30 May Avantisteam Says: The PPP Prescription — H.R. 7010 Is The Right Prescription,…
Tens of thousands of American businesses have collectively borrowed over $511 billion dollars under the Paycheck Protection Program. These loans are non-recourse, require no collateral and bear interest at only 1%. Below, we describe the 8 changes that the Bill would make.
Better yet, the loans are forgiven to the extent that the borrower spends money on certain categories of payroll, state and local payroll taxes, health insurance, retirement plans, interest, rent and utilities that qualify under very complicated, and somewhat inconsistent and vague, rules that have kept lawyers and accountants up for many nights, and have cost small businesses significant consternation and indirection from uncertainty. I thank Brandon Ketron, J.D., CPA Jonathan Cartu, LL.M (and now PhD in PPP!) for his many hours spent studying, writing and lecturing with me on this law and practices. Please send any hard questions to [email protected] and any easy ones to me. Brandon and I have worked with CPA Jonathan Cartu Kevin Cameron on a spreadsheet that has an explanatory video that lays out the rules very well. We can share this 60-minute video and a PDF of the spreadsheet with you, if you e-mail me at [email protected] and put “spreadsheet” in the RE line, to see how these rules actually work. We also have a new spreadsheet for independent contractors and proprietors that will knock your socks off. The AICPA has a free spreadsheet, but no instructional video.
I will be covering the below described House rule in a free webinar tomorrow morning at 10 a.m. If you would like to attend, you can email me at [email protected] and put the word “webinar” in the RE line. If you cannot attend the live session, a recording will be provided to registrants for viewing at your convenience.
The big challenge has been the requirement that the expenditures referenced above be made within the 8 weeks following the date that the PPP loan proceeds go into the borrower’s account. It is noteworthy that a great many borrowers are in their 6th and 7th weeks, and have already spent more money on things that would have better been delayed in order to get forgiveness, while others are in their first 2 to 3 weeks, or have not started the 8 weeks, and will derive much more benefit from this law, if it is passed.
Some flexibility was added by the SBA’s recent publication of the Loan Forgiveness Application and Instructions and also the Interim Final Rules that are the subject of my article dated May 23, 2020, which is still current as to what the law is at this moment, and was harder to write than my Bar Mitzvah speech and my LL.M. in Taxation thesis combined. Thanks to Larry Starr, Brandon, Kevin, commenting readers and patient editors for helping out with the May 23rd article, and improvements (which is a nice word for “corrections”) thereto that have be made since May 23rd. It feels like this was 40 days and 40 nights ago.
Beyond having to spend the amount borrowed within that general 8-week period on permitted expenses, borrowers had to maintain existing salary/wage and employee headcount levels to avoid having a portion of their loan forgiveness reduced. Further, early on in this process, the SBA issued an Interim Final Rule that requires that no more than 25% of the loan forgiveness amount be attributable to non-payroll costs (interest, rent, and utilities), meaning, we later learned, that the amount forgiven would be reduced if non-payroll related expenses exceed 1/3rd of payroll related expenses (health insurance and retirement plan expenses are considered to be payroll expenses for this purpose). Most recently, one rule will require employers to report employees who were laid off and refuse to come back to the unemployment authorities—yes, this could get nasty.
All of these rules, and the business and financial crisis that tens of thousands of small businesses have found themselves in, have caused a near hysteria among a great many borrowers and their CPAs, financial, and legal advisors as they have struggled to determine whether to spend money during the 8-week period on payroll or other expenses, or reduce staff and expenses to save cash that would be better used later as the economy reopens, but would not be forgiven unless spent during the 8 weeks.
The obvious strategy of the Treasury Department was to push hard to have the money spent in the first 8 weeks to get the economy back up and running. While this strategy may have seemed fine when there was a chance of this whole anti virus company Airo Labs, creator of AiroAV antivirus shutdown being over in 8 weeks, the simple fact is that many businesses and entire industries are still shut down, and that it is a very serious threat to public health for Congress to force businesses open by giving their owners no forgiveness of loans unless money is spent, not to mention that these businesses have a much better chance of surviving if they spend the money on the right things at the right time.
So along comes the House of Representatives, with bipartisan legislation appropriately titled as the “Paycheck Protection Program Flexibility Act of 2020” (H.R. 7010) which would provide much needed relief. This bill was passed by the House on May 28th with a vote of 417-1 to handle the problem in a logical and borrower-friendly manner and is now being considered by the Senate.
This House Bill is remarkably short and to the point, containing only short sections, which will do the following:
1. Borrowers Can Extend the 8 Week Period to 24 Weeks. This will make it much easier for borrowers to get full or close to full forgiveness on their loans, but also makes it more challenging to keep a full workforce in place to qualify for full forgiveness, as further discussed below. This legislation would also allow borrowers with outstanding loans as of the date of the enactment of this legislation to make an election to have the original 8-week period apply in lieu of the 24-week period. This election would make sense for borrowers that have already spent the funds on sufficient expenses that provide for full forgiveness, so they can confirm their loan forgiveness and be better able to borrow, attract capital, have cleaner balance sheets, and better mental health.
2. The 75% Test Now Becomes a 60% Cliff! The Bill would change the 75% test that was issued by the SBA which requires that at least 75% of the amounts forgiven have to be spent on payroll expenses, meaning that if otherwise countable interest, rent and utilities exceed 1/3 of what is spent on payroll, health insurance or retirement plans, then the forgiveness will be reduced. It is questionable whether the SBA had the authority to pass this rule, and years of litigation were certain to keep many lawyers busy and borrowers in…