What are stablecoins?

Stablecoins are a form of cryptocurrency issued by private companies. As their name suggests, they are significantly more stable than other cryptocurrencies because their value is tied to assets such as the U.S. dollar, gold, and government securities. Stablecoins are primarily used for trading, conducting transactions for goods and services, insulating against local currency instability, and facilitating cross-border payments.

What does the GENIUS Act do?

The GENIUS Act allows only permitted issuers to create payment stablecoins for use by individuals in the U.S., with specific exceptions and safe harbor provisions. Currently, permitted issuers include insured depository institutions like national or state banks and their subsidiaries. However, the law will soon expand to also include federal and state-qualified payment stablecoin issuers.

The GENIUS Act requires permitted issuers to maintain reserves backing stablecoins on a one-to-one basis using U.S. currency or similarly liquid assets. Additionally, issuers must publicly disclose their redemption policies and publish monthly reports detailing their reserves.

The bill outlines requirements for (1) reusing reserves, (2) providing safekeeping services for stablecoins, and (3) establishing supervisory, examination, and enforcement authority over federal-qualified issuers. Domestic permitted issuers will be subject to these requirements, while foreign issuers must adhere to comparable regulations in their country to offer, sell, or make stablecoins available in the United States.

How will stablecoins and the GENIUS Act affect commercial transactions?

Stablecoins provide several advantages that traditional payment options do not. The GENIUS Act further clarifies these benefits, which include:

• Speed and availability: stablecoins enable payments to be made 24/7, with settlements occurring in minutes rather than days
• Lower costs: payment stablecoins eliminate intermediaries and the accompanying fees typically associated with processing payments. Cross-border transactions benefit from direct payments in stablecoins, avoiding currency conversions and banking delays
• Increase in transparency and control: stablecoins provide real-time tracking of payments and automatically verify compliance with anti-money laundering regulations

The GENIUS Act is set to take effect at the beginning of January 2027 or 120 days after the implementing regulations are issued. In the meantime, businesses should consider taking proactive steps to explore the advantages that stablecoins can provide for them and their contracting partners in future commercial transactions, particularly regarding time and cost savings.

For more information or to seek counsel from our Banking & Finance practice group, please reach out to request a consultation or call us at 216-696-1422.

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According to the  “discharge for value” rule of restitution, a beneficiary that receives erroneously wired funds may keep the erroneously wired funds if: (1) the erroneously wired funds discharge a valid debt; (2) the beneficiary did not make any misrepresentations to induce the payment; and (3) at the time the beneficiary received the payment, it was not aware that the funds were erroneously wired. If these conditions are met, the beneficiary may consider the wire final and maintain ownership of the erroneously wired funds, not subject to revocation.

In the case of In re Citibank August 11, 2020 Wire Transfers, the United States District Court for the Southern District of New York upheld the discharge for value rule of restitution and held that the defendants were entitled to keep funds that were erroneously wired by Citibank. The defendants were certain lenders on a $1.8 billion dollar syndicated term loan that had received an erroneous wire transfer from Citibank, the administrative agent under the loan for the borrower, Revlon. Citibank claimed that it had intended to wire just under $8 million dollars in interest payments to the lenders, but instead wired almost $900 million dollars of its own money to the lenders, in addition to the $8 million dollars in interest payments. The aggregate amount of the wire transfers was exactly equal to the amount of principal and interest outstanding on the loan. Notably, Citibank realized its mistake and promptly notified the lenders before any of the lenders relied to their detriment on the belief that the wire transfers were intentional. Nonetheless, the District Court, citing Banque Worms v. BankAmerica International, ultimately held that the discharge for value rule of restitution applied because: (1) the amount of erroneously wired funds was exactly equal to the amount that Revlon owed to the lenders; (2) the lenders did not make any misrepresentations to induce the mistaken payment from Citibank; and (3) at the time the funds were received, the lenders were not aware that Citibank had made the payment by mistake.

To avoid the occurrence of a similar situation, the District Court advised banks to determine clear standards for the content and timing of payment notices. Further, many commentators have suggested that administrative agents utilize contractual provisions that effectively waive the discharge for value rule of restitution. Though In re Citibank August 11, 2020 Wire Transfers is not precedential in Ohio, it will likely be instrumental in shaping internal wire procedures and payment notice standards across the country.

