The government has provided relief in response to demands from companies that received small business loans and need to maintain employee levels to obtain tax-free forgiveness but whose employees won’t return to work.
The Small Business Administration updated its FAQ May 3 with question 40, which clarified that a recipient of a Paycheck Protection Program (PPP) loan won’t have its forgiveness amount reduced if it laid off an employee and then offered to rehire them but they refused to come back.
According to the FAQ, that position will be added in an interim final rule and will take the form of a de minimis exemption. The guidance will provide that to qualify for the exemption, a company must make a good-faith effort to rehire the worker and the offer must be in writing. The worker's rejection of the offer must be documented.
“Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation,” the FAQ cautioned.
The guidance comes after small business owners sent comments to the SBA and Treasury asking for the relief because some of their employees won’t return to work, either because they’re worried about safe working conditions or they’ll make more money by receiving temporarily increased unemployment benefits.
That was a real concern because under the PPP, which was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), the loans are forgivable, tax free, if employee levels are maintained and a specific portion of the loan proceeds is used for payroll costs. Under the statute, the amount of forgiveness is reduced if employee levels and salary levels aren’t maintained during the eight-week period after the business receives the loan in which it must use the proceeds.
The CARES Act provides an exemption for rehires in cases in which employers were forced to lay off workers, but that time frame is different; instead, it looks to the period from February 15 to 30 days after the law’s enactment, which was March 27. In other words, if a company laid off workers between February 15 and April 27 but hired those workers back by June 30, according to the statute, the company is treated as having eliminated the reduction.
More Answers Wanted
Edward K. Zollars of Thomas, Zollars & Lynch Ltd. told Tax Notes the exemption in the statute for rehires is confusing in several ways.
“First, there's that odd February 15, 2020, to April 27, 2020, testing period compared to a single day,” Zollars said. “And it's not totally clear to me if the restoration is a one-day test (only on June 30), or do we need to get an average from February 15 to June 30?”
Zollars also pointed out that the initial full-time equivalent employee reduction uses a different period (eight weeks beginning with the funding of the loan) — the restoration looks to a different period found in section 1106(d)(2) of the CARES Act.
“Not sure why they didn't use the same period for the amount of reduction and the target to restore to,” he said.
Ivan H. Golden of Hahn Loeser & Parks LLP said May 4 on an American Bar Association Section of Taxation webcast that he agreed that the statutory language on what it means for the reduction to be eliminated raises questions.
“If you reduce someone’s salary from $80,000 to $55,000, does that mean you have to repay them the difference?” Golden asked. “Or does it just mean on or before June 30, you have to say, OK, going forward, your salary is restored?” There’s no clear answer to that question, he added.
Golden said the CARES Act says forgiveness is reduced to the extent wages paid to an employee during the eight-week covered period are more than 25 percent less than the wages paid to an employee during the immediately preceding 13-week calendar quarter.
“But that will always be the case because of the difference between eight weeks and 13 weeks,” he said. “It seems like a clear error in the statute, but so far, it has not been corrected.”
The new FAQ addresses only a scenario in which workers don’t come back to eliminate the reduction, providing some relief to business owners who are already wary of the loan forgiveness aspects of the PPP.
With the forgiveness details still uncertain, loan recipients are increasingly concerned they won’t qualify for loan forgiveness under rules the SBA and Treasury promulgate — or, worse, that they’ll be accused of committing fraud.
Sen. Marco Rubio, R-Fla., one of the architects of the program, tweeted May 2 his frustration with the SBA because for two weeks it hadn’t responded to his request to issue clear guidance on loan forgiveness. The next day, the SBA responded with FAQ 40.