As guidance in this area is being released regularly, we recommend you read all of our blogs on this subject. All the blogs in the Paycheck Protection Program series are here: Updates #1, #2, #3, #4, #5, #6, #7, #8, #9, #10, #11, #12, #13, #14
The Paycheck Protection Program (PPP) could be compared to the longest baseball game in history (we really miss sports, humor us here). That Triple-A International League game ended with a 3-2 score, lasted 33 innings, and clocked 8 hours and 25 minutes of playing time. As we enter the twelfth inning on this subject, complete and clear guidance remains wanting. Last at bat we discussed the passage of the Paycheck Protection Program Flexibility Act (PPFA) and the welcome flexibility it provided. Today we will discuss the first set of guidance released by the Treasury and SBA regarding the PPFA, which amounts to a bunt, at best.
On Wednesday, June 10, the Treasury and SBA issued a new borrower application and the 17th interim final rule (IFR) as their first response to the PPFA. This guidance only scratches the surface of what is to come post-PPFA.
New Borrower Application
The new borrower application is identical to the prior version except for revisions to the borrower certifications on page 2. Specifically, two certifications were revised:
- 4th Certification – Revised to change the 8-week covered period to the new 24-week covered period.
- 5th Certification – Revised to reflect the revised 60% payroll cost requirement in lieu of the original 75% requirement
17th Interim Final Rule (IFR)
Yes, you read the sub-title correctly; this is the 17th issuance of formal regulations by the Treasury relative to the PPP. To stick with our baseball analogy, SBA and Treasury are building the stadium borrowers are playing in while the game is in progress.
The 17th IFR revised the 1st IFR for changes made by the PPFA. Specifically, the following revisions are noted:
- Covered Period (Loan Application & Use) - The covered period governing loan usage, loan eligibility and related requirements is revised to end on December 31, 2020, instead of the original June 30, 2020.
- Loan Maturity - The minimum maturity date for PPP loans is revised to 5 years for loans made on or after June 5, 2020. The maturity date remains 2 years for loans made before June 5, 2020, but the Treasury confirms borrowers and lenders can mutually agree to extend the maturity to 5 years. A loan is considered made on the date the SBA assigns a loan number.
- Deferral Period - For borrowers who apply for forgiveness within 10 months after their loan forgiveness covered period ends, the deferral period is extended through the date on which the SBA remits the loan forgiveness amount to the lender. Previously, the deferral period was 6 months from the date the loan was received. For those who do not apply for forgiveness within 10 months, payments begin at the 10-month Interest continues to accrue during the deferral period.
- Payroll Cost Requirement – As announced in a joint statement by the SBA and Treasury on Monday, June 8, the Treasury has interpreted the 60% payroll cost requirement in the PPFA as a limitation on forgiveness instead of a required threshold to receive any forgiveness. This interpretation is consistent with the 75% rule it replaced, but inconsistent with the language of the law. The IFR acknowledges this inconsistency and provides a lengthy discussion on why it is the intended interpretation. This is a very favorable outcome for borrowers.
What is not included in the 17th IFR is additional specifics around how loan forgiveness will work post-PPFA. The Treasury specifically states it will be separately issuing revised forms and guidance for loan forgiveness.
Also curious was the return of Treasury stating loan forgiveness can be up to the full principal amount of the loan and any accrued interest. Throughout this process, our interpretation of the law has been that only principal can be forgiven and no accrued interest. Over time, the IFR language changed to indicate only principal could be forgiven and the original forgiveness application contained no indication accrued interest could be forgiven. It appears the Treasury is backtracking, but we will have to wait and see where this ends up.
While the lack of complete and clear guidance continues to be frustrating, we continue to believe the PPFA is a game changer for most borrowers. What previously looked like a solid double or triple pre-PPFA may turn into 100% loan forgiveness post-PPFA. We won’t call the PPFA a grand slam, given all the hassle the PPP has created for borrowers, but surely a homerun analogy is warranted.
We will continue providing PPP updates when relevant information becomes available. If you have questions about how to navigate the PPP Forgiveness Application process, or how other CARES Act incentives may apply to your business, please call on us. You can stay up to date on PPP guidance and tax issues relating to the coronavirus at our COVID-19 Tax Resource Center.