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Earlier this week, the SBA announced that the portal for the RRF will go live on Friday, April 30, 2021, beginning at 9 am EDT so that qualified applicants may register for an account.  Further, the SBA announced that the portal would officially begin accepting applications to receive funds from the program on Monday, May 3, 2021 at 12 pm EDT.  Applicants will need an account in the system in order to apply for funds.

The SBA is encouraging applicants to familiarize themselves with the application process by registering for an account in advance, ensuring a smooth and efficient experience.  Applicants should also review the official SBA guidance, including the program guide, frequently asked questions, and the sample application.

One notable change is that the SBA has signaled that the portal will remain open to eligible applicants only until the Fund has been exhausted. Previously, there had been speculation about options to increase the funds if the applicants flooded the SBA with requests, as happened last year during the initial round of the Paycheck Protection Program.  This week’s announcements seems to imply that once the RRF funds have been exhausted, the application portal will shut down.

What does this mean for restaurant owners who have suffered huge losses during the pandemic?  For starters, applicants would be wise to review the application requirements in advance and be prepared with all the information required to complete the application once the portal begins accepting applications on Monday, May 3.

Although the SBA has set aside the first 21 days of the application period as a priority window to benefit businesses owned by women, veterans, and socially and economically disadvantaged individuals, it is recommended that any qualified applicant register and apply early.  Expectations are high that the SBA will be flooded with applicants and the funds will quickly be exhausted.

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Application

Ahead of the program launch and over the next two weeks, the SBA will conduct a 7-day pilot period where the SBA will address any technical issues ahead of the launch.  Applicants will be able to submit applications as soon as the program opens, but the SBA will prioritize applications from businesses owned by women, veterans, and economically disadvantaged individuals for the first 21 days.  After the first 21 days, the SBA will accept applications from all eligible participants and process applications in the order in which they are approved by the SBA. The SBA has not announced an official launch date for the program.

Applicants will be able to apply through SBA-recognized Point of Sale Restaurant Partners or directly via the SBA’s forthcoming online application portal.  While the SBA is not currently accepting applications, a sample application can be found on the SBA’s website.  Applicants must complete the application (SBA Form 3172) and provide the following additional documentation with their application:

1. IRS Form 4506-T (completion of this form digitally on the SBA platform will satisfy this requirement); and
2. Gross receipts documentation demonstrating gross receipts and, if applicable, eligible expenses. Gross receipts documentation includes business tax returns, IRS Form 1040 Schedule C, IRS Form 1040 Schedule F, a partnership’s IRS Form 1065 (including K-1s), bank statements, externally or internally prepared financial statements, and point of sale reports (including IRS Form 1099-K).
3. Brewpub, tasting room, taproom, brewery, winery, distillery, or bakery applicants must provide confirming documentation that onsite sales to the public comprise at least 33% of gross receipts.
4. Inn applicants must provide confirming documentation that onsite sales of food and beverage to the public comprise at least 33% of gross receipts.

Eligible Entities

Eligibility for the program is confined to those entities that have experienced pandemic-related revenue loss.  Eligible entities include: (1) restaurants; (2) food stands, food trucks, food carts; (3) caterers; (4) bars, saloons, lounges, taverns; (5) snack and nonalcoholic beverage bars; (6) bakeries; (7) brewpubs, tasting rooms, taprooms; (8) breweries and/or microbreweries; (9) wineries and distilleries; (10) inns; and (11) licensed facilities or premises of a beverage alcohol producer where the public may taste, sample, or purchase products.

