On June 5, 2020, the Paycheck Protection Program Flexibility Act (PPPFA) was signed into law, which is a bipartisan effort to address the many concerns expressed by small business owners around the Paycheck Protection Program (PPP).
Key changes to the Paycheck Protection Programs (PPP)
Reduction in loan required to be spent on payroll
The new law is an attempt to address flaws originating with the PPP program created under the CARES Act. First, the PPPFA changes the amount of loan needed for payroll to 60%. This is a reduction in the amount of the loan that was required to be spent on payroll; down from the original 75% requirement. This allows business owners to increase the amount of funds available to support their businesses for other expenses from 25% to 40%. This change was highly advocated for and is a step in the right direction to allowing further relief to businesses where needed.
Extension on period of time to use funds
Second, the PPPFA extends the period to use the funds from 8 to 24 weeks. This was a much-welcomed change considering the complex and uncertain environment most businesses are currently facing. Having additional time to spend the funds alleviates the burden imposed for most businesses having to shutter do from government mandate as an example of some hardships faced by management teams. There are two important things to realize from this change; businesses now have through 2020 to spend the funds on authorized expenses and will presumably make complete loan forgiveness more likely. The latter is about the loan amount being based on one-month of 2019 payroll multiplied by 2.5, which equals roughly 10 weeks. The last part of this modification does not require businesses to wait for 24 weeks to apply for forgiveness and can still do so after eight weeks should they prefer.
Delayed deadline for rehiring workers
Third, the PPPFA pushes back the June 30 deadline to rehire workers to December 31, 2020. With the concern over the timing of reopening businesses, management teams were concerned that all workers had to be rehired by the original deadline for their payroll to count towards loan forgiveness. The law does not change how the salaries are calculated towards forgiveness and the payroll calculation used in the loan application still applies to the forgivable amount and thus employee compensation is still capped at $100,000 and employer owners and contractors are still capped at $15,385.
Relaxed rehiring requirements
Fourth, PPPFA eases the rehiring requirements. One of the main intents behind PPP was to maintain the same number of employees on payroll as was used to calculate the loan. Thus, allowing businesses to rehire the same number of full-time employees or equivalents by June 30, 2020, with consideration for employees who rejected a rehire offer. With the new law, the rehire date is extended to December 31, 2020, and allows for a reduced headcount. The law states a business may still receive forgiveness on payroll amounts if the following conditions are met: unable to rehire an individual who was an employee of the eligible recipient on or before February 15, 2020; able to demonstrate an inability to hire similarly qualified employees on or before December 31, 2020; or able to demonstrate an inability to return to the same level of business activity as noted prior to February 15, 2020. As with all new laws, an expectation on clarity around demonstrating the inability to rehire similarly qualified employees and demonstrating the inability to return to previous levels of business activity should be forthcoming.
Extension on loan repayment terms
Lastly, the PPPFA extends loan repayment terms from 2 years to 5 years. Should a portion of the loan be unforgiven, businesses will now have five years to make repayment on the debt at 1% interest. Additionally, the first payment will be deferred for 6 months after determination from the SBA for forgiveness is made. Currently, banks have 60 days to make forgiveness determination and the SBA has an additional 90 days, resulting in what could mean a deferment of the first loan payment during May 2021. Borrowers can now also take advantage of the CARES Act provision allowing deferment of the employer’s payroll taxes for Social Security. Previously, PPP did not permit the deferment of these taxes on the forgivable portion of the loan.
The new law is a further step in the right direction for placing relief where it is needed for small businesses to continue weathering an environment filled with complexity and uncertainty.
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