June 18, 2020

The Paycheck Protection Program: Where We Stand

Written By

Thomas E. Rutledge
Member, Stoll Keenon Ogden PLLC

Since its adoption, our firm has been tracking the Paycheck Protection Program (PPP) and its numerous modifications and limitations. We wish we could tell you that everything is now settled, and everything expected of borrowers who are going to be seeking loan forgiveness is resolved. Doing so would, however, result in the classic retort “Liar, Liar, Pants on Fire.” Rather, while there have been some positive developments, the PPP remains embroiled in ambiguity.

The PPP Flexibility Act

On June 5, the ‘‘Paycheck Protection Program Flexibility Act of 2020’’ (H.R. 7010) was signed into law. The highlights of the bill were reviewed in a June 3 SKO Insider entitled New Liberalized Rules for Paycheck Protection Plan Loans (Maybe). To repeat and expand upon those points:

First, under a Treasury regulation, in order for a PPP loan to be forgiven, 75 percent of the amount borrowed must be spent on payroll expenses with the balance spent on other permitted expenses. The Flexibility Act overrode that 75 percent threshold and imposed a threshold of 60 percent [Section 3(b)(8)]. This reduction in the threshold is a benefit to businesses with significant rent and utility obligations but with relatively low payroll costs. But there is a potential problem in the wording, a point discussed below.

Second, the CARES Act created a “covered period” of eight weeks within which the PPP funds must be deployed. That period began on the day the loan was disbursed. Since then, by regulation, there was created the “alternative payroll covered period” during which the PPP funds may be devoted to payroll expenses. The alternative payroll covered period begins not on the day the loan is disbursed but on the next regular payroll day. Functionally, the alternative payroll covered period allows PPP loan proceeds to be used to pay more than eight weeks of payroll. Under the Flexibility Act the covered period/alternative payroll covered period are extended from eight weeks to twenty-four. Section 3(b). This change affords borrowers significantly more time within which to deploy the PPP funds. It (big surprise here) also creates new questions as discussed below.

Third, the deferral of the obligation to pay principal and interest on a PPP loan will continue through the determination on forgiveness. Section 3(c). If forgiveness is granted then it will apply to all interest and principal; under the CARES Act it was clear that the deferral applied to principal, but not to interest. Conversely, if and to the extent that the loan is not forgiven, interest will begin to accrue from that determination.

Fourth, two changes are made as to the reduction in forgiveness that are based upon the borrower’s reduction in full time equivalent employees (“FTEE”). While reducing to statute the regulatory relief already afforded when an employee rejects an offer to return from being furloughed or terminated, there is additional relief for companies that are unable to return to pre-pandemic employment levels consequent to compliance with certain “standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.” Section 3(b)(7). This provision provides relief to, for example, restaurants that may open but with fewer tables, requiring fewer wait staff and fewer employees in the kitchen to cook fewer meals.

The fifth point is important, and there has been a significant amount of mis-reporting in the media and in some professional publications as to it. Under the CARES Act, a PPP loan (to the extent not forgiven), will have a term of two years. Under the Flexibility Act, a PPP loan will have a term of five (5) years. However, this change in term does not apply to existing PPP loans; it applies only to loans entered into after June 5. Section 2(b). As set forth in the “Flexibility IFR” (discussed below), it recites:

For loans made before June 5, 2020, the maturity is two years; however, borrowers and lenders may mutually agree to extend the maturity of such loans to five years. For loans made on or after June 5, the maturity is five years.

The same point is made in the 3rd/6th IFR (discussed below). Press reports to the effect that the term of already outstanding loans is extended to five years are inaccurate. That said, the Flexibility Act allows borrowers and lender to agree to substitute the five-year term in existing loans. Doing so will require negotiation between the borrower and the lender and a modification of the PPP loan’s promissory note.

Post-Flexibility Act Guidance

Last Friday evening, after the close of business on the east coast, the Treasury and the SBA issued an updated Interim Final Rule (the “Eligibility IFR”), an updated PPP loan application (the “Updated Application”) and additional guidance in the form of the Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to First Interim Final Rule (the “Flexibility IFR”). Then, on June 16, the Treasury released this (the “3rd/6th IFR”).

