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Treasury, SBA Heed Lawmaker Concerns Over PPP Loan Cliff Effect

Posted on June 9, 2020

Upcoming guidance on the Paycheck Protection Program (PPP) will retain the option for partial loan forgiveness when a borrower doesn’t meet a payroll threshold.

Lawmakers had voiced concern that the language of a provision in the recently enacted Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142), reducing the threshold for the amount of loan money required to be spent on payroll costs, might inadvertently eliminate the option for partial loan forgiveness. But in a June 8 joint statement, Treasury and the Small Business Administration indicated that wouldn’t be the case.

The new law requires that at least 60 percent of a borrower’s loan proceeds be allocated to payroll costs during the eight-week or new 24-week covered loan forgiveness period, down from the 75 percent level originally established in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136). According to the statement, borrowers who use less than 60 percent of their loan amount for payroll costs will still be eligible for partial loan forgiveness, “subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.”

The statement also indicates that the SBA and Treasury intend to promptly issue rules and guidance implementing the legislation, along with modified forms for borrowers’ applications and loan forgiveness applications to make them consistent with the new law.

“The clarification that there is no 60 percent cliff for payroll expenses helps a lot,” Joe B. Kristan of Eide Bailly LLP told Tax Notes. “That is very borrower-friendly when it is often unwise or difficult to increase payroll.”

Alan S. Gassman of Gassman, Crotty & Denicolo PA likewise praised the decision to maintain partial loan forgiveness as welcome relief for borrowers, although he questioned whether Treasury and the SBA were exceeding their regulatory authority in doing so.

“This is a welcome move towards what we expect to be provided in legislation in the future, or respected by the banks to fix this, as if it were a glitch needing a technical correction,” Gassman said.

More Relief, More Questions

The ever-shifting rules around the PPP may provide welcome relief for the program’s borrowers, but they're also keeping practitioners’ heads spinning.

“The biggest headache is the way the rules keep changing. Just when you think you understand how to play, there is a new tweet, new legislation, or an updated FAQ,” Kristan said.

Jeffrey A. Porter of Porter & Associates CPAs said that the law’s new 24-week period, while helpful for many taxpayers, could create a lot of “workload compression” in the 2021 filing season. The extended period will “push some of the forgiveness calculations into tax season, when we are already pushed for time,” he said.

“If the current guidance holds that you cannot deduct the expenses paid with the PPP loans, then the forgiveness calculation will need to be completed and accepted before you can file tax returns for 2020,” Porter explained.

Kristan similarly said that the 24-week period comes as major relief for many of his clients facing the eight-week deadline, but Treasury and the SBA have plenty of questions they’ll need to work through as they implement the new law. Those questions include whether a borrower who spends all the borrowed funds within, for example, 15 weeks still has to meet requirements through week 24, or if a borrower has to wait until after week 24 to begin the loan forgiveness process.

“With the timelines involved, many borrowers will not have certainty of forgiveness — and the related tax consequences — before 2020 return filing deadlines,” Kristan said.

Gassman observed that the new law allows loans that aren’t forgiven to be paid back in five years, but that applies only to loans approved by the SBA on or after June 5, 2020.

Although banks are allowed to extend the loan period for pre-June 5 loans with borrower approval, that could pit banks and borrowers against each other because “lenders will want the leverage to be able to demand repayment on a two-year basis, while borrowers will want as much time as possible to repay the loan,” Gassman said.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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