On June 5th, the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”) was signed into law. The PPPFA gives small business owners more time in which to use their Paycheck Protection Program (“PPP”) loans, and provides increased flexibility regarding how funds may be used, while preserving loan forgiveness. Major provisions of the PPPFA are summarized below.
“Covered Period” Extension
Previously under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), borrowers had a period of eight weeks in which to use their loans (the “Covered Period”) starting either after disbursement, or as it lined up with their payroll cycle, as explained by the PPP Loan Forgiveness Application. The PPPFA extends the Covered Period to be the earlier of: (1) 24 weeks after loan disbursement; or (2) December 31, 2020.
Payroll vs. Non-Payroll Costs
Under the CARES Act, borrowers could only request forgiveness on PPP loan funds put towards non-payroll costs (i.e. rent, utilities, and mortgage interest) if those costs represented 25% or less of their overall loan. The remaining 75% must have been spent on payroll costs in order to have the loan fully forgiven. The PPPFA has altered these requirements to allow forgiveness for businesses that spend up to 60% of their loan proceeds on payroll costs, and up to 40% on qualified non-payroll costs. The PPPFA has not altered what constitutes a forgivable non-payroll cost.
The PPPFA adds two exemptions to the full-time employee (FTE) requirements under the CARES Act which codify some of the guidance issued by the Small Business Administration (SBA) and assist businesses that have tried to bring employees back in good faith.
First, loan forgiveness will not be reduced for borrowers providing documentation that they attempted, but were unable, to rehire any individuals employed as of February 15, 2020 that had subsequently been let go due to the COVID-19 pandemic. The PPPFA adds that businesses may also provide documentation that they have not been able to hire “similarly qualified employees” prior to December 31, 2020, and not be penalized for FTE reduction.
Second, the PPPFA clarifies that reduced FTE amount will not impact loan forgiveness if the borrower can demonstrate that it has been unable to return to the “same level of business activity” that existed prior to February 15, 2020 as a direct result of COVID-19 safety measures. Such measures include requirements for social distancing, sanitation, and employee and customer safety which have negatively impacted the borrower’s business.
The PPPFA also extends the existing PPP safe harbor for restoring FTEs from June 30, 2020 to December 31, 2020.
Loan Repayment and Deferral of Payroll Taxes
Under the CARES Act, borrowers had two years during which to repay unforgiven loan proceeds at an interest rate of 1%. The PPPFA has extended this to give borrowers five years during which to repay loans at an interest rate of 1%. The PPPFA also now allows borrowers to defer the first payment on any unforgiven loan proceeds by up to six months after a loan forgiveness determination. The PPPFA also allows borrowers to defer payment of payroll taxes, where previously this was not permitted.
The content of this post is for informational purposes only and should not be construed as legal advice or legal opinion. You should consult a lawyer concerning your specific situation and any specific legal question you may have.