Paycheck Protection Program Flexibility Act Enhances The Value Of PPP Loans For Business OwnersJune 8, 2020
On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act (PPPFA). The PPPFA was passed to give businesses, who have or will participate in the Paycheck Protection Program (PPP) more flexibility regarding the use of their PPP loans. These changes will enhance the value of PPP loans for most businesses. The PPPFA also made some additional limited changes to the CARES Act. Below is a summary of key changes under the PPPFA.
1. The “Covered Period” for Loan Forgiveness Is Extended From 8 To 24 Weeks
Under the PPP loan program as initially drafted, a business can have a portion of its PPP loan forgiven, if it can show that the business used the loan proceeds for qualifying payroll, rent and utility expenses during the eight-week period following the date it received the loans. This eight-week period is known as the “covered period.” The length of the covered period has now been extended under PPPFA. The extension allows businesses additional time to get their operations restarted. This change will affect businesses differently depending on whether they have already applied or whether they will apply for a loan under the PPP.
New Borrowers—those businesses that have not yet applied for PPP loans—now have the option to extend the “covered period” from eight weeks to the earlier of: (a) 24 weeks after receiving the PPP funds; or (b) December 31, 2020.
Current borrowers—those that have already applied for PPP loans—will have the option to use the new 24-week period or apply for forgiveness using the original eight-week period.
2. Only 60%, Instead Of 75%, Of A PPP Loan Must Be Used For Payroll.
Under earlier PPP guidance from the SBA, at least 75% of the loan forgiveness amount must be used for payroll costs and up to 25% could be used for mortgage interest, rent and utilities. The PPPFA has now eliminated this rule.
The new rule under PPPFA provides that to receive loan forgiveness, a business must use at least 60% of the loan amount on qualifying payroll costs and no more than 40% can be attributable to non-payroll costs such as rent and utilities. Unlike the old rule, this new rule is “all or nothing.” If a business spends more than 40% of the loan amount on non-payroll costs, then it is not eligible for forgiveness of any amount.
3. Businesses Have Additional Time To Restore Employees
A business that rehires or replaces workers who it had previously laid off will now be exempt from the reduction in loan forgiveness. Under the PPP program as initially drafted, a business that laid off workers or reduced its workforce had to rehire those employees during the eight-week period “covered period” or face a reduction in the amount of loan forgiveness. That rule has now been modified under the PPPFA.
Under the PPPFA, any business that rehires or replaces workers can do so either during the eight-week covered period or now during the 24-week covered period provided that: 1) such employee reduction occurred between February 15, 2020 and April 26, 2020, and 2) the business restored its full time equivalent employee levels by no later than December 31, 2020 to the full-time equivalent levels that were in place on February 15, 2020. If the business restores its full-time equivalent workforce levels by December 31, 2020, to the same level as existed on February 15, 2020, there will be no reduction of the forgiveness amount
4. Safe Harbor For Businesses That Are Unable To Restore Full-Time Equivalent Workers Due to Regulatory and Guidance Compliance
For those businesses that may be unable to restore their workforce by December 31, 2020, due to governmental regulations or mandates, Congress has provided additional relief through a new safe harbor. Now any business that is unable to restore its workforce may now be entitled to loan forgiveness anyway if it can document that:
- It was unable to rehire individuals who were employees on February 15, 2020 and unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or
- It was unable to document its ability to return to the same level of business activity as it was operating at before February 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 December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
5. Loan Repayment Period Extended to Five Years
The PPP program had initially required that the loan must be repaid in two years. Now, however, that period has been extended to five years for:
New Borrowers—the repayment period is now five years for any loans that are issued after June 5, 2020.
Current Borrowers—can be extended for up to five years, if the lender and the borrower agree.
In addition, a borrower’s first payment is deferred until such time that the forgiveness is granted by the SBA and remitted to the borrower’s lender. Note that the 1% interest rate remains unchanged.
6. Payroll Tax Deferral
PPPFA allows businesses that took a PPP loan to take advantage of the CARES Act deferral of the 6.2% employer portion of payroll taxes (FICA). This relief is permitted regardless of whether the business had a PPP loan forgiven. Before the PPPFA, businesses were not allowed to defer the employer’s share of FICA taxes after any portion of the PPP loan was forgiven.
Businesses should keep in mind that this deferral of FICA taxes is different from the CARES Act employee retention tax credit. The PPP and employee retention tax credit are still mutually exclusive, so businesses may not apply for both.
If you have any questions about this alert, please contact the Financial Services and Incentives members of our COVID-19 Response Team indentified below.
Contact information for the complete McGrath North’s COVID-19 Response Team can be found here.
For information regarding additional business-related concerns centered around COVID-19, please visit our COVID-19 Resource Guide here.