This past Friday, on June 5th, the Paycheck Protection Program Flexibility Act of 2020 was signed into law creating changes to the Small Business Administration’s Paycheck Protection Program (PPP). The Act has a substantial impact on small businesses that obtained a PPP loan under the CARES Act.
The following is a summary of the legislation’s main points: New options include a 24-week covered period, payroll expenditure requirement reduced to 60%, and, for those loans not forgiven, a repayment plan of 5 years.
Current borrowers have the option to extend the 8-week period to 24 Weeks
- Provides flexibility for borrowers that may make it easier to achieve full or near-full forgiveness if current conditions aren’t conducive to bringing back employees.
New borrowers have a covered period of 24 weeks after the loan proceeds are received or December 31, 2020, whichever is earlier.
- The deadline for PPP loan applications continues to be June 30, 2020.
- Based on “Congressional Intent for H. R. 7010” letter and June 8, 2020 Joint SBA and Treasury statement.
The 75% payroll expenditure requirement is reduced to 60%.
- In the original CARES Act, 75% of eligible costs were to be used for payroll and if not, there was a reduction in loan forgiveness.
- This Act provides that borrowers shall use at least 60% of the covered loan amount for payroll costs.
- Per June 8, 2020 Joint SBA and Treasury statement, “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.”
- Because the loan amount is based on 10 weeks of payroll, borrowers may have a good chance of meeting the 60% requirement with the covered period extended to 24 weeks.
Opportunity to avoid FTE Reduction penalties if headcount is restored by December 31 instead of June 30
- Borrowers have a longer period to restore workforce.
- It is unclear if the borrower can claim the safe harbor was met prior to Dec. 31. Additional guidance is needed.
New exceptions for FTE reduction provided if borrower documents an inability to:
- Rehire individuals who were employees of the eligible recipient on February 15, 2020;
- Hire similarly qualified employees for unfilled positions on or before December 31, 2020;
- Return to the same level of business activity as before Feb. 15, 2020, due to compliance with requirements established or guidance issued related to COVID–19.
Repayment period extended to five years for new loans
- Existing PPP loans can have maturity extended if lender and borrower agree
- Interest rate to remain at 1%
PPP Borrowers can now qualify for the deferral of employer’s share of payroll taxes available under the CARES Act
- Deferral of Social Security payments (6.2%)
- 50% due in 2021, remainder due in 2022
Loan Payments are deferred until the SBA determines the amount of loan forgiveness and remits to the lender
- Had been a 6-month deferral
- However, if borrower doesn’t apply for forgiveness within 10 months after the last day of the covered period, payments will be required at that 10th month.
This legislation does not address tax deductibility of expenses paid with a forgiven PPP loan, and as of June 8, 2020, additional guidance is still needed regarding changes in the calculation of Salary And Hourly Wage Reduction as well as Safe Harbor rules and timing.