On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “PPPFA”) which modifies significant elements of the Paycheck Protection Program (the “PPP”) as established under Section 7(a)(36) of the Small Business Act by the CARES Act (forgiveness governed by Section 1106 of the CARES Act). The U.S. House of Representatives passed the PPPFA by a near unanimous vote of 417-1 on May 29, 2020. The U.S. Senate then unanimously passed the PPPFA on June 3, 2020 despite concerns raised by some U.S. Senators regarding the changes. This FGMK Alert provides an overview of the changes made by the PPPFA, as well as thoughts moving forward.
The key modifications that the PPPFA makes to the small business loan program include the following:
Importantly, the PPPFA also strikes Section 2302(a)(3) of the CARES Act. As a result, borrowers who obtain PPP loans may defer the employer share of Social Security tax (6.2 percent share) for the period of March 27, 2020 through December 31, 2020. Previously, the government had clarified the borrowers could exercise the deferral election until the date on which they received loan forgiveness decision. This modification now treats such borrowers like all other taxpayers by eliminating any restrictions on the election of the deferral opportunity.
Prior to the Senate vote, Senator Marco Rubio and others had expressed the concern that the language of PPPFA created a “cliff effect” for those borrowers that fail to meet the 60 percent payroll cost test. The government had interpreted the SBA-created 75 percent rule in a manner that would merely reduce loan forgiveness on a proportionate basis if a borrower failed to meet the 75 percent threshold. Based on the language of the PPPFA, it appears that the failure to meet the 60 percent threshold could result in zero loan forgiveness. While the SBA and Treasury may provide future clarification, borrowers should be aware of this issue and aim to meet the 60 percent threshold to avoid any concern regarding the complete denial of loan forgiveness.
Congressional leaders have also indicated that technical corrections to the program may be made in the next phase of COVID-19 response legislation. A critical issue that such future legislation may address, as the PPPFA did not, is the deductibility of expenses that result in loan forgiveness. Barring a decision by the IRS to retract Notice 2020-32, Congress will have to act legislatively to provide borrowers with the ability to deduct such expenses for federal income tax purposes. If Congress does take the expected action, borrowers will still need to monitor states’ responses to the deductibility issue for state income tax purposes.
FGMK will continue to monitor the government loan program, future guidance, and updates to the SBA loan forgiveness application in order to keep our clients informed.
The summary information in this document is being provided for education purposes only. Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.
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