Funding Calculations

The SBA may approve up to $5 million per location, not to exceed a total of $10 million per applicant and any affiliated businesses. The minimum award is $1,000.  The SBA has provided three separate calculations to determine an applicant’s funding amount:

CALCULATION 1:

For applicants in operation prior to or on January 1, 2019:

(2019 gross receipts) – (2020 gross receipts) – (PPP loan amounts)

CALCULATION 2:

For applicants whose business operations began partially through 2019:

[(Average 2019 monthly gross receipts) X (12 month)] – [(2020 gross receipts) – (PPP loan amounts)]

CALCULATION 3:

For applicants that began operations on or between January 1, 2020 and March 10, 2021 and have not yet opened but have incurred eligible expenses:

[(Amount spent on eligible expenses between February 15, 2020 and March 11, 2021) – (2020 gross receipts) – (2021 gross receipts through March 11, 2021) – (PPP loan amounts)

Entities who began operations partially through 2019 may elect to use either Calculation 2 or Calculation 3.  Further, for purposes of the program, gross receipts do not include:

1. Amounts received from Paycheck Protection Program (PPP) loans;
2. Amounts received from Economic Injury Disaster Loans (EIDL);
3. Advances on EIDL;
4. State and local grants; or
5. SBA Section 1112 payments.

Eligible Use of Funds

Recipients are not required to repay the funding, as long as funds are spent on eligible uses by no later than March 11, 2023.  RRF funds may be used for specific expenses including:

1. Business payroll costs (including sick leave);
2. Payments on any business mortgage obligation;
3. Business rent payments (not including prepayments of rent);
4. Business debt service (both principal and interest, but not including any prepayment of principal or interest);
5. Business utility payments;
6. Business maintenance expenses;
7. Construction of outdoor seating;
8. Business supplies;
9. Business food and beverage expenses;
10. Covered supplier costs;
11. Business operating expenses.

Conclusion

The SBA will announce in the near future a start date to start accepting applications once the website they will be using has been tested.  Until then, prospective applicants are encouraged to visit the SBA website for additional information and begin assembling all necessary data and documentation requirements for the application.

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As part of its efforts to finalize and unveil program, the SBA has released a draft application form, together with a letter to the Office of Management and Budget asking for emergency review of the materials.  While the application is merely in draft form, it is believed that the finalized application will largely reflect the information included in the current document.  Thus, the draft application helps shed some light on the specifics of the program and what information business owners should have available when applying for the RRF grants.

For instance, the draft application shows that the SBA plans to maximize the covered period under which businesses can spend grant proceeds.  The ARPA identifies a covered period of February 15, 2020 to December 31, 2021, however it also gives the SBA the ability to expand the covered period to no later than two years after the legislation was passed.  The current draft application indicates that the SBA intends to maximize the covered period so that businesses can spend grant proceeds through March 11, 2023.

Further, the draft application provides additional details on the group of applicants given priority under the program.  During the first 21 days of the program, the ARPA gives priority to applications for businesses owned by women, veterans, and/or socially and economically disadvantaged individuals.  Pursuant to the draft application, the applicant must be at least 51% owned and controlled by individuals who are women, veterans, and/or socially and economically disadvantaged individuals in order to receive priority treatment.

Additionally, businesses must not be permanently closed to qualify for the program.  Businesses that have declared bankruptcy but have an approved reorganization plan are still eligible to receive RRF grants.  However, if a business has declared bankruptcy but does not have a plan for reorganization, or has filed for a liquidation, the business will not be eligible for the program.

The draft application also details the documentation required to be submitted when applying for a RRF grant.  All applications must include:

1. a completed application form;
2. a completed IRS Form 4506-T; and
3. documentation demonstrating gross receipts, such as business tax returns, IRS Forms 1040 Schedule C and Schedule F, bank statements, externally or internally prepared financial statements, and point of sale reports. Paycheck Protection Program (PPP) proceeds are removed from gross income for purposes of calculating gross receipts in the application.

Additionally, applicants from businesses defined as brewpubs, tasting rooms, taprooms, breweries, wineries, distilleries, bakeries, and inns must supply additional documentation evidencing onsite sales to the public comprise at least 33% of gross receipts.  In total, the application is expected to take about 45 minutes to complete.

Further guidance by the SBA is expected as the program nears its launch date Though  the application is not “live,” applicants would do well to gather the required information in advance so they have everything ready when the program does go live, especially since the $28.6 billion ear-marked for the program is not expected to last long. In the meantime, the draft application is available for review and can be found at https://omb.report/icr/202104-3245-001.

