On Friday (June 5, 2020), the President signed the bipartisan Paycheck Protection Program Flexibility Act of 2020 (PPPFA) into law. The PPPFA changes the rules of the PPP program to make it more favorable to small businesses, in most cases.
Background | The Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27, 2020. The PPP created a new loan program through the SBA to enable businesses and nonprofit organizations with 500 or fewer employees to obtain federally guaranteed loans to be used for payroll, rent, utilities, and other specified costs.
Why was there a need to pass a second version of the PPP?
One reason is that businesses were about to face a Catch 22. The original PPP required small businesses to rehire employees as soon as this week — but state and local governments have required companies to stay closed because of the COVID-19 pandemic.
To address this issue, the law now extends the PPP program “covered period” until December 31, 2020, and gives employers 24 weeks, rather than eight weeks (or December 31 if earlier) to spend PPP proceeds. (However, a congressional letter was added to the record to clarify that no new PPP loans may be originated after June 30, 2020.)
Here are some major changes made to clarify the PPP.
|1. Increased amounts allowed for non-payroll costs|
Prior to the passage of the PPPFA, at least 75% of the repayment had to be for payroll expenses. Under the new law, the 75% threshold has been reduced to 60%.
(NOTE: The original legislation allowed for the forgiveness portion to be reduced formulaically if less than 75% of the PPP loan was spent on qualified payroll costs. As it currently stands, the PPPFA would appear to create a ‘forgiveness cliff’ so that none of the loans would be forgiven if a business fails to spend 60% of the PPP funds on qualified payroll costs.)
2. Covered period increased to 24 weeks
With the original law, the small business had eight weeks to spend the funds from the PPP loan funds to qualify for loan forgiveness. And the clock started ticking when the loan was funded. The borrower now has 24 weeks to incur costs eligible for forgiveness (or until December 31, 2020, if it comes first).
An alternative option | Many businesses are nearing the eight-week mark and have been diligent to spend the funds according to the original rules. The eight weeks covered period is still an option and can be selected for use in lieu of the 24 week period. If you qualify for full forgiveness with an eight-week coverage you may want to consider electing the shorter term so that you can apply for forgiveness sooner than if you elected the 24 week coverage period. Talk with your accountant or banker for advice regarding your specific approach.
3. A longer period to restore wages and/or replace (FTEs)
Businesses now have until December 31, 2020 to restore wages and full-time equivalents (FTEs) to February 15th levels to avoid a reduction in forgiveness based on those factors. (Previously, the deadline for restoration was June 30th.)
Additionally, the PPPFA provides two new exceptions for borrowers to qualify for forgiveness even if their workforce isn’t fully restored.
The first exception is for businesses that could not find qualified employees. The other exception is for businesses that are unable to restore operations by the end of 2020 to February 15, 2020 levels due to COVID-19 related restrictions.
4. Longer repayment period
New borrowers will have five years to payback non-forgiven amounts. If you already have a PPP loan, your repayment period can be extended from the original two years to five years if both you and the lender agree on the change. The interest rate under both scenarios is still 1%.
Paycheck Protection Program Flexibility Act of 2020
ADP Research Institute, June 05, 2020
Paycheck Protection Program Loan FAQs (PDF)
Dept. of Treasury, May 27, 2020
The Paycheck Protection Program Flexibility Act (PPPFA)
Puryear & Noonan CPAs, Nashville, Tenn.
7 Ways PPP Loans Just Got Better
|NOTE |As we often remind our users, each small business can have unique situations that should be reviewed by your trusted accountant, financial, lawyer, legal advisor, or banker. The information you read on this, or any website, can change often. The information found on SmallBusiness.com is not provided by the IRS or SBA unless indicated.|