New PPP Changes Bring Further Pitfalls Along With New Flexibility

Amendments to the SBA Payroll Protection Program became law on Friday, June 5th, which extend the time to spend PPP money from eight (8) weeks to twenty-four (24) weeks. However, relying on this new 24 week time has disadvantages, due to penalties from pay reductions or lower headcounts during the extended 16 weeks time. If you already have a PPP loan, you do have the option of retaining the original eight (8) week time period. If your 8 weeks is nearly up, it is time to start preparing the eleven-page SBA Loan Forgiveness Application, unless you wish to see your tax free funds become a debt you must carry on your books.

“Business owners tell us they are worried about the risk of their PPP loan being audited (or reviewed) and the loan not being forgiven. They are as scared of one of these audits as they are an IRS audit. Many already realize they may have made innocent mistakes when they applied because, for example, the rules weren’t clear on how payments to independent contractors or general partners should be handled. We hope that the main purpose of these reviews is to identify cases of fraud and that borrowers who keep good records won’t encounter problems. But the fact that records must be kept — and may be examined — for six years adds to the anxiety; after all most IRS audits only focus on the most recent three years of tax returns.” Forbes Magazine 6/4/20

By modifying the time for spending the loan, the new amendments cause new limitations in the number of employees or reductions in compensation. Under the prior law, the time for measuring the number of employees and compensation was the 8-weeks after the loan was made. Following the amendments,  the time period runs for 24 weeks after the loan was made. It is also unclear how the amendments will affect the measurement periods for payment of compensation. Business owners previously had the ability to adjust the original eight-week period for payroll and compensation costs, as compensation paid or incurred during the 8-week period the borrower chooses are forgivable. This means payroll costs incurred before the chosen 8-week period but paid during the chosen 8-week period are forgivable. Further, payroll costs incurred during but paid after the chosen 8-week period are forgivable, as long as they are paid on or before next regularly scheduled payroll date.  How these elections are made can cost your business tens of thousands of dollars in loan reductions.

For existing borrowers that used the PPP loan proceeds to continue to maintain employee headcounts and salary and wages for the initial 8-week covered period, and now face concerns about their ability to continue to retain such employees, particularly as the amount of the PPP loan has will not be increased to reflect this longer time period, careful attention may be needed to examine whether utilization of the longer covered period actually results in greater loan forgiveness. As noted above, existing PPP borrowers may elect to retain the original 8-week covered period under the terms of the PPP amendments.

The government once again did not realize the administrative burden these rules place on business owners at a time when they’re trying to figure out how to survive the coronavirus shutdown and the cautious reopening of our economy. As commentators have observed, the biggest problem with the new law and regulations is that you will likely need a lawyer, accountant, and advanced degree in finance to figure out how to calculate the forgivable portion of the loan.

We have in house expertise in law, accounting, and finance, and have a program to assist with the preparation of your SBA PPP Loan Forgiveness Application, which your lender will be asking about at the end of this month. Lenders are creating portals to accept these Applications filings in July.

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