PPP Flexibility Act – Good news! Or maybe Good news?? Congress passed the Paycheck Protection Program Flexibility Act of 2020 and the President signed it into law. This is a short bill (3 pages) but has the much-anticipated extension of the Covered Period. Here are the highlights of the bill:
Highlights of the PPP Flexibility Act:
- Employers who have received PPP funds now have the option of using a 24-week covered period instead of the original eight-week covered period. This is an either/or selection. Employers cannot choose a period between eight weeks and 24 weeks.
- Headcount restoration date is extended from June 30, 2020 to December 31, 2020
- The 75% rule has been changed to the 60% rule. No less than 60% of the PPP funds must be used for payroll. If less than 60% of the PPP funds are used for payroll, none of the PPP loan may be forgiven.
The headcount restoration date is interesting. The CARES Act states that headcount must be restored by “not later than June 30, 2020.” The Flexibility Act amends that section by striking June 30, 2020 and inserting December 31, 2020. What makes this interesting is that a lot of practitioners (including me) originally interpreted this section to say that the headcount reduction would not apply if headcount was restored on June 30, 2020.
What the law was really saying is that the headcount reduction doesn’t apply as long as the headcount is restored by (read “on or before”) June 30, 2020 (new date now is December 31, 2020). This means (we think) that as long as you have at least one pay period in which you reach your required headcount, and that pay period occurs prior to December 31, 2020, your loan forgiveness calculation will not be reduced due to headcount. This is good news and makes the 24-week extension even more valuable.
From a tax planning perspective, this new 24-week covered period introduces an interesting angle. It’s possible that your PPP loan won’t be forgiven in 2020, but instead will be forgiven in 2021. We aren’t sure yet what that means for tax reporting. Prior to this extension, a taxpayer receiving PPP funds would apply for forgiveness in 2020, have the debt forgiven, exclude the forgiven debt from income and also exclude the qualifying expenses from deductible expenses. For some taxpayers, this will increase their taxable income for 2020. If the loan isn’t forgiven until 2021, though, what does that mean for the qualifying expenses? We aren’t sure yet how the reporting associated with the forgiveness is going to work.
What to do with this information?
- If you can achieve full forgiveness in the 8-week Covered Period, it likely means you’ll want to file the application for forgiveness soon after the 8-week Covered Period ends;
- If you can’t achieve full forgiveness in the 8-week Covered Period, you’ll want to wait until the end of the 24-week Covered Period and see if more of your loan can be forgiven in this longer period;
- Depending on how the taxation works, it might be advantageous to use the 24-week period even if you qualify under the 8-week period so you can defer both the income and qualified expenses into 2021. We aren’t 100% sure this works, since no rules have been issued, but it’s worth watching and we don’t see any advantages to filing the forgiveness application early. Best to take a “wait and see” approach.
No new FAQs have been answered yet on the SBAs website and the loan forgiveness application has not been updated yet either. As new information becomes available, Tembo will keep you in the loop – stay tuned!
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