The president has signed the Paycheck Protection Program Flexibility Act of 2020. This law may make PPP loans more attractive to small businesses. Here are seven of the main ways it may help your business:
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1. More money for non-payroll expenses
Although not a provision of the CARES Act, current guidance from Treasury and the SBA limits forgiveness for nonpayroll expenses to no more than 25% of the forgiven amount. At least 75% of PPP loan proceeds must go toward payroll and payroll-related costs to qualify for full forgiveness.
What will change: To qualify for forgiveness, the Paycheck Protection Program Flexibility Act allows up to 40% of PPP funds to be spent on certain nonpayroll expenses while at least 60% of the PPP loan proceeds must be spent on payroll and payroll-related expenses. (Note: It appears that the way the legislation is written, spending less than 60% of PPP funds on payroll won’t simply reduce forgiveness, but may eliminate it. Further guidance will be needed.)
The types of non-payroll expenses that may qualify for forgiveness don’t change. They are still limited to business rent, mortgage interest and utilities for services or obligations in effect by February 15, 2020.
You can read more about PPP loan forgiveness here.
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2. Triple the time to use your loan
Currently the “covered period” is the eight weeks after the loan is disbursed and ends June 30, 2020. Based on guidance from the SBA and Treasury, business owners who want to qualify for forgiveness must spend their PPP funds during the eight weeks after the loan is disbursed or within the “alternative covered period,” which is the eight-week period that begins on the first day of their first pay period following their PPP loan disbursement date.
What will change: The covered period will be “the period beginning on the date of the origination of a covered loan and end the earlier of the date that is 24 weeks after such date of origination; or December 31, 2020.” This essentially triples the time during which the business owner can spend PPP funds and apply for forgiveness from eight to 24 weeks. (Note that business owners can still elect to stick with the eight-week period for forgiveness purposes.)
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3. Business owners can get PPP and payroll tax deferral
The CARES Act allows employers to defer the deposit and payment of the employer’s share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes. Currently, employers that received a Paycheck Protection Program loan may not defer the deposit and payment of the employer’s share of Social Security tax that is otherwise due after the employer receives a decision from the lender that the loan was forgiven.
What will change: This prohibition will be removed. This will give employers and self-employed individuals full access to both PPP and payroll tax deferral.
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4. Extends the rehiring time period
The CARES Act contains a provision that generally allows employers who reduced employee headcount before February 15, 2020 to restore similar employment levels by June 30, 2020 and avoid a reduction in forgiveness.
What will change: The PPP Flexibility Act allows this “rehiring exemption” to be extended to December 31, 2020.
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5. Provides more flexibility for COVID-19 impacted businesses
Employers who aren’t able to bring employees back to work due to stay at home orders or other restrictions generally still have to pay employees in order to avoid a reduction in forgiveness.
What will change: Employers may be exempted from a reduction for forgiveness if they are “able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID– 19.”
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6. Five year loans
The CARES Act established a minimum loan maturity of 10 years but subsequent Treasury and SBDC guidance has limited the length of a PPP loan repayment period to two years.
What will change: The maximum loan term would be five years for any loan originated on or after the date this legislation is enacted, but nothing would prohibit lenders and borrowers from mutually agreeing to a similar repayment period for PPP loans made prior to the date this legislation becomes law.
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7. Payments deferred until forgiveness period
Under The CARES Act, payments on PPP loans are deferred for six months to one year, though subsequent guidance from Treasury and the SBA established a standard six-month deferral on payments.
What will change: Payments will be deferred until “the date on which the amount of forgiveness determined under section 1106 of the CARES Act is remitted to the lender.” Essentially, this will allow the borrower to avoid having to make payments until forgiveness is determined. A borrower has ten months to apply for forgiveness or must start making payments. The 10-month period starts the last day of the PPP loan forgiveness covered period (24 weeks after the loan is originated or December 31, 2020, whichever comes first).
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What happens next?
With the exception of the five-year loan repayment period, these provisions will apply to all PPP loans, including those made before this legislation became law. As has happened in the past, Treasury and the SBA will likely provide guidance that may affect how different provisions are implemented.
At this time, there is still funding available for PPP loans. If you’ve been on