Small-business owners who borrowed from the Paycheck Protection Program are about to get a break on forgiveness.
Last Friday, President Donald Trump signed the Paycheck Protection Program Flexibility Act into law.
The legislation makes a slate of changes to the so-called PPP, a forgivable loan program for small businesses that covered up to eight weeks of payroll costs and other costs to help employers keep workers on board.
Originally, borrowers were required to spend at least 75% of the funding on payroll expenses for the loan to be forgivable. No more than 25% could go toward utilities, mortgage interest or rent.
This requirement raised concerns among entrepreneurs who were based in areas with high rental costs and who could easily spend large chunks of their funding on their storefront.
The new legislation Trump signed on Friday softens the requirement so that 60% of the proceeds go toward payroll.
Even more relief came on Monday.
The U.S. Treasury Department and the Small Business Administration further clarified on Monday that business owners who apply less than 60% of the funding toward paying their staff are still eligible for partial forgiveness of the loan.
The agencies' clarification reassures entrepreneurs that they won't be on the hook for the full amount borrowed if less than 60% of the proceeds goes toward payroll. Tax professionals called this a "cliff," meaning that employers would have no forgiveness unless they met the spending requirements exactly.
"This is what everyone was concerned about – that the statutory language would be interpreted as saying there was a cliff effect," said Tony Nitti, CPA and partner at RubinBrown in Denver. "The SBA is nipping the controversy in the bud by doing this."
The SBA and Treasury also announced that further guidance, including a modified loan forgiveness application, would be forthcoming and would implement last week's legislative changes.
Those updates, in addition to the 60% requirement for payroll spending and the opportunity for partial forgiveness, include the following:
• Giving borrowers more time to exhaust their PPP loan. Initially, businesses had eight weeks to use up their proceeds. The new legislation gives them 24 weeks from disbursement to use the money.
• Forgiveness protections for businesses that couldn't return to normal operations. Firms that were unable to return to normal activity due to health and safety guidance related to coronavirus may not have been able to bring back all of their full-time equivalent employees. Treasury and the SBA won't reduce their loan forgiveness if this is the case.
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• Safe harbor if you're unable to rehire employees. Your forgiveness won't be reduced if you're unable to rehire laid-off workers or on-board similarly qualified employees by year end.
• More time to pay off your loan. Originally, borrowers had two years to repay their loans at an interest rate of 1%. The Treasury and the SBA are giving borrowers five years if their loan was approved by the SBA on or after June 5.
• June 30 is the last day on which a PPP loan can be approved. You have just a few weeks to apply if you're still on the sidelines.
Tax professionals and their clients are eagerly anticipating further formal guidance from Treasury and the SBA, but they have been frustrated by the fact that the terms of the PPP loans have been shifting since late April.
The federal agencies have been releasing piecemeal guidance on the loans in the form of frequently asked questions, which only spawned further queries from tax professionals and entrepreneurs.
"With this new law passed, a lot of the guidance is now useless," Nitti said.
Further, while the guidance helps business owners who still have PPP proceeds to use, those who hurried to spend down their funding in accordance with the original rules won't benefit nearly as much.
"I've gotten emails from business owners who are just furious," Nitti said. "'We did it right, we spent 75% on payroll costs even though we had other costs to spend it on.'"
"Many businesses are frustrated with the way the information has been rolled out," he said. "It's the nature of this process, which has been so frustrating for everyone involved."