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Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo, Pat Balthazor and Michael Wronsky

Congress passed the Paycheck Protection Program Flexibility Act of 2020 (the Act), which makes significant amendments to the Paycheck Protection Program (PPP). The changes provide borrowers with additional time to use loan proceeds and qualify for forgiveness, plus increase to 40% the limit on the amount of loan forgiveness that can be attributed to nonpayroll costs.

Key takeaways

  • Borrowers now have until 24 weeks from receipt of the PPP loan or Dec. 31, 2020 (whichever is earlier) to use the proceeds and qualify for forgiveness.
  • The 25% limit on the amount of loan forgiveness that can be attributable to expenditures for qualifying mortgage interest, rent and utilities would be increased to 40%. However, a possible drafting error in this amendment appears to create a “cliff effect,” meaning if more than 40% of a borrower’s PPP loan proceeds are used on nonpayroll costs, none of the loan would be eligible for forgiveness.
  • Borrowers whose loans are forgiven would be eligible for the deferral of the employer’s portion of Social Security taxes provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
  • The Act does not address the deductibility of expenses funded with forgiven loan proceeds. While the PPP has a debt forgiveness component, Notice 2020-32 stipulates any expenses associated with the use of PPP loan proceeds subsequently forgiven are not deductible for federal income tax purposes (see our previous tax alert). Despite numerous lawmakers’ bipartisan rebuke of this position, the Act does not overturn it and, as such, Notice 2020-32 remains in effect.
  • A minimum five-year maturity replaces the original restrictions put in place by a Small Business Administration interim rule limiting the loan term to two years. The CARES Act’s maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness remains.
  • Workforce reductions no longer necessarily result in a proportional reduction of loan forgiveness. An employer can be exempt from the associated loan forgiveness reduction if they can document in good faith:
    – An inability to a) rehire terminated employees and b) hire similarly qualified employees for unfilled positions on or before Dec. 31, 2020; or
    – An inability to return to pre-COVID-19 business levels due to compliance with public health and safety standards.

Please reach out to your Baker Tilly tax advisor to discuss how these potential changes may affect your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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