By Martin Milita, Esq.
On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act) into law. The Flexibility Act makes several changes to the Paycheck Protection Program (PPP) that will impact borrowers.
1. Extends Deadline for Filling a PPP Loan Application
The law extends the deadline for filing a PPP loan application from June 30, 2020, to December 31, 2020.
2. Increases Amount of Time to Spend PPP Funds
The law extends the amount of time PPP loan recipients have to spend PPP loan proceeds from eight weeks to either (a) 24 weeks or (b) December 31, 2020, whichever is earlier. This addresses concerns that the eight-week forgiveness period was not enough time to help businesses (specifically bars, restaurants, and salons) spend their received funding and recover financially, particularly in light of other restrictions due to COVID-19. PPP loan recipients that have already received their PPP loans would have the option to extend the covered period or continue with the original eight-week period.
3. Increases to 40% the Amount of a Loan that Can Be Spent on Non-Payroll Costs
The law lowers the amount of the loan required to go to payroll costs from 75% to 60%, and recipients may use up to 40% of a PPP loan for other approved costs, such as mortgage payments, rent, and utilities. By lowering the minimum percentage of funds recipients must spend on payroll, businesses may spend more on other business operating expenses without sacrificing the amount of the loan that the federal government will forgive. The expansion of time to use the loan and the change in amounts for non-payroll significantly increase the likelihood that PPP loan recipients will have the entire PPP loan forgiven. Those loan recipients who used the loan to pay employees, even though they were not open for business, will likely require additional relief to restart and ramp up for business as usual.
4. Extends Time to Rehire Employees and Provides Additional Safe Harbor for FTE Reductions
The law extends the deadline for rehiring employees and receiving loan forgiveness reductions under the PPP to six months from June 30, 2020, to December 31, 2020. The additional six-month period should help eliminate most reductions in loan forgiveness resulting from a workforce reduction. Also, the loan forgiveness amount would no longer be decreased due to a reduction in the number of full-time equivalent (FTE) employees from February 15, 2020, through December 31, 2020, if the loan recipient can document:
(a) its inability to rehire individuals employed on February 15, 2020, and hire qualified replacements by December 31, 2020; or
(b) the company’s inability to return to its activity level before February 15, 2020, due to COVID-19-related restrictions, guidance or requirements imposed by the government between March 1, 2020, and December 31, 2020.
The reduced percentage of PPP loans that recipients must spend on payroll and the new deadline for rehiring employees increases a small business’s ability to maximize the impact of PPP funding and obtain complete loan forgiveness.
5. Maturity of Loan Extended to Five Years
PPP loans now mature in five years instead of two years. While this change applies to all PPP loans made on or after the enactment of the law, loan recipients will be able to retroactively extend the maturity of PPP loans funded before the enactment of the law.
6. Payment Deferral Period Extended to Ten Months
The law no longer requires a loan recipient to make any payments to the outstanding loan balance until ten months after the recipient received the loan. The deferral period is currently only for six months. Also, loan recipients must apply for forgiveness within ten months after the last day of their covered PPP loan period, which is the earlier of 24 weeks from origination or December 31, 2020.
7. Permits Employer to Defer its Portion of the 6.2% Payroll Tax
Any loan recipient can now access the CARES Act deferral for its portion of Social Security payroll taxes up to 6.2% for payments required between March 27, 2020, and December 31, 2020, regardless of whether the federal government forgives any portion of the PPP loan. Previously, a loan recipient could not continue to defer its portion of Social Security payments after the federal government forgives any of its PPP loan.
In addition, the Senate added a letter to the Congressional Record clarifying its intention that the extension of the covered period does not authorize the SBA to issue any new PPP loans after the June 30, 2020 deadline established by the CARES Act.
Nevertheless, with more time to use the funds, more time to rehire employees, and a decrease in the mandatory minimum funds to be spent on payroll costs, more borrowers will be able to meet the loan requirements and guarantee complete loan forgiveness.