further into the future, the Act provides that if a borrower fails to apply for loan forgiveness “within 10 months after the last day of the covered period defined in section 1106(a) of the CARES Act,” the borrower must begin making payments of principal, interest, and fees. The reference to “section 1106(a) of the CARES Act” appears to start the 10-month clock at the end of the original eight-week Covered Period instead of the new 24-week Covered Period. We must wait for the SBA to confirm this point.

Deferral of Payroll Taxes

CARES Act section 2302(a) permits employers to defer the payment of 2020 employer payroll taxes. Fifty percent of the deferred taxes are then due in 2021, with the balance due in 2022. The CARES Act specifically denied this deferral opportunity to employers who received forgiveness of a PPP loan. The Act removes this barrier and now permits all employers to qualify for the deferral of employer payroll taxes. The IRS has posted a set of frequently asked questions regarding employer payroll tax deferral on its website. Note that these frequently asked questions do not yet reflect the enactment of the Act.

In the June 8 statement, the SBA and Treasury noted that they will “promptly issue rules and guidance, a modified borrower application form, and a modified loan forgiveness application implementing these legislative amendments to the PPP.”

Taking Next Steps

My hope is that these changes will greatly reduce the energy you have to spend on maximizing PPP loan forgiveness and allow you to begin to address practical steps your church can take today to improve financial support for your mission and ministries. I suggest reviewing this free resource The Church Ministry Funding Guide-How to Thrive During the Covid-19 in 2020 and Beyond. If after reviewing this material, you decide you would like to explore Horizons guiding you in all or part of this process with coaching or as a Virtual Stewardship Pastor, click here to schedule a free conversation.

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