Updates to the Paycheck Protection Program – PPP Flexibility Act of 2020
By: Daniela Silva and Adrian Karborani, Robert Allen Law
[UPDATE: This is an update to an earlier article published to the Robert Allen Law blog titled CARES Act Relief Programs Now Live on April 3, 2020.]
On June 5, 2020, the President signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”). The PPP Flexibility Act amended the Paycheck Protection Program (“PPP”), which was first introduced under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The purpose of the PPP Flexibility Act is to provide business with greater flexibility over the use of loan proceeds and to make it easier for business to obtain loan forgiveness. The most important things you need to know now are:
- Maturity Date Extended from 2 Years to 5 Years
Although the CARES Act did not define the minimum maturity date for loan amounts after the forgiveness period, the Small Business Administration (“SBA”) clarified the minimum maturity date was two (2) years. The PPP Flexibility Act has extended this time to five (5) years. This means that in the event a portion of your PPP loan is not eligible for forgiveness, you will have five (5) years to repay that portion of the loan.
- Reduction of the Covered Loan Amount for Payroll Costs
By far one of the most significant changes is the amount of money that may now be used for non-payroll costs. When the CARES Act was passed, there was little guidance on what amount of a loan may be used for authorized non-payroll purposes. The US Treasury and the SBA eventually decided that at least 75% of PPP loan proceeds must have been used to cover payroll costs, or the amount of money eligible for forgiveness would be reduced. Under the PPP Flexibility Act, small businesses now only need to spend at least 60% on payroll costs and are free to utilize up to 40% of the loan proceeds to pay other authorized expenses. This change was necessary as many businesses are no longer operating anywhere near pre-COVID levels and cannot, even with financial assistance, restore their full workforce.
- Extension of Timeline to Rehire Employees
The PPP required employers to maintain substantially the same number of employees on payroll at their pre-COVID wages and salaries or the money eligible for forgiveness would be reduced commensurate with the reduction in workforce or wages. As discussed above, even with financial assistance from the PPP, this was just not possible for many businesses who were unable to rehire their full workforce and were hesitant to spend the loan money if they were unsure that they could repay the loan in the future. The PPP Flexibility Act extends the period in which an employer may rehire employees or return employee’s salaries and wages to pre-COVID levels. Specifically, under the PPP, small businesses had until June 30, 2020 to restore employee’s salaries and wages and rehire employees. However, under the PPP Flexibility Act, businesses now have until December 31, 2020. In addition, the forgivable amount will now be determined without regard to a reduction in the number of employees if the business 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. Given that virtually all businesses will likely fall into one of these two categories, a reduction in workforce will no longer prevent loan recipients from receiving loan forgiveness.
- Extension of Deferral Period
Previously, PPP loan payments on principal, interest, and fees were to be deferred until 6 months after the loan’s funding date. The PPP Flexibility Act extended this referral period to the “date on which the amount of forgiveness determined under Section 1106 of the CARES Act is remitted by the lender.” If a recipient does not apply for forgiveness, the PPP Flexibility Act states that a recipient will have 10 months from the program’s expiration to begin making payments.
- Extension of Covered Period
Under the PPP, all money spent on a permissible use had to be used within the first eight (8) weeks after disbursement of the loan. With the enactment of the PPP Flexibility Act, the covered period during which a loan recipient may use such funds for certain expenses while remaining eligible for forgiveness has been extended until December 31, 2020.
A letter by five members of the House and Senate clarified that the intent of this extension is to “allow borrowers who received PPP loans before June 30, 2020 to continue to make expenditures for allowable uses until December 31, 2020.” The purpose of this extension is not to “authorize the Small Business Administration (SBA) to issue any new PPP loans after June 30, 2020, as this date remains fixed by section 1102(b) of the CARES Act.”
- Removes Exclusion for Eligibility of Employment Tax Referral
Under the CARES Act, borrowers could defer employer payroll taxes, with 50% due on December 31, 2021 and the other 50% due on December 2022. However, borrowers who received loan forgiveness under the PPP could not defer employer payroll taxes. The PPP Flexibility Act removes this exception.
* This article is provided for informational purposes only and does not constitute legal advice. Please contact an attorney to discuss the specifics of your circumstance.