New 60% Paycheck Protection Program Threshold is not a Cliff Test
The Paycheck Protection Program (PPP) Flexibility Act was signed into law last Friday, and it reduces the amount of PPP money that must be spent on payroll costs to qualify for forgiveness from 75% to 60%. One of the concerns that remained after the passage of the PPP Flexibility Act last week was whether or not a PPP borrower would receive any forgiveness if they spent less than 60% of the PPP loan proceeds on payroll costs.
In a somewhat surprising decision, a joint statement issued yesterday by Treasury Secretary, Steven Mnuchin, and SBA Administrator, Jovita Carranza, announced some additional flexibility to the Act. The joint statement clarifies that the new 60% test is not a cliff test. Instead, partial forgiveness is achievable for those recipients who spend less than 60% on payroll costs. Payroll costs include payroll, state payroll taxes, group health insurance, and retirement plans.
For example, If a borrower spends less than 60% of the PPP loan money on payroll costs, then the borrower determines their available forgiveness amount by taking the total amount of payroll costs and dividing by 1.5. For example, if the loan amount is $150,000, and the borrower spends $60,000 on payroll costs and the remaining amount on rent, utilities, and interest, then only $100,000 ($60,000/1.5 = $40,000 + $60,000) will be forgiven instead of $0 forgiveness.
We expect that there will be additional guidance and clarification in the coming days, weeks, and months. We’ll keep you informed as additional guidance continues to be released.