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Favorable Tax Provisions – Recently, the IRS published its position denying businesses a deduction for expenditures covered by PPP loan proceeds that had a reasonable expectation of being forgiven. Congress, however, has essentially overruled the IRS by legislating that business expenses paid by PPP loan proceeds will be deductible, despite the underlying loan being forgiven, or eligible for forgiveness. This is welcomed news for businesses!

In addition, taxpayers may now obtain a 100% (as opposed to the previous 50% limitation in place) deduction for business meals that will be paid or incurred between January 1, 2021 and December 31, 2022. This increased deduction only applies to business meals, whether dine-in or carry-out, provided by a restaurant.

Congress has also extended, for one more year, the increased limit from the CARES Act on deductible contributions to charity for corporate taxpayers and individuals who do not itemize their deductions. The limit on such deductions was increased to 100% under the CARES Act and shall now stay in place for charitable gifts made in 2021. Taxpayers must maintain documentation to substantiate any gifts made.

Employee Retention Credit – When Congress first passed a COVID-19 relief package, businesses had the ability to take advantage of a refundable payroll tax credit for retaining employees during the pandemic. Notably, businesses could not take advantage of this tax credit and also obtain a PPP loan. However, in this latest relief bill, Congress expanded eligibility for the refundable payroll tax credit to PPP loan borrowers, allowing both future and past borrowers to obtain the credits. Retroactive application of the credits to prior PPP borrowers is permitted.

Second Round of PPP Loans and EIDL Grants – Businesses that previously received a PPP loan may now be eligible to receive another forgivable loan based on the new relief package, provided that they meet the new eligibility criteria. A business is only eligible for a second PPP loan if they have 300 or fewer employees and had at least a 25% reduction in gross receipts for a single quarter in 2020 as compared to that same quarter in 2019. For bars and restaurants in particular, loan amounts must be calculated based on 3.5 times average payroll as opposed to the 2.5 multiplier for other business types. Regardless of the type of business, all PPP loans from the second round are capped at $2 million.

Congress has also mandated a new round of Emergency Injury Disaster Loan grants, for eligible applicants.

Streamlined Forgiveness – The new legislation includes provisions to simplify filing procedures for borrowers to obtain forgiveness for PPP loans for $150,000 or less. This is very good news for borrowers and loan processers alike, as it should save time and stress on obtaining forgiveness.

Sick and Family Leave Tax Credit Extensions – Family and medical leave tax credits provided under the Families First Coronavirus Relief Act will be extended through March 31, 2021, constituting a 90-day extension from the original expiration date of December 31, 2020.

Stimulus Checks – Finally, the new recovery bill provides stimulus payments to individuals, including children, of $600.00, subject to phaseout, similar to what was originally written into the CARES Act. Therefore, if you received a stimulus check during the first round of payments, you will likely be getting another, soon.

Please Consult a Professional Advisor – The first Coronavirus relief package was very complicated and changed very quickly in the weeks and months following its enactment. The second relief bill is nearly 5,600 pages long. It too shall be subject to scrutiny and may change or otherwise be refined as it is rolled out. Businesses are urged to consult with a professional advisor who can help them navigate the complexity ahead and maximize benefits available under the relief bill. Please contact your attorney at McCarthy Lebit to discuss your options and develop a plan that is right for your business.

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Normal commercial business “loans” must be repaid or else the forgiveness of the loan in full or part creates taxable cancellation of debt income. The PPP loans are unique in that the underlying law contemplates the forgiveness of the borrowed money if the borrower has met the criteria for loan forgiveness and submits documents to the lender requesting loan forgiveness. On May 2, 2020, the Department of the Treasury and the IRS released Notice 2020-32 which stated that no deduction is allowed for covered expenses that are otherwise deductible if the payment of the eligible expense results in forgiveness under a PPP loan.

Many commentators wrote to the IRS questioning how taxpayers should report the PPP loans and covered expenses on their 2020 income tax returns. One question is whether the banks issuing the PPP loans should issue IRS Forms 1099-COD for the amount of the PPP loans forgiven. Amounts reported on Form 1099-COD must be included in taxpayer’s income tax returns. In September 2020, the IRS issued guidance to the lending banks directing them not to issue Forms 1099-COD for the amount of the PPP loans forgiven.

