Changes to the “Covered Period”
Most notably, H.R. 7010 changes the “covered period” of the PPP loans to 24 weeks or until December 31, 2020, whichever comes first. The covered period is the amount of time a company has to expend the PPP loan funds in order to obtain forgiveness from the SBA and was initially set at eight weeks from the date the loan was funded.
Updates on Payroll/Non-Payroll Percentage Allocation
Under initial post-CARES Act guidance, 75% of the PPP loan proceeds were required to be expended on payroll costs in order to obtain loan forgiveness. H.R. 7010 amends the payroll/non-payroll percentage allocation to 60%/40%, respectively. However, in doing so, H.R. 7010 creates a “cliff,” whereby borrowers who fail to spend at least 60% of the funds on payroll expenses (which includes payroll, health insurance, and related retirement funding) will receive no forgiveness at all. It appears that H.R. 7010 will provide borrowers the option of using either the original eight-week covered period or the revised 24-week period (under both scenarios, the 60% payroll / 40% non-payroll test must be met).
Safe Harbor Provision Extended
Further, H.R. 7010 also extended the safe harbor provision to December 31st (from the prior June 30th date). The safe harbor provision enables borrowers to replace or rehire employee deficit or salary reductions to avoid subsequent reductions to the forgiveness amount sought by borrowers. For taxpayers that may struggle with replacing salary cost and employees by the December 31st deadline, H.R. 7010 provides an exemption from a reduction in forgiveness for borrowers that have incurred a reduction in their workforce if, during the period beginning on February 15, 2020 and ending on December 31, 2020, the borrower can document any of the following:
- The borrower could not find qualified employees to replenish the reduction in workforce; or
- The borrower could not restore its business to comparable activity as a result of social distancing or other federal health guidance.
Repayment Term Extended
With respect to any loan balance remaining at the time of forgiveness, H.R. 7010 extends the term of the note to five years; the previous loan term was two years. It further appears that there will be no payments on the loan until the date on which the SBA makes a determination on the forgiveness application submitted by the borrower. The loan will continue to be a non-recourse obligation (no owner liability) and carry the 1% interest rate.
Expanded Eligibility for Deferral of Employer’s Share of Social Security Payroll Taxes
Lastly, H.R. 7010 would allow borrowers to be eligible for the deferral of payment of the employer’s share of Social Security payroll taxes, regardless of whether the borrower receives forgiveness. The deferral of the employer’s share of the Social Security tax was introduced in the CARES Act but was previously unavailable to companies that had applied for PPP loan forgiveness. Under these provisions, the borrower can defer payment of the employer’s share of Social Security taxes incurred through December 31, 2020. One-half of the deferred taxes will be due December 31, 2021, with the balance due December 31, 2022.