THE PAYCHECK PROTECTION PROGRAM FLEXIBILITY ACT (PPPFA)
The Paycheck Protection Program Flexibility Act (PPPFA) passed nearly unanimously by the U.S. House of Representatives and U.S. Senate. President Trump signed it into law on Friday June 5, 2020. The PPPFA was intended to ease some of the forgiveness provisions of the CARES Act passed on March 27, 2020, as well as correct some of the deficiencies of the CARES Act. Here are some of the highlights.
Time Period to Use the Loan Proceeds – The time period for PPP loan borrowers to expend loan proceeds was extended from 8 weeks to 24 weeks. This provides more time to small businesses to use PPP-provided funds. Current PPP borrowers can elect either an 8-week covered period or a 24-week covered period. New borrowers will have to use a 24-week covered period. The covered period cannot extend beyond December 31, 2020.
Flexibility on use of PPP Proceeds – Recall, the CARES Act did not have any requirement on the amount required to be used on payroll costs in order to receive forgiveness. The Small Business Administration (SBA) added a requirement that at least 75% of the loan proceeds must be spent on payroll costs to achieve full forgiveness. The PPPFA provided additional flexibility to PPP loan borrowers on how they use those proceeds by lowering the amount required to be spent on payroll to qualify for full loan forgiveness — to 60%. While the PPPFA made this 60% a “cliff”, the Treasury Department issued a June 7, 2020 statement advising of its intention to abolish the 60% cliff, but no more details are available at this time.
Extended Date to Rehire and/or Eliminate Reduced Salary and Wages – Under the CARES Act, the date to rehire employees was June 30, 2020. This is the period by when an employer may rehire employees or eliminate a reduction in salary, or wages that would otherwise reduce the forgivable amount of a paycheck protection loan. The date is extended to December 31, 2020.
Reduced Headcount Penalty – The PPPFA removes a reduced-headcount penalty for businesses facing workforce challenges by providing that the forgiveness amount must be determined (and shall not be reduced due to a reduction in the number of employees) if the recipient is (1) unable to rehire former employees and is unable to hire similarly qualified employees, or (2) unable to return to the same level of business activity due to compliance with federal requirements or guidance related to COVID-19. A borrower should be able to document this in good faith.
Loan Term – Originally, the loans had a 2-year term. The PPPFA extended the term to 5 years for PPP loans that originate after the passage of the PPPFA (June 5, 2020). For example, for any PPP Loans or parts of Loans that are not forgiven, they will become a 5-year loan. For existing PPP loans, banks and borrowers are permitted to mutually agree to modify the maturity terms to adjust for this change.
Payroll Tax Deferral – Under the PPPFA, PPP borrowers with loan forgiveness may also qualify for the COVID-19 related tax credit to defer payroll taxes, which had been previously prohibited.
Deferral of Loan Payments – Payment are not due until after the bank receives the forgiveness amount for your loan from the SBA. However, if the borrower does not apply for forgiveness for 10 months after the last day of the covered period, payments will become due 10 months after the end of the covered period. This new deferral does not apply to borrowers who elect the 8-week covered period.
NOTE: – According to the Small Business Administration (SBA), there remain funds available for PPP loans. As of June 6, 2020, there still remains approximately $160 billion of funds available. The PPP application deadline remains June 30, 2020.
We can expect additional guidance as well as modified application and forgiveness forms from the Treasury and SBA in the future.
The contents are intended for general informational purposes only and are not tax or legal advice. You are urged to consult a tax advisor or lawyer concerning your own situation and legal questions.