Much has been written these past months about the Paycheck Protection Program, with the latest news coming on June 5 when the Paycheck Protection Program Flexibility Act was signed into law. The Act provides modifications that will allow businesses more flexibility in using the PPP loan funds and qualifying for forgiveness.
A highlight of the Act’s modifications is the extension of the covered period to 24 weeks from 8 weeks, during which time a loan recipient may use the funds for certain expenses while remaining eligible for forgiveness. Any business that borrowed its PPP loan prior to the date the bill was signed into law can elect to use the eight-week period beginning on the date funds were received.
This provision will be helpful for all borrowers in attaining forgiveness of their PPP loans; it is especially important for those who are reaching the end of their eight-week covered period and have not yet been able to reopen their businesses.
The Flexibility Act makes the provision that to receive loan forgiveness, an eligible recipient must use at least 60% of the covered loan amount for payroll costs and can use 40% for the non-payroll portion – covered mortgage interest, covered rent and covered utilities – of a forgivable covered loan.
As currently drafted, this provision appears to eliminate the option for partial forgiveness by requiring 60% usage on payroll costs in order to receive any forgiveness. However, on June 8, the U.S. Treasury and the Small Business Administration (SBA) indicated in a Joint Statement that future guidance will provide that “if a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60% of the loan forgiveness amount having been used for payroll costs.”
The Flexibility Act also extends the period to December 31, 2020, in which an employer may rehire or eliminate a reduction in employment, salary or wages that would otherwise reduce the forgivable amount of a paycheck protection loan. It further states that the forgivable amount will be determined without regard to a reduction in the number of employees if the loan recipient is unable to rehire former employees and unable to hire similarly qualified workers or can’t return to the same level of business activity due to compliance with federal requirements or guidance related to COVID-19.
Extended payroll tax deferral is another key provision of the PPP Flexibility Act. Under the CARES Act, PPP borrowers were only able to take advantage of the employer payroll tax deferral provision until they received notice of forgiveness. The Flexibility Act allows PPP borrowers to use the deferral provision even after receiving forgiveness on their loan.
Repayment terms for loan amounts not forgiven have been modified under the Flexibility Act. Initially, the SBA provided for a two-year maturity term for the portion of a PPP loan that was not forgiven; the new provision extends that period to five years, but only for loans that are made after the date that these amendments were signed into law. For loans acquired prior to June 5, a five-year extension may also be available, but only if both the borrower and lender agree.
The payment deferment period (principal, interest, fees) is now extended from six months after the end of the covered period to the date the SBA sends the borrower’s loan forgiveness amount to the lender. If the borrower does not apply for forgiveness, the deferral period lasts until 10 months after the end of the covered period, according to guidance issued by the SBA on June 8, 2020.
Take note – the June 30, 2020 application deadline for a PPP loan remains in effect and was not changed under the new law.
The PPP Flexibility Act contains some useful changes for every PPP borrower, although some businesses will benefit more than others. The SBA will issue more guidance, a modified loan forgiveness application and perhaps additional rules in the coming days, but for now PPP loan recipients can breathe just a bit easier.
blum has been on the forefront of interpreting PPP guidance and providing trusted resources for clients to keep them apprised of constant changes and providing the most up-to-date information to assist in calculating loan forgiveness. Our team is working with clients to assist them with navigating through compliance requirements of the loan forgiveness program, to ensure forgiveness is received, help expedite the loan forgiveness process and provide a reliable and trusted source of information. Learn more about our loan forgiveness services >>
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Disclaimer: The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.