As noted below, additional guidance will be forthcoming.

Eligible PPP Borrowers and Criminal Convictions

Previously, if the borrower had a principal owner with a felony within the last five years, it was ineligible to apply for a PPP. The time period has been reduced to one year, but certain categories of financial crimes, namely “fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance” within the last five years are still fatal to the loan application. These changes are set forth in the Eligibility IFR. At least one lawsuit has already been filed saying that this relaxed requirement is too strict and unjustly precludes otherwise qualifying businesses from receiving PPP loans.

The 24 versus 8 Week Covered Period

Under the CARES Act, a PPP borrower was required to expend the borrowed funds for permissible purposes in the eight-week period (i.e., the “covered period”) commencing the day the loan was disbursed. See CARES Act § 1102(a)(2)(F) (“During the covered period, an eligible recipient may, in addition to the allowable uses of a loan made under this subsection, use the proceeds of the covered loan for: ….”). The “covered period” has been by regulation morphed into an “alternative payroll covered period” whereby the loan forgiveness period for payroll could commence on the next regularly scheduled payroll date after the loan was disbursed. Under the Flexibility IFR:

Your “loan forgiveness covered period” is the 24-week period beginning on the date your PPP loan is disbursed; however, if your PPP loan was made before June 5, 2020, you may elect to have your loan forgiveness covered period be the eight- week period beginning on the date your PPP loan was disbursed.

Whether a business wants to use an eight-week or twenty-four-week covered period will be an individual decision. Many early recipients of PPP loans are coming to the end of the original eight week covered period and are on a glide path of filing an application for forgiveness on the basis that the funds have already been expended. The twenty-four-week covered period would do them no benefit and would defer the time at which loan forgiveness could be sought.

On the other hand, the twenty-four-week period may be a significant benefit to a company that has not been able to spend its PPP loan proceeds. Consider a dog boarding and grooming facility that in the reference period had a monthly payroll of $43,200 (18 employees * 40 hours per week * $15 per hour) * 4 weeks in a month) that received a $108,000 loan on April 20. When the loan was disbursed all eighteen employees were furloughed consequent to a state order closing all dog boarding and grooming facilities. While rent/mortgage interest and utilities could be covered with PPP loan funds while closed, the employees were not drawing paychecks (rather, they each qualified for unemployment). The state order closing the facility was lifted on May 20, a full month into the eight-week covered period. With low demand for boarding services consequent to travel restrictions, and grooming employing only those few employees dedicated to that service, it becomes impossible to effectively expend the PPP funds in the remaining four weeks. However, with the expansion of the covered period to twenty-four weeks (in our case mid-October) the funds may be used to ramp up employment as demand increases. In addition, this flexibility may be especially important in bringing back laid-off employees who are currently benefitting from the federal $600 per-week-unemployment benefit that is scheduled to expire the end of July.

Will every borrower with unapplied PPP loan funds at the end of the eight-week-covered period want to elect into the twenty-four-month period? Probably not. If, for example, 90 percent of the PPP borrowings were in the eight-week covered period applied to forgivable expenses, the borrower can return the unapplied 10 percent (exactly how that impacts on the forgiveness calculations is not resolved[1]) and apply for forgiveness of the 90 percent that was applied. It is as of the application for forgiveness that the borrower is subject to the FTEE and reduction in payroll tests that limit forgiveness; elect the twenty-four-week covered period and our borrower will have to worry about those calculations being made four months from now. Further, as the economy is slowly reopening, likely now is the time a borrower can most easily take advantage of the leniency afforded borrowers unable to return to pre-pandemic employment levels consequent to compliance with certain “standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”

The 60 Percent Threshold

Under regulations released by the Treasury, 75 percent of a PPP loan had to be applied to payroll costs in order for there to be complete loan forgiveness. This requirement was not, however, a cliff. Rather, to the extent that the loan proceeds did not meet this requirement, there was a proportionate reduction in the amount that could be forgiven. As previously discussed:

