This article is sponsored by The Fitness CPA.
[Editor’s Note: This sponsored article originally appeared on the website of The Fitness CPA. It has been adapted for use on Club Industry’s website, edited for style and updated with the latest information about the bill’s passage.]
[Author’s Note: This post is about the changes to the Paycheck Protection Program resulting from the Paycheck Protection Program Flexibility Act of 2020 only. If you want a full breakdown of the full Paycheck Protection Program, please check out other blogs that go into more detail.]
The guidance from the Small Business Administration (SBA) interpreting the Paycheck Protection Program (PPP) has been untimely, inconsistent, and incomplete. Many of you have been patiently waiting for changes to the program and watching as your eight-week period approaches any day or has possibly even passed.
On June 5, 2020, the president signed into law the Paycheck Protection Program Flexibility Act to address some of the issues that small business owners had with the rules related to PPP. Even if you feel that the changes are two months late and a dollar short, they offer a lot of good news for the industry. If you have questions about what this bill means for health club operators, we have some explanations below.
President Signs the Bill
First, more on the bill itself. On June 3, 2020 the Senate passed the H.R. 7010 bill that Congress wrote and passed the week prior. On June 5, the president signed the bill. This has been the long-awaited patch to the PPP program business owners, CPAs, bankers, and even members of Congress have been clamoring for. The bill itself is a short one page document that changes key terms and definitions in the Cares Act law.
The bill includes some good things and some glaring oversights, but we’ll get into that in a minute.
The Four Horsemen of PPP Forgiveness Reduction
First, understand the PPP program allows for forgiveness of the loan amount provided certain criteria are met. This is the carrot everyone has been chasing for two months: what do I have to do to get my loan forgiven (also known as: how do I get my free money)?
Prior to today, there were generally four ways to have your PPP forgiveness reduced or limited. They were:
- Using less than 75 percent of the funds for payroll within eight weeks
- Reducing your headcount or full time equivalent (FTE)
- Receiving EIDL funds.
- Reducing a single person’s pay below 75 percent of the look-back period
This is an overly simplistic summary, but it illustrates the limitations most fitness business owners are facing and how the bill helps loosen these restrictions.
New PPP Regulations Change the 75 Percent Rule
The two major changes to the bill are that:
- Only 60 percent of the funds are required to be used for payroll (rather than 75 percent)
- Business owners have 24 weeks rather than eight weeks
These changes are a major reprieve for gyms and fitness studios across the nation who have been wondering how they meet the 75 percent requirement when their facility is closed and their employees are home. If you’ve been reading our content or attending our webinars, we’ve been counseling everyone to only pay workers who are currently working because we predicted, correctly, that these changes were coming. It’s unfortunate for owners who did not have professional advice (or the right professional advice) and ended up paying workers who were staying at home, but here we are. Let’s focus on the road ahead.
This 24-week period should make it fairly easy for owners of almost every kind to meet the 60 percent threshold and is the only piece of good news I have received so far this year.
If you’re still having trouble, remember that the 24-week period begins either on the date you received the funds, or you can choose an alternative period and start your 24 weeks on the pay date after you receive your funds, possibly providing you with an additional two weeks.
Change in FTE Head Count Requirement
Originally, the law reduced your PPP forgiveness by the percentage of employees that weren’t brought back by June 30. And sure, you could bring back people to replace employees who weren’t coming back, but many businesses are not what they once were and either can’t or don’t have the capacity to have the same level of staffing. COVID19 gutted businesses more than Congress anticipated back in mid-March when the Cares Act was written.
Fix No. 1: The Flexibility Act extends that time to Dec. 31, 2020.
Fix No. 2: The bill renders the headcount requirement largely a non-issue. It does this by providing an exemption of sort to businesses that certify in good faith that they are:
- unable to rehire former employees and unable to hire similarly qualified employees
- unable to return to the same level of business activity due to compliance with government requirements or guidance related to COVID-19.
The details say if the business “is able to document an inability to return to the same level of business activity as such business was operating at before Feb. 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending Dec. 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”
This seems like a nice low bar for most fitness business owners. With this exemption, almost every business in America that has been affected by COVID19 shutdowns and closures should be relieved of meeting the full time equivalent (FTE) requirement. In the odd business that is doing better, chances are that you’ve had to staff up to support your growth.
This was perhaps the most complicated part of the forgiveness calculations that had accountants reeling over the amount of work involved to project and plan for how much of the PPP funds would need to be paid back. It’s unclear whether we need to still figure out the full-time equivalent differences on the forgiveness application at all. I’m hoping the forgiveness application is simplified.