Additional questions have been raised as to whether a taxpayer that received a PPP loan, that subsequently may be forgiven, can deduct the covered expenses in the year in which the expenses were paid or incurred. Multiple scenarios arise depending upon when an application for PPP loan forgiveness is submitted by the taxpayer and whether the application for forgiveness is approved or denied in either 2020 or in 2021. The IRS has just issued Revenue Rule 2020-27 and Revenue Procedure 2020-51 to address these questions.

Revenue Rule 2020-27 provides two fact patterns pertaining to taxpayers that properly applied for and received a PPP loan and incurred covered expenses during the covered period in 2020. In the first situation the taxpayer applied for PPP loan forgiveness before year-end 2020 but had no indication from the lender whether the loan would be forgiven. In the second scenario, the taxpayer had not applied for forgiveness before year end 2020 but expected to apply in the subsequent year. Both taxpayers had a reasonable expectation that their respective PPP loans would be forgiven, predicated upon the taxpayers’ compliance with the PPP loan rules.

Revenue Rule 2020-27 analyzed language in the CARES Act, prior IRS Notices, and certain case law, concluding that taxpayers cannot take tax deductions for expenses paid by a PPP loan that is reasonably expected to be forgiven. Whether the taxpayer had received confirmation of forgiveness, or had even applied for such, is irrelevant. What matters is whether the taxpayer, based on compliance with the program rules, has a reasonable expectation that the loan proceeds used to pay the covered expenses are subject to forgiveness. If so, then the taxpayer may not deduct the covered expenses.

Notwithstanding the clarity of Revenue Rule 2020-27, a taxpayer may wonder what happens if, despite having a reasonable expectation of obtaining loan forgiveness, the requested forgiveness is in fact ultimately denied. Or alternatively, what might happen if the taxpayer never actually files for PPP loan forgiveness? To address these contingencies, the IRS issued Revenue Procedure 2020-51, which provides a deduction safe harbor for covered expenses. Pursuant thereto, a taxpayer may be able to deduct some, or all, of the covered expenses paid for with PPP loan funds.

To be eligible for the safe harbor, the taxpayer must have paid or incurred covered expenses during the prescribed time frame and have a reasonable expectation of forgiveness. The taxpayer must also have, by the end of 2020, submitted, or intend to submit, an application for PPP loan forgiveness. Finally, the taxpayer must receive notification from their lender in 2021 that all or part of the loan forgiveness has been denied. Upon such notification, the taxpayer must irrevocably decide to not to seek loan forgiveness for the denied portion of their PPP loan. This can be accomplished by withdrawing the PPP loan forgiveness application. A taxpayer in this situation may deduct the otherwise nondeductible covered expenses paid for using PPP loan funds. Such a taxpayer, however, may not deduct an amount of nondeductible eligible expenses in excess of the principal amount of the taxpayer’s covered loan for which forgiveness was denied or will no longer be sought. As an example, if a taxpayer’s PPP loan amount was $500,000 and he spent the entire $500,000 on covered expenses during the prescribed time frame in 2020 and the forgiveness of the PPP loan does not happen in 2021, the taxpayer using the safe harbor may be able to deduct the $500,000 in eligible expenses in either his 2020 income tax return or alternatively in his year 2021’s income tax return.

A taxpayer making use of the safe harbor must attach a statement to their tax return on which the deduction is claimed, which must be titled “Revenue Procedure 2020-51 Statement”. The statement must include the taxpayer’s name, address and identification number, a statement specifying the taxpayer is eligible under Revenue Procedure 2020-51 and is applying the safe harbor rules, the amount and date of the taxpayer’s PPP loan, the total amount of forgiveness that was denied or abandoned, the date such denial or abandonment occurred, and the total amount of eligible expenses and nondeductible eligible expenses that are reported on the tax return.

PPP loan administration, forgiveness applications, and tax compliance remain challenging and changing. Please contact your professional tax advisors for additional assistance with maximizing the benefits available to your business and maintaining compliance with your tax obligations.

