by Morgan Dilks
On the afternoon of Friday, June 5, 2020, new relief was granted to Paycheck Protection Program borrowers by way of the Paycheck Protection Program Flexibility Act of 2020. The primary impact of the Act is that it provides millions of Paycheck Protection Program (“PPP”) borrowers additional time to spend PPP funds and eases the use restrictions previously required to qualify for forgiveness.
Here are the highlights:
- The Forgiveness Period Is Expanding: Under the CARES Act, which provided for the PPP originally, borrowers had eight (8) weeks from the date the applicant received the funds to spend the PPP loan proceeds on a set percentage dedicated exclusively to payroll and qualifying payroll expenses, with the remainder going to other qualified expenses (such as rent, mortgage, utilities, or interest on prior existing debt obligations). That has been expanded to the earlier of twenty-four (24) weeks or December 31, 2020. If a borrower prefers, the borrower can elect for the covered period to remain as currently structured under the SBA’s existing guidance. NOTE: The deadline to file for a PPP loan remains unchanged, so applications must be submitted to a qualified lender by June 30, 2020.
- Relaxed Restrictions on Eligible Forgivable Expenses: Under the CARES Act, PPP Loans were forgivable if they were spent within eight weeks of receipt of funds, and spent according to the following formula: 75% had to be spent on payroll and other qualifying payroll expenses, 25% could be spent on rent, utilities, mortgage, or interest on prior existing debt obligations. The new legislation which has taken effect under the Paycheck Protection Program Flexibility Act requires that only 60% of forgivable expenses be used towards payroll costs, as opposed to 75%. Up to 40% of your PPP loan can now be used for the other qualifying expenses outlined above.
- Extension of Period for Restoring FTEs and Salary/Wages: This legislation extends the period in which borrowers must restore FTEs or salaries/wages from June 30, 2020 to December 31, 2020. In essence, combining this extension with the expanded forgiveness period means that if a borrower spends 100% of the PPP proceeds on payroll expenses and other qualifying expenses during the twenty-four week period starting the day the borrower receives the funds, and restores their FTE count by December 31, the entire loan amount will be forgiven.
- New Exceptions Based on Employee Availability & Social Distancing/Safety Requirements: This Act includes two new exceptions to the requirement that borrowers restore their FTE count to February 15, 2020 levels by December 31, 2020. The first exception is when a borrower cannot find qualified employees to fill vacated positions. This applies both to when employers cannot restore their FTE count due to specific skillsets that are in high demand, as well as difficulty in filling positions due to COVID-19 risks and concerns. The second exception applies when the borrower cannot restore its operations to comparable pre-COVID-19 levels due to health restrictions (i.e., restaurants that are only allowed to operate at 25% capacity due to social distancing orders). For the second exception to apply, the restrictions must have been established by the Secretary of Health and Human Services, the Director of the CDC, or the Occupational Safety and Health Administration.
- Extending Maturity Date and Deferment Period: The loan maturity date for any loan amounts remaining after forgiveness is now a minimum of five (5) years, a three year increase over the previously required two (2) year maturity. Interest will remain at 1%; however, the deferment period is extended from “not less than six months” to the time a borrower’s forgiveness is determined.
- Employer Payroll Tax Deferrals for Two Years: This legislation also allows PPP borrowers to take advantage of the existing payroll tax deferrals permitted under the CARES Act for businesses not participating in the PPP. This legislation allows borrowers to defer 50% of the employer’s share of payroll taxes until 2021 and the remaining 50% until 2022.
Additionally, the New Interim Final Rules issued by the SBA and the Treasury Department bring a resolution to rules governing payroll expenses to furloughed employees and bonuses/hazard pay to employees during the covered period. “Payroll costs” have been determined to include payments to furloughed employees and bonuses or hazard pay provided during the covered period, as long as the employee’s total compensation does not exceed $100,000 on an annualized basis (this does not apply to self-employed individuals and owner-employees, who remain capped at the lesser of 8/52 of their 2019 compensation or $15,385.00 per individual). This provides a definitive answer to the widespread confusion on whether employers could spend PPP money on furloughed employee wages or pay bonuses during the covered period.
Finally, a significant benefit of the Payroll Protection Program Flexibility Act is that it reduces the risk borrowers face in determining how to spend 100% of their PPP proceeds in a short amount of time without running afoul of the rules governing forgiveness. With the extended use window, employers can take more time to spend the PPP proceeds on undoubtedly qualifying expenses without having to guess how the SBA will ultimately view maneuvers such as pre-paying rent/mortgage obligations (an issue on which the SBA has yet to provide clarity) simply to spend through the money in the previously allotted eight weeks. This will allow employers to simplify their forgiveness application, leading to a smoother forgiveness process for borrowers.
Start your PPP application at SBA.gov by clicking here.
Visit our COVID-19 Resource Page for more updates.