The Paycheck Protection Program Flexibility Act is silent on the third potential reduction in PPP forgiveness, which is pay reduction. So unless something changes, you’ll need to pay at or greater than 75 percent of their previous pay. This goes for both salaries and for hourly rates.
If you need to keep pay reduced, as long as you bring it back to normal pay rates by the earlier of Dec. 31, 2020, or the date you file your PPP forgiveness application, you are okay. Otherwise, you may need to pay back a portion of your PPP funds.
Our recommendation is to bring pay levels back to where they were previously by the dates specified.
The Paycheck Protection Program Flexibility Act is also silent on the fourth potential reduction in PPP forgiveness, which is Economic Injury Disaster Loan (EIDL) funds. So unless something changes, your PPP forgiveness is reduced by the amount of the EIDL grant you may have received ($1,000 per employee up to $10,000 maximum). We never expected changes to this portion of the law as the intent is to keep business owners’ hands out of both cookie jars.
Improved Repayment Terms
The Paycheck Protection Program Flexibility Act improves the repayment terms from two to five years and includes a 10-month deferment period. So if you have had your forgiveness reduced for any reason, those funds are paid back over five years at a rather generous one percent interest rate. The Flexibility Act also allows for PPP loan recipients to defer payroll taxes where previously they were ineligible. We don’t recommend any business owner get behind on payroll taxes and do not recommend utilizing this strategy.
Still Unclear and Forever Waiting
Several items remain unclear:
- Do schedule C filers’ PPP loans get automatically forgiven since they have no employees? We think so.
- Do wages paid to family members of shareholders or owners of the business count toward the 60 percent requirement? The U.S. Treasury has not released guidance on this 10 weeks after the CARES Act was passed (as of this writing).
- Will the $15,385 limit on employee and owner compensation includable in the forgiveness calculation increase?
Expenses paid for with PPP funds are still not deductible, according to the U.S. Treasury, contrary to the CARES Act itself. We expect this to be litigated in courts if it is not fixed soon by Congress.
There are still dozens of unanswered questions we expect to be released to address a myriad of other nuanced issues now that the Flexibility Act has been passed.
Glimmer of Hope Is Fading
Our hope was that loans under a certain dollar amount would be completely forgiven. Say, for example, loans under $150,000 or $500,000 would not need to meet any requirements at all. This seemed to make sense to the CPAs and bankers across the nation that we spoke with. For a while, it seemed like this rumor floating around was a real possibility. Now with the passage of the Paycheck Protection Program Flexibility Act of 2020, I believe the chances of “rubber stamping” loans of any amount are much less of a reality.
Updated PPP Forgiveness Application
As a small business owner and CPA, I was hoping for the rubber stamp that would eliminate the need for the forgiveness application entirely. And while the Paycheck Protection Program Flexibility Act of 2020 greatly helps most business owners qualify for maximum loan forgiveness, it still burdens business owners, accountants and bankers with the forgiveness application process. These 11 pages are not fun. And while better now than before, I am anxiously awaiting to see if the U.S. Treasury blesses us with a simplified and streamlined forgiveness form.
The U.S. Treasury Can Still Screw It Up
It’s important to note that the U.S. Treasury interprets the financial and tax laws. And while the Paycheck Protection Program Flexibility Act of 2020 seems incredibly clear on its intentions, the U.S. Treasury has already directly contradicted the CARES Act numerous times. So we’ll wait with bated breath to see what the U.S. Treasury does with this simple one page change. Tony Nitti summed it up best by saying: “I’m not sure what type of wiggle room they’ll have, given the statutory language, but when you consider that the SBA pretty much took a blowtorch to the legislative text of the CARES Act, I guess anything is possible.”
The Paycheck Protection Program Flexibility Act of 2020 should hopefully clarify many of your questions, but we know this is confusing stuff. If you have a question, even if you’re not our client, use our contact us page and I’ll respond in 24-48 hours. My team and I are happy to help.
In the meantime, check out our COVID-19 Resource Hub where we’ve compiled our latest blog posts and YouTube videos along with third-party resources that we find valuable. There is some great stuff in there.
Better yet, download our most recent guide on How-to Survive COVID-19 As a Fitness Business Owner. It’s a great resource.
Until next time.
Eric Killian is a CPA and founder of The Fitness CPA. Fitness is a big part of who he is. Maintaining a healthy lifestyle, eating well (mostly paleo), hiking, backpacking, mountaineering, practicing yoga and Crossfit are all important cornerstones of life. But Kiillian also loves ice cream and cookies too much to say no. He enjoys helping owners make sense of their business and finding ways to grow it. It’s an honor to help you see situations, scenarios and opportunities from all sides so you can make informed decisions.