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Businesses Eligible for the Small Business Relief Grant

Not every small business may receive an SBR Grant; only a business that meets the following criteria will be eligible:

• The business must be a for-profit entity with no more than twenty-five (25) total or full-time equivalent Ohio employees;
• The business must have a physical location in Ohio and derive at least ninety percent (90%) of its annual revenue based on activities performed in and taxable in Ohio;
• The business must have been in continuous operating since January 1, 2020 (except for government-mandated COVID-19 orders) and has the ability to continue operations as a going concern;
• The business must be in good standing with the Ohio Secretary of State, the Ohio Department of Taxation, and any other governmental entity charged with regulating the business;
• The business has experienced revenue loss or incurred unplanned costs substantially caused by COVID-19 and a grant is necessary to help it recover from the impact of COVID-19; and
• If applicable, the business has fully utilized any other government support received (including both grants and loans) by the applicant business for business expenses incurred due to COVID-19 or that can be utilized for business expenses incurred due to COVID-19.

Businesses that are not eligible for an SBR Grant include publicly traded entities, clubs, businesses engaged in the sale or distribution of liquor (excluding bars and restaurants), tobacco or vaping products, and gambling institutions, among others. Therefore, bars and restaurants may be eligible for both an SBR Grant as well as the Bar Fund (as further explained below).

Application Process and Eligible Uses for Small Business Relief Grant Funds

A business is only eligible to receive one grant under the SBR Grant program, and all entities with the same FEIN will be treated as a single business for the purposes of the determining program eligibility. With respect to the SBR Grant application, the Development Services Agency will require businesses to supply specific details and documentation concerning the business, which shall include the following:

• Number of W2 employees as of January 1, 2020, including documentation to support said number;
• Documentation to verify that the applicant business has incurred business costs during the 60-day period prior to the application being filed; and
• The business’s most recent Federal or State income tax return.

In addition, by completing and signing an application, a business certifies to the Development Services Agency and to the State of Ohio that the information, representations and certifications set forth therein are true and correct. Knowingly making a false statement on an application may subject a business to fines and/or other civil and criminal penalties.

If an application is approved and a business receives an SBR Grant, the proceeds may be used to reimburse eligible expenses associated with COVID-19 that were incurred between March 22, 2020 and the date their application was submitted. Eligible expenses include the following:

• Business supplies or equipment, including personal protective equipment for employees, customers and clients, and measures taken to protect employees, customers, or clients from COVID-19;
• Mortgage or rent payments for business premises;
• Utility payments; and
• Salaries, wages, or compensation paid to contractors or employees, including employer’s share of health insurance costs.

Costs for non-COVID related expenses are ineligible, in addition to costs incurred for tax obligations, non-business purposes, political purposes, and costs for which the business has or will receive reimbursement from another source, including any other government loan or grant program and insurance proceeds.

Awarding Small Business Relief Grant Funds

To ensure that small businesses in each of Ohio’s 88 counties receive SBR Grants, $44 million has been set aside to provide 50 businesses in each county with funding. Once a county’s allocation has been depleted, businesses will be allocated the remaining $81 million in funds regardless of their location in Ohio. In either case, applications will be approved on a first-come, first-served basis.

Businesses Eligible for Bar and Restaurant Assistance Fund

The Bar Fund was established to provide relief to 28 different liquor permit types, as shown below, which include those for bars, restaurants, breweries, distilleries, wineries, casinos and private clubs:

Licensees with any of the above-listed permits must have an active on-premise permit as of the close-of-business on October 23, 2020, however, the business does not have to be currently open. The status of a permit can be verified through the Ohio Division of Liquor Control’s online portal at https://www.comapps.ohio.gov/liqr/liqr_apps/PermitLookup/PermitHolder.aspx.

Because bars and restaurants may also be eligible for an SBR Grant, liquor permit holders could potentially receive a grant from the Bar Fund as well if they meet the specific requirements for each.

Application Process and Eligible Uses for Bar and Restaurant Assistance Funds

As part of the Bar Fund application process, a licensee will need to submit its FEIN or SSN, and liquor permit number and address for each unique location. Applications will be accepted through December 30, 2020, and after applying, a licensee will receive $2,500 per unique business location.

