Down With PPPs? The Continuing Saga of the Payment Protection Program

No good deed goes unpunished. Aimed at providing a financial lifeline during the “stay home” world of the COVID-19 pandemic, the federal government flung the Paycheck Protection Program (“PPP”) to the “small business” community. The PPP was one of several programs in the $2 Trillion CARES Act stimulus bill. President Donald J. Trump quickly signed the CARES Act into law. In the weeks after enactment, the PPP has been fraught with large statutory gaps and confusing, and often conflicting, guidance.

Many small businesses are nearing the end of the all-important 8-week “covered period” (which generally begins when the business receives the PPP loan – but see discussion below). The covered period is the testing period for determining, for loan forgiveness, whether a recipient has expended an appropriate quantum of loan proceeds and spent those proceeds on eligible purposes. Many practical questions had been unanswered with respect to what payments to employees were eligible for loan forgiveness and how to calculate the forgiveness amount. Importantly, the CARES Act provides that the amount of the PPP loan that is forgiven will not cause the borrower to have to include the amount of forgiveness in its income (i.e., the amount of forgiveness will not be taxed).

Over the Memorial Day holiday, the U.S. Department of the Treasury and the Small Business Administration issued new interim final rules which offer helpful guidance. Copies of all of the interim final rules related to the PPP are available here. Some helpful tidbits from the new guidance include:

  • “Payroll costs” paid or incurred during the covered period (or “alternative payroll covered period” discussed below) are eligible for forgiveness.
  • The introduction of an “alternative payroll covered period,” which allows borrowers, if elected, to measure the 8-week covered period beginning with the first day of the first payroll cycle in the covered period (for amounts paid or incurred on payroll costs, but not amounts paid or incurred on other eligible purposes which still must be expended during the covered period).
  • Treating payroll costs as “paid” either on the day checks are distributed or ACH transfers are initiated.
  • Allowing payroll costs incurred, but paid on the first regular payroll date after the covered period (or alternative payroll covered period), to be counted towards forgiveness.
  • Clarifying that “hazard pay” or bonuses paid to employees during the covered period (or alternative payroll covered period) are eligible “payroll costs.”
  • Specifying that advance payments of interest on otherwise eligible mortgage obligations are ineligible for loan forgiveness.
  • Adding helpful guidance on calculating the reduction in the forgivable amount for rehiring employees.

In addition to the recent helpful guidance, word has circulated that the Enforcement Division of the U.S. Securities and Exchange Commission has begun to ask copies of PPP loan applications from public companies that have secured PPP loans. The eligibility of public companies to receive a PPP loan has been the subject of intense scrutiny, particularly focused on the “necessity” certifications. Many public companies opted to return PPP loans once the Department of the Treasury released a safe harbor allowing for repayment without consequence.

Finally, the House of Representatives passed on a 417-1 vote legislation to expand and refine the PPP. The legislation would offer a number of helpful refinements. For example, the House legislation would: lower the amount of PPP loan proceeds that must be used on “payroll costs” to 60 percent; extend the 8-week covered period 24 weeks; extend the repayment period to 5 years; and provide that repayment obligations would not begin until after the SBA determines that all or a portion of a PPP loan is not forgiven. The Senate is expected to act on the House legislation this week.

For more information, please contact Peter Kulick at 517-487-4729, Troy Terakedis at 614-744-2589, or any other attorney in our tax group.