The Paycheck Protection Program: keeping up with the changes

Written by Peggy Kirk Hall and Barry Ward, Leader, Production Business Management

Many farmers have utilized the CARES Act’s Paycheck Protection Program (PPP) to obtain federal funds to help with payroll and certain non-payroll expenses in the wake of COVID-19.  As we’ve discussed on our Farm Office Live webinars here, Congress revised the PPP with the passage of the Paycheck Protection Program Flexibility Act earlier this month.  As a result of the new legislation, the Small Business Administration released a series of Interim Final Rules (IFRs) and a new forgiveness application.  The IFRs, available here, clarify certain points contained in the bill and provide revisions to previous IFRs.  All of these changes affect how farmers can use the funds and how much of the funds can be forgiven from loan repayment requirements. 

The new PPP provisions

• The “covered period” that applies to the issuance and use of PPP loan expenditures was to end on June 30, 2020, but the law now extends that date to December 31, 2020.  This means that borrowers now have until December 31 to spend PPP loan proceeds.
• The “covered period” for loan forgiveness has also changed.  Borrowers will now be able to have up to 24 weeks of costs forgiven and not subject to repayment.  But borrowers who received loans prior to June 5, 2020 may choose to use the 8-week period provided in the original PPP.  A borrower need not wait until the end of the covered period to apply for forgiveness if the borrower has expended the loan funds prior to the end of the covered period.
• The requirement that 75% of loan proceeds be used for payroll costs in order to receive full forgiveness has been reduced to 60%.   This means that forgiveness is not applicable for any portion of non-payroll costs that exceed the 40% maximum for non-payroll.  Under the original law, forgivable non-payroll costs could not exceed 25%.
• The amount eligible for forgiveness can equal the full loan amount plus accrued interest, and the IFR revises the eligible costs for both the 8-week and 24-week covered periods as follows:
  • Payroll costs for 24 weeks at a maximum of $46,154 per employee and for 8-weeks at a maximum of $15,385 per employee, as well as benefits such as health care costs, state payroll taxes paid by the employer, and retirement contributions.  Note that there are limitations to including health insurance contributions made on behalf of self-employed persons, general partners and owner-employees of S-corporations and to including employer retirement payments on behalf of self-employed persons or general partners.
  • Owner compensation replacement is calculated according to 2019 net profit.  The forgiveness limit for an 8-week covered period is 8/52 of the 2019 net profit, up to $15,385 and for a 24-week covered period, is restricted to two and a half months or 2.5/12 of 2019 net profit, up to $20,833.
  • Mortgage interest, rent payments on lease agreements, and utility payment costs are eligible to the extent that they would be deductible as business mortgage, rent and utility payments on Form 1040 Schedule F or Schedule C.  Note that although this language defines the forgivable portions of these non-payroll costs, such costs are not actually deductible if forgiven.
• Employers will have a longer period to rehire employees and restore salaries without reducing the forgiveness amount.  This “safe harbor” date for rehiring employees is extended to December 31, 2020.
• An employer who isn’t able to rehire employees by the end of the “safe harbor” period may qualify for an exemption from a corresponding forgiveness reduction that would occur if the employer can document that:
  • The employer is unable to rehire persons who were employees on February 15, 2020 or to rehire similarly qualified persons, or
  • The employer is unable to return to the same level of business activity it was at before February 15 due to COVID-19 standards and requirements.
• For new loans taken out after June 5, loan proceeds that are not forgiven may be repaid in five years rather than two years.  Loans prior to June 5 remain at a two-year repayment term, unless the lender agrees otherwise.
• Borrowers can defer repayment of the loan until the date that the lender receives the borrower’s forgiveness amount, or until 10 months from the end of the borrower’s forgiveness period if not applying for forgiveness.              
• The original law prohibited borrowers  from using the CARES Act provision that allows employers to defer payroll taxes once they received loan forgiveness, but the new law allows borrowers who receive forgiveness to also defer payroll taxes under the CARES Act.

The forgiveness application and process

A new forgiveness application was also released to correspond with the changes in the new PPP Flexibility Act.  As laid out in the application instructions, borrowers are eligible to use a shorter “EZ application” for loan forgiveness if they meet one of these criteria:

• Borrower is self-employed and has no employees or
• Borrower didn’t reduce salaries or wages for employees by more than 25% and didn’t reduce numbers or hours of employees or
• Borrower experienced reductions in business activity as the result of health directives related to COVID-19 and did not reduce salaries or wages of employees by more than 25%.

The forgiveness process could take up to five months.  It begins with a borrower submitting the application to the lender that provided the loan, who will have 60 days to review the application and send the approved application on to the SBA.  The SBA will have up to 90 days to review the application, confirm the amount to be forgiven and remit to the lender the forgivable amount and any accrued interest, less any advance payments made to the borrower under the Economic Injury Disaster Loan program. 

The Loan Forgiveness Application Form is here and its instructions are here.  The Loan Forgiveness Application Form EZ is available here and its instructions are here. 

Uncertainties remain

Despite the recent changes to PPP, several gray areas and uncertainties remain, such as:

• PPP Loans received prior to June 5, 2020 allow the borrower to choose between an 8 week and a 24 week covered period.  Farmers with a loan based on owner compensation replacement and no employees will likely benefit from choosing the 24 week covered period to meet the criteria for full loan forgiveness.  One possible downside with choosing the 24 week covered period might be further rule changes that might be unfavorable to the borrower, although this is unlikely.  There is still uncertainty as to whether a self-employed person needs to write a check to themselves to qualify for forgiveness based on the owner compensation replacement portion of the PPP Loan. The safe alternative would be to write this check even if the check is deposited back into the same account.
• According to some sources there is ongoing discussion regarding legislation that would grant forgiveness to all PPP loans under $150,000. This discussion of a safe harbor based on the size of the PPP loan is apparently being advanced by certain banks.

We encourage employers who obtained a PPP loan to talk with their lenders and accountants to capitalize on and comply with the PPP changes and make decisions about the forgiveness options.  For those who have not yet applied for a PPP loan, the deadline is soon approaching —applicants have until June 30, 2020 to apply for a loan.

Read more about the PPP’s original provisions in our blog post here.