On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act (PPPFA). The new law addresses many concerns with the Paycheck Protection Program (PPP) aimed at providing relief to small businesses affected by the COVID-19 pandemic. In addition, it provides businesses with greater flexibility and more time to maximize forgiveness of loans received under the PPP.
PPPFA changes amount of loan needed for payroll to 60%. The PPPFA reduces the amount of the loan needed to be spent on payroll from 75% to 60%, thus increasing the amount of funds available for other expenses from 25% to 40%. It does not change the list of expenses eligible for forgiveness. It still includes rent, mortgage payments, utilities, and interest on loans.
PPPFA extends time period to use funds from 8 to 24 weeks. Business owners wanted to have the flexibility to spend their loan after reopening, especially on payroll when workers returned to work and were not sitting idle. The eight-week window under the previous PPP initiative, required companies to use the funds when many would still be closed.
While businesses will still need to spend the money on payroll and authorized expenses, they now have until the end of 2020 to do so. This should make receiving complete loan forgiveness more likely since the loan amount was based on one month of 2019 payroll multiplied by 2.5, which equals approximately 10 weeks. Businesses should now have the flexibility to spend the PPP funds when they like for the remainder of the year. The PPPFA also does not require businesses to wait for 24 weeks to apply for forgiveness and can still do so after eight weeks if they prefer.
PPPFA pushes back deadline to rehire workers to December 31, 2020. Under the new law, businesses now have until December 31, 2020, to rehire workers in order for their salaries to count towards forgiveness. The law did not change how salaries are calculated towards forgiveness. The payroll calculation used in the loan application still applies to the forgivable amount. So, employee compensation eligible for forgiveness is still capped at $100,000, and until further guidance, employer owners and contractors are still capped at $15,385.
PPPFA eases rehire requirements. The new law makes two significant changes. First, it extends the rehire date to December 31, 2020, and second, it adds additional exceptions for a reduced head count. The law states a business can still receive forgiveness on payroll amounts if it:
- Is unable to rehire an individual who was an employee of the eligible recipient on or before February 15, 2020;
- Is able to demonstrate an inability to hire similarly qualified employees on or before December 31, 2020; or
- Is able to demonstrate an inability to return to the same level of business activity as such business was operating at prior to February 15, 2020.
There should be additional guidance coming specific to how companies demonstrate the inability to rehire similarly qualified employees or what the standard to demonstrate the inability to return to previous levels of business activity would be. Regardless, even with a reduced head count based on these exceptions, if 60% of the loan is still used on payroll throughout the remainder of 2020, it will be forgiven. Businesses will need to document in writing as thoroughly as possible their efforts to rehire employees through December 31, 2020.
PPPFA extends the repayment term to five years. The new law also eases repayment terms in the event loans or portions of them are not forgiven. A business now will have five years at 1% interest to repay the loan. Further, the first payment will be deferred for six months after the SBA makes a determination on forgiveness. Since under current regulations your bank has 60 days to make a forgiveness determination and the SBA an additional 90 days, this means you could have up until May of 2021 to make the first payment on the loan.
In addition, the PPPFA also allows borrowers to take advantage of the CARES Act provision allowing deferment of the employer’s payroll taxes for Social Security. Previously, PPP did not permit deferment of these taxes on the forgivable portion of the loan.
Treasury guidelines still provide for SBA loan audits. The SBA can still look at how a business calculated the original loan amount and review whether it had access to credit elsewhere when determining if all or a portion of the loan should be forgiven. All businesses, especially those with loans in excess of $2 million, should prepare to explain why the funds were financially necessary at the date of application.
Thorough documentation of the financial health of the business at the time of the loan application and detailed tracking of how the loan is expended will prevent any issues down the road. It is important to note that the responsibility for accurately calculating the loan amount and the forgiveness amount rests with the borrower.
There may still be further revisions to the PPP. We will continue to monitor any new developments and share them as appropriate. If you have questions about the PPPFA, please contact Johnson & Bell Shareholders Mark D. Belongia or Joseph F. Spitzzeri.
For more information about developments related to the COVID-19 pandemic, please visit The Docket.