Relaxed Guidelines Afforded By The Paycheck Protection Program Flexibility Act
The Paycheck Protection Program Flexibility Act was enacted on June 5, 2020. In a nutshell, the new law relaxes the guidelines to businesses who are still struggling to recover, due to an extended shelter/quarantine period caused by the COVID-19 pandemic. It provides flexibility on when and how the loan funds secured from the Payroll Protection Program (PPP) are used. It also aims to increase the amount of the loan that can be forgiven.
The PPP originated in the CARES Act that was passed in March 2020 with an expectation that most businesses affected by the Covid-19 pandemic would be fully open and start recovering by now. Unfortunately, small businesses have been forced to respond more slowly than anticipated – and with limited time and formal guidance, businesses, lenders and their advisors struggled from the onset to navigate the program.
In fact, businesses scrambled to submit loan applications without adequate understanding of how the funds should be used and how to maximize loan forgiveness. The PPP was shut down temporarily when the first round of funds ran out and original deadlines were not extended. Guidelines for self-employed individuals and independent contractors were provided much later, resulting in funding delays.
Longer repayment period. The original repayment period assigned by the Small Business Administration (SBA) was two years under the CARES Act for any portion of the PPP loan that was not forgiven. The new law extends this period to five years.
Borrowers were permitted to defer principal and interest payments for six months. The new law allows for deferral until the date the lender receives the forgiveness amount from the SBA – expected to be a significantly longer period. Technically, the extended repayment period only applies to loans made after June 5, 2020, but borrowers can negotiate the terms of earlier PPP loans to match the new five year period.
Extended covered period. The CARES Act granted borrowers eight weeks from the date they received PPP proceeds to use the funds for costs eligible for forgiveness. The new law extends the covered period to 24 weeks from the loan origination date, or December 31, 2020, whichever comes earlier – potentially an additional four months to incur costs for forgiveness.
The new law does not require all borrowers to adopt a 24-week covered period. A business that borrowed its PPP loan prior to June 5, 2020 can elect to use the eight-week period, beginning on the date it received the funds. Businesses that have spent all of their proceeds and qualify for full forgiveness, but prefer not to wait until the end of the year can make this election and submit their loan forgiveness application earlier.
Reduced payroll cost requirement. The SBA previously required a 75% / 25% ratio of payroll costs vs. non-payroll costs of the loan amount for loan forgiveness. The new law reduces the requirement to at least 60% of the loan amount used for payroll costs in order to receive forgiveness. Up to 40% of the funds that can be forgiven may now be used on rent, utilities and mortgage interest on real and personal property incurred before February 15, 2020.
Longer time to restore workforce. Borrowers will not be required to reduce the loan forgiveness amount, if they restore their full time employees (FTEs) or salary/hourly wages to February 15, 2020 levels by December 31, 2020. Previously, the deadline to restore FTEs or salary/ hourly wages was June 30, 2020.
New relief for businesses who still remain partially or fully closed. The amount of loan forgiveness will not be reduced when a borrower experiences a loss of FTEs, if the borrower, in good faith, is able to document any of the following situations:
- Inability to rehire individuals who were employees on February 15, 2020.
- Inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
- Inability to return to the same level of business operations before February 15, 2020, due to compliance with federal agency requirements related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to the COVID-19 pandemic.
Basically, for businesses that are unable to fully open, due to government orders by December 31, 2020, any loss in FTEs resulting from such restrictions should not be taken into account in calculating the required reduction in the forgivable amount.
Employer payroll tax deferral. The CARES Act previously allowed borrowers to defer the employer share of Social Security tax (6.2%) only until the date of PPP loan forgiveness. The new law allows borrowers to defer all 2020 employer taxes, even if their PPP loan is forgiven prior to December 31, 2020.
The PPP rules are a moving target. While the Paycheck Protection Program Flexibility Act provides some much needed relief, there are still questions. We expect to receive additional guidance in the coming weeks. The SBA is also expected to release a revised loan forgiveness application to incorporate the new rules.
We are here to help you navigate various COVID-19 pandemic relief programs available to your business. Please connect with us for guidance.