The 75-Percent/25-Percent Split is Not a Cliff

Only persons living under large rocks in the hinterlands (I’m jealous) are unaware of the PPP requirement (actually a requirement of the Treasury/SBA imposed in the first PPP Interim Rule, 85 FR 20811) that in order for there to be loan forgiveness 75 percent of the loan proceeds are to be spent on payroll expenses with not more than 25 percent spent on utilities, mortgage interest and other permitted expenses. Some have wondered whether a failure to meet the 75 percent threshold rendered none of the loan forgivable, or rather only reduced the forgivable amount. The Borrower Interim Rule (cryptically at pp. 21-22) indicates that failing to meet the 75 percent payroll threshold is not a cliff, but rather only reduces the amount of forgiveness. “This does not change or affect the requirement that at least 75 percent of the loan forgiveness amount must be attributable to payroll costs.” Reviewing this point in an article in Forbes, “If a borrower has $25,000 of interest, rent and utility expenses and $70,000 of payroll expenses, then only $23,333 of the interest, rent and utility expenses will be forgiven ($23,333 divided $93,333 is 25 percent).”

In the Flexibility Act the regulatory 75 percent threshold was reduced to 60 percent. Which sounds good (great) for companies that were in that over 60 percent but less than 75 percent window; they do not run the risk of reduced loan forgiveness for not having met the 75 percent threshold.

But for companies still coming in under 60 percent, the Flexibility Act creates a potential problem. The language added by the Flexibility Act can easily be read to provide for a cliff; absent meeting the 60 percent requirement then no forgiveness:

To receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs and may use up to 40 percent of such amount for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rental obligation, or any covered utility payment.

According to the published reports , there is an agreement that the language will not be treated as a cliff. Not going out of the way to make the point clear, the Joint Statement by Treasury Secretary Steven T. Mnuchin and SBA Administrator Jovita Carranza Regarding Enactment of the Paycheck Protection Program Flexibility Act issued on June 8, stated that:

If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.

Which is not a cliff; compare “loan amount” and “loan forgiveness amount.” Meanwhile, the Updated Application requires a borrower certification that:

I understand that loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities, and not more than 40 percent of the forgiven amount may be for non-payroll costs.

Meanwhile the Flexibility IFR provides:

While the Flexibility Act provides that a borrower shall use at least 60 percent of the PPP loan for payroll costs to receive loan forgiveness, the Administrator, in consultation with the Secretary, interprets this requirement as a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness.

So, we have the answer borrowers want, no cliff, even though that is almost certainly not what the statute says is the result. I’m not sure who will complain.

Limits on Use of PPP Funds for Self-Employed Owners

The 3rd/6th IFR addresses several points including the application of funds for which forgiveness may be sought. It provides in part (footnotes have been deleted) that a PPP loan recipient may apply for forgiveness for:

i. payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for 24 weeks, a maximum of $46,154 per individual, or for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);

ii. owner compensation replacement, calculated based on 2019 net profit as described in Paragraph 1.b. above, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period, but excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116-127) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA;

While shareholders of a C-corporation who are employees of the corporation are not treated as being self-employed, shareholders of an S-corporation, members of an LLC (except in the rare case of an LLC taxed as a C-corporation), sole proprietors (including the sole members of single-member LLCs) and partners in partnership are treated as being self-employed. Borrowers who are not C-corporations need to carefully account for payments made to and on behalf of the self-employed owners and back out from the amount for which forgiveness is sought payments for group health care, the employer portion of state income tax withholdings, and retirement plan contributions.

Deducting the Expenses You Paid with a Forgiven PPP Loan

Early on in the life of the PPP there was a question as to whether expenses paid with PPP loan proceeds would be deductible on the borrower’s tax return, a question presented in an earlier SKO Insider. Subsequently, the IRS issued a ruling to the effect that taxpayers may not “double-dip,” both receive PPP funds to pay an expense and then deduct from their tax returns those same expenses. There have been proposals to reverse this determination and permit PPP borrowers to deduct the expenses paid with PPP loan proceeds. To date those proposals have not had traction.

State Tax Treatment of a Forgiven PPP Loan

As previously discussed, for federal tax purposes, the forgiveness of a PPP loan is not “discharge of indebtedness income” and does not create taxable income. It is not clear what will happen on your state tax return. As previously written:

Normally, if you borrow money from the bank, and then do not have to pay it back, barring certain exceptions in the tax code such as upon bankruptcy, you have discharge of indebtedness income, Code §§ 61(a)(11), 108. Discharge of indebtedness income is just that; you have to pay income taxes on the amount of the loan that is discharged. The CARES Act, which created the PPP, provides that if a PPP loan is forgiven, the loan recipient does not have any discharge of indebtedness income – for purposes of the federal tax code. However, the CARES Act simply declared this to be the result without amending Code § 108. That matters, because, while states, for purposes of their tax codes, typically follow the treatment under federal Code § 108, there is no policy to handle one-off federal treatments such as the CARES Act. In consequence, there is a debate going on as to whether upon forgiveness of a PPP loan your company will for state tax purposes have discharge of indebtedness income.

Neither the Kentucky nor the Indiana state revenue cabinets have issued (desperately needed) guidance as to this question.

Accounting Treatment of a PPP Loan Before and After Forgiveness

As a loan that may be converted into a tax-free (at least for federal purposes) grant, many have wondered as to the appropriate accounting treatment of a PPP loan. A recent article in the Journal of Accountancy by Ken Tysiac entitled AICPA issues guidance on accounting for forgivable PPP loans, addressed the question. That article cited Technical Question and Answer (TQA) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program for the proposition that the PPP borrower:

– Would initially record the cash inflow from the PPP loan as a financial liability and would accrue interest in accordance with the interest method under ASC Subtopic 835-30.
– Would not impute additional interest at a market rate.
– Would continue to record the proceeds from the loan as a liability until either (1) the loan is partly or wholly forgiven, and the debtor has been legally released or (2) the debtor pays off the loan.
– Would reduce the liability by the amount forgiven and record a gain on extinguishment once the loan is partly or wholly forgiven and legal release is received.

Disclosure of Borrower Information

PPP loans are made under section 7(a) of the SBA Act, and information on section 7(a) loans is made public. That information includes borrower’s name and address, lender’s name and address, borrower’s industry, the amount of the loan and its terms. To date the information posted for PPP loans is broad and based on statistics such as the loan size, but without any information as to who is the borrower. The Treasury and certain Congressional committees are currently engaged in at least a war of words over the need to protect the confidential business information of borrowers (if you know the loan amount you can derive the monthly payroll) with the need to engage in substantive oversight including as to who was able to borrow.

Nope, Still Not Done

The Department of the Treasury and the SBA have promised (threatened?) that additional guidance is forthcoming. For example, the Flexibility IFR provides, “SBA will be issuing revisions to its interim final rules on loan forgiveness and loan review procedures to address amendments the Flexibility Act made to the loan forgiveness requirements.” This review is current through noon on June 17. Yesterday a modified PPP loan forgiveness application (along with instructions) was released, as was an “EZ” forgiveness application. Both will be reviewed in an upcoming article. There could well have been further developments between when I put down the pen and you read this review.

Stay tuned; we are not done yet.


Stoll Keenon Ogden understands that these are trying times for our clients and our country. Our firm operations have continued uninterrupted and our attorneys are equipped to serve as we always have – for more than 120 years.

Please also be sure to consult the Stoll Keenon Ogden Coronavirus Resource webpage for additional articles and information related to the latest information on new laws and directives enacted by federal, state, and local governments in response to the Coronavirus pandemic.

[1] This is a point on which no guidance has been issued. Presumably the return of unapplied PPP proceeds will be treated as a partial repayment of the loan with forgiveness calculated on the balance.

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