Once a licensee receives funds, said funds are to be used on COVID-related expenses due to business interruptions caused by the pandemic.

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Extension of Covered Periods

Through the Flexibility Act, borrowers can elect to extend the PPP’s eight-week covered period for loan forgiveness purposes to 24 weeks. This will give borrowers more time to strategically use loan proceeds to maximize forgiveness. However, because PPP guidance continues to evolve and change, borrowers should avoid using the extended period on the loan forgiveness application if full loan forgiveness can be achieved during the original eight-week covered period.

Use of Loan Proceeds

Previously, in order to obtain full loan forgiveness, a borrower had to spend at least 75% of loan proceeds on payroll costs and no more than 25% on non-payroll costs. If a borrower was unable to meet that 75% threshold for payroll costs, loan forgiveness would be proportionately reduced based on the actual percentage spent on payroll. Under the Flexibility Act, the 75% threshold has been lowered to 60%. The SBA and Department of the Treasury issued a joint statement that clarified borrower’s will still be eligible for partial loan forgiveness if less than 60% of loan proceeds are not allocated to payroll costs, as was the case with the previously higher threshold. While this provides flexibility in terms of spending loan proceeds on non-payroll costs, the lower threshold represents such a significant departure from the prior rule that borrowers should expect further guidance.

Rehiring Deadline Extension

Under the original text of the PPP, the forgivable portion of a loan was proportionately reduced if a borrower did not rehire laid off employees by June 30, 2020 to the level that existed February 15, 2020. Under the Flexibility Act, the “rehire date” has been extended to December 31, 2020.

Workforce Reduction Safe Harbor

In the event a borrower attempts to rehire employees but is unsuccessful, the Flexibility Act provides an exemption from a reduction in loan forgiveness if, during the period beginning February 15, 2020 and ending December 31, 2020, the borrower is able to document, in good faith, one of the following: (1) it could not find qualified employees to hire; or (2) it could not restore its business to a comparable level of activity because of federal health guidance such as social distancing.

Loan Repayment Extension

Prior to the enactment of the Flexibility Act, the period for repaying any loan amount not forgiven was two years. That repayment window has been extended to five years, with the interest rate remaining at 1%.

Payroll Tax Deferral

Regardless of whether a borrower receives loan forgiveness, the Flexibility Act has made clear that borrowers are eligible to defer their employer’s share of payroll taxes. If a borrower elects to defer such taxes, 50% of the deferred amount must be paid in 2021, with the remaining 50% due in 2022.

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A PPP loan is forgivable to the extent that borrowers carefully follow certain requirements implemented by the SBA. In order for a loan to be completely forgiven, borrowers must use at least 75% of the loan proceeds on payroll costs during the eight-week period after receiving the loan, while the remainder can be used for certain specific nonpayroll costs: rent payments, utility expenses, and mortgage interest payments. The intention of the program is for small businesses to maintain employment and compensation levels during this period of economic uncertainty due to the coronavirus pandemic. The attorneys at McCarthy Lebit have written extensively about the PPP in The More Report.

The PPP Loan Forgiveness Application and its instructions include measures to reduce compliance burdens and simplify the process for borrowers. Step-by-step instructions explain how to perform the forgiveness calculations required by the CARES Act and confirm eligibility for loan forgiveness. Notably, the 75% requirement is not an “all-or-nothing” requirement and a borrower who spends less than 75% on payroll costs is still eligible for forgiveness.  The application makes clear that in such a scenario, “eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount.”

The application also includes the option for borrowers to calculate payroll costs using an “alternative payroll covered period” which is an eight-week (56-day) period that begins on the first day of the borrower’s first pay period following the PPP loan disbursement date. Further, the application includes the addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined. A copy of the application and its instructions can be found on SBA’s website. Borrowers also have the option to complete the application electronically through their lenders.

Additional guidance on the application is expected to be released soon. Given the potential complexity of the loan forgiveness calculations and the numerous requirements of the PPP, borrowers are advised to contact their professional advisors for help in completing the loan forgiveness application.

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