CQ-Roll Call, Inc via Getty Images
Yesterday, Senators Marco Rubio and Susan Collins released a 92 page proposed Bill for an Act that will be called the Continuing Small Business Recovery and Paycheck Protection Program Act.
The Act is intended to correct some problems and a number of challenges that PPP borrowers have had, while opening new opportunities for many borrowers who were not treated as well as others under this Program. There is something in this new Act for almost everyone, and below we summarize the primary provisions.
This is not law yet, but based on past experience there is a very high probability that this will be passed with bi-partisan support.
A Second Bite at the Apple
AAPL
The biggest question that many borrowers now have is whether they can borrow more, and this Bill will take a balanced approach by allowing new PPP loans for past borrowers who meet the following requirements:
- The borrower must demonstrate that there has been at least a 50% reduction in gross receipts from January 1 to March 31 or from April 1 through June 30 of 2020, as compared to gross receipts for the same time period in 2019. There are alternative tests for borrowers who were not in business during the first and second quarter of 2019 which are discussed below.
- The borrower must employ no more than 300 employees, or meet an alternative size standard under SBA published guidelines.
- The new loan cannot exceed $2,000,000 in most cases, and cannot exceed $10,000,000 in the aggregate with other SBA loans approved in the last 90 days (including PPP loans).
Eligible entities must be businesses, certain non-profit entities, veterans organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors or small agricultural cooperatives. Publicly traded businesses and entities affiliated with the People’s Republic of China are on the list of entities that cannot qualify.
For purposes of the above 50% reduction in gross receipts test, borrowers who were not in business during the first or second quarter of 2019 (January 1, 2019 – June 30, 2019) but were in business during the third and fourth quarter of 2019 (July 1, 2019 – December 31, 2019) can compare their gross receipts in the first or second quarter of 2020 to their gross receipts in the third or forth quarter of 2019.
If the borrower was only in business during the fourth quarter of 2019 (October 1, 2019 – December 31, 2020) then such borrower can compare their gross receipts in the first or second quarter of 2020 to their gross receipts during the fourth quarter of 2019.
Finally, if the borrower was not in business during 2019, but was in operation on February 15th, 2020, the borrower can compare their gross receipts in the second quarter of 2020 to their gross receipts in the first quarter of 2020.
The loan amount for the second bite will be identical or almost identical to what the borrower received as an original PPP loan, based upon the most recent regulations and pronouncements; however the loan is capped at $2,000,000 rather than $10,000,000 under the initial round of PPP loans, and the combined loan amount cannot exceed $10,000,000 if another PPP loan was taken within the last 90 days. If this limitation is included in the final bill, borrowers that received large PPP loans in the first round may consider waiting until the 90 day period has passed so that the $10,000,000 aggregate limitation will not apply.
In addition, borrowers who received PPP loans that could have received larger loans due to SBA Interim Final Rules issued after receipt of the loan can submit a request to increase the loan to the maximum amount that could have been borrowed under the most favorable rules. This will apply regardless of whether the sponsoring bank has filed a Form 1502, and will enable many seasonal businesses and entities taxed as partnerships to borrow more at this time.
Qualified borrowers that are in bankruptcy will be able to apply under special rules that are to be issued by the SBA in order to give the government a “superpriority claim” in the bankruptcy process.
A Good Day For Banks
The Act provides that there will be no “enforcement action” against a lender who acted in good faith in relying upon a certification or documentation submitted by a borrower, and the banks will receive 3% of new loans for up to $350,000, and 1% of the excess thereof.
Borrowers With Loans Under $150,000 Will Not Be Required To Submit The Previously Issued Application, And May Simply “Attest” To A Good Faith Effort To Comply With PPP Loan Requirements, But Such Attestation May Be Audited And Reviewed By the SBA to “Ensure Against Fraud”
For loans between $150,000 and $2,000,000 borrowers will not be required to submit formerly required “lender documentation,” but must certify the existence of the documentation and retain records and worksheets for 3 years after the Application for Forgiveness is filed.
More Flexible Covered Period. The 8 to 24 week covered period during which a borrower has to spend sufficient amounts to receive forgiveness will now apply for a period of time selected by the borrower, which will start on the day after the borrower receives the funds, and will end on any day selected by the borrower, but no later than December 31, 2020.
This will enable borrowers to cut off the testing period before making a reduction in workforce that would cause the applicable reduction in workforce penalties apply, as long as the workforce is at its pre-February 15 level on the last day of the Covered Period.
Expanded List of Permitted/Forgivable Expenses.
The 60% Test has been retained, whereby if 60% of the loan amount is not spent on payroll, group health insurance and pension contributions (collectively known as “payroll costs”), then the other “nonpayroll “ costs counted towards forgiveness will be limited so that a 60/40 proportion applies.
For example if the loan was for $100,000, and only $30,000 is spent on payroll costs, then no more than $20,000 of other expenses will count towards forgiveness. ($30,000 / .6 = $50,000 and $50,000 – $30,000 = $20,000).
The new law will allow all past and future borrowers to use nonpayroll “forgivable expenses” besides just the interest, lease payments and utilities allowed under the original CARES ACT, and include the following regardless of whether they arise or have been increased as a result of the COVID-19 virus and the economic crisis resulting therefrom:
- Covered operations expenditures. Payment for any software, cloud computing, and other human resources and accounting needs.
- Property damage costs. Costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance.
- Covered supplier costs. Expenditures to a supplier pursuant to a contract for goods that was in effect prior to February 15, 2020 that are essential to the recipient’s current operations.
- Covered worker protection expenditure. Personal protective equipment and adaptive investments to help a loan recipient comply with federal health and safety guidelines related to COVID-19 during the period between March 1, 2020, and December 31, 2020.
It is noteworthy that the costs of hiring lawyers and accountants to understand these rules and to assure that applications and compliance is proper is still not a permitted expense.
Deductibility of PPP Forgivable Expenses Not Addressed
The IRS in Notice 2020-32 provided that PPP expenses that result in forgiveness will not be deductible for tax purposes. There has been discussion of Congress overriding IRS Notice 2020-32, but the proposed Bill does not address this issue. It therefore appears that IRS Notice 2020-32 will remain in effect and many borrowers may be surprised with a larger than expected tax bill due to the non-deductibility of PPP expenses.
Conclusion
There are more details to be reviewed and understood, as tens of thousands of PPP borrowers stand by waiting to determine the fate of their businesses, and their ability to be responsible employers and solvent entities.
Brandon Ketron, CPA, JD, LL.M, Kevin Cameron, CPA and I will provide a free webinar on the new rules this coming Saturday at 10:00 AM EDT. You can email info@gassmanpa.com with the subject line “Saturday” to receive a link to join this free 30-minute webinar.