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On Wednesday, June 3, 2020, the Senate unanimously passed the Paycheck Protection Program Flexibility Act (“PPP Flexibility Act”) which also passed the House last week with a 417-1 vote. The President signed it on June 5, 2020. The two pages of legislation contain significant and favorable changes to the Paycheck Protection Program’s forgiveness requirements. For borrowers who are close to the end of their 8-week covered period and were having difficulty using the PPP loan funds in accordance with the current guidance, this new legislation greatly expands the flexibility for spending the funds. The SBA and Treasury are expected to modify the PPP Forgiveness application and publish additional rules to further clarify this new legislation. The key provisions incorporated in the PPP Flexibility Act are as follows:
Extension of Covered Period from 8 Weeks to 24 Weeks
The covered period (i.e. the time period allowed for spending PPP funds on eligible expenses) is extended from 8 weeks to 24 weeks. The time periods are also extended to 24 weeks for correcting any reduction in full-time equivalent (FTE) employees or reductions in salaries in order to receive full forgiveness. These changes will make it significantly easier for borrowers to get full forgiveness. On the flip side, it may require borrowers to maintain their full payroll for a longer period, which may have a negative impact on certain businesses. Borrowers with outstanding loans on the effective date of this legislation will have the option to elect the 8-week or 24-week covered period. Borrowers who are close to the end of their 8-week period and have already met the thresholds for forgiveness may want to elect the 8-week period so they could apply for forgiveness, get the loan off the books and not be hampered by the requirements to maintain payroll for the longer 24-week period.
The 75% Threshold For Payroll Costs has been Reduced to a 60% Threshold (fall below it and you lose all forgiveness)
Under the new legislation, a borrower must use no less than 60% of the PPP Loan for eligible payroll costs; however, if a borrower drops below this 60% threshold, they are not eligible for forgiveness on the PPP Loan. Up to 40% of the PPP loan funds may be used for eligible non-payroll costs. Previously, the threshold amount was 75%, but if a borrower fell below that threshold, forgiveness would be reduced somewhat proportionately. This is a major change. There is some debate on whether this change was intentional but it appears that the House intended this result as it assures that a certain portion of the loan is used for payroll costs, as was the intention of the initial legislation. Some lawmakers are proposing that this be reconsidered by the SBA or through future legislation.
Requirement to Restore FTE/Salary Extended to December 31, 2020
The date to rehire FTE employees and restore salary related to decreases made between February 15, 2020 and April 26, 2020 has been extended from June 30, 2020 to December 31, 2020. We are uncertain as to whether borrowers who elect the 24-week period will be required to have maintained their FTE and salary as of the end of the 24 weeks or whether they could be in compliance at the time they exhaust the PPP funds and apply for forgiveness. In other words, will all borrowers now need to wait until the end of the 24-week period to apply for forgiveness?
Favorable Extension of Loan Terms
The PPP loan repayment date (for any portion of the loan that is not forgiven) has been extended to 5 years (from 2 years) for any loans that are made after the date of the new law. For existing loans, the lender and borrower have the flexibility to agree to this longer period. The legislation also allows payments on the loans to be deferred until the lender makes a determination regarding forgiveness and such amount is remitted to the lender. The interest rate for the unforgiven portion of the loan will remain at 1%.
New Exceptions Regarding Forgiveness
In addition to the exceptions set forth in the interim rules, borrowers that are unable to restore FTEs or salaries by December 31, 2020 will not receive a reduction in loan forgiveness due to FTE or pay rate decreases if:
These additional exceptions are favorable to borrowers but will require additional guidance from the SBA or Treasury.
Employer Payroll Tax Deferral
Borrowers that receive loan forgiveness are now allowed to defer the employer side of FICA taxes through December 31, 2020. Previously, borrowers were not entitled to employer payroll tax deferral if they were receiving PPP loan forgiveness. Fifty percent of the deferred taxes will be required to be paid back by December 31, 2021 while the remaining fifty percent will be due on December 31, 2022.
For more information about the PPP loan forgiveness process and rules, please review the Schneider Law Group article at this link entitled “New Guidance Regarding Loan Forgiveness under the Paycheck Protection Program.”
This article is for informational purposes only and is not intended to be legal advice. For more information about the Paycheck Protection Program or to discuss specifics regarding your situation, please contact Jason Schneider at (919) 324-3599 or firstname.lastname@example.org.
Schneider Law Group is a business boutique law firm primarily focused on general corporate, M&A, securities, and tax strategy for growth-oriented businesses. For more information, please visit www.schneiderlawgroup.com.