On June 5, President Trump signed the Paycheck Protection Program (PPP) Flexibility Act (The Act) into law, introducing favorable changes to several issues within the PPP loan program for small businesses.
The Treasury and the Small Business Administration (SBA) will now issue new and updated guidance to reflect changes noted below.
- More time to use PPP loan funds: The new law extends the time period to use PPP loan proceeds to obtain forgiveness from eight weeks from the date the funds are received to 24 weeks, with the new period ending the earlier of 24 weeks after receipt of loan proceeds or December 31, 2020. This gives businesses more flexibility to deploy the funds while remaining eligible to qualify for forgiveness. The Act does not extend the date to apply for a PPP loan, therefore the SBA will continue to accept applications only through June 30, 2020.
- More of the PPP loan can be used for operational expenses: The Act reduces the portion of a loan that must be used for eligible payroll expenses from 75% to 60%. Businesses will now be able to spend up to 40% of the total PPP loan amount on eligible non-payroll expenses such as lease payments, mortgage interest, and utilities. Caution should be exercised: if less than 60% of the loan total is used for eligible payroll expenses, loan forgiveness may no longer be an option. This is a new issue that we hope will be favorably resolved with more guidance.
- More time to rehire employees and restore salaries: The Act also extends the period which businesses have to restore jobs, or full-time equivalents (FTE), and pay in order to qualify for maximum loan forgiveness through December 31, 2020. If jobs are not restored in accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the PPP Flexibility Act, the amount of the PPP loan that can be forgiven will be reduced unless PPP recipients can demonstrate either the recipient is unable to rehire former employees or similarly qualified employees, and/or is unable to return to the same level of business activity at which it was operating before February 15, 2020 due to compliance with federal requirements or guidance related to COVID-19.
This extension, along with the 24-week extension to use funds for forgiveness purposes, means that if a recipient uses all of their PPP proceeds to pay payroll costs and their FTE count and wages/salaries on December 31, 2020 which equal or exceed those as of February 15, 2020, the entire amount of the PPP should be forgiven.
- Ability to defer payroll taxes: The Act allows PPP recipients to defer payment of payroll taxes incurred during the period beginning on March 27 and ending on December 31, 2020. Loan recipients may now defer payment of 50% of employer’s payroll taxes from 2020 until December 31, 2021 and with the remaining 50% due on December 31, 2022. Before, this option was available only to those who did not receive a PPP loan.
- More time to repay the loan: Businesses with PPP loans not forgiven or forgiven only in part will now have five years instead of two to repay the unforgiven portion of a loan. Loans will continue to accrue interest at 1% per year. If you have already received a loan and executed a promissory note for the full PPP, we recommend actively seeking guidance from your respective lender to have your promissory note amended in connection with your application process seeking forgiveness. This is only important to the extent that your PPP loan is not fully forgiven (including situations where you also received an Economic Injury Disaster Loan (EIDL) advance).
While the new provisions ease PPP forgiveness requirements, many important mechanics and details are yet to come from the Treasury and the SBA. Moreover, there are several unanswered questions to which we hope (but can’t promise) to receive further guidance soon, including around the IRS’ recent decision that payroll and other permitted expenses forgiven are not deductible on the recipient’s 2020 tax returns.
We are continuing to pay close attention to these and other important developments and will update you accordingly. My team and I are here to continue to help you pursue your financial goals during these unprecedented times.
Best wishes to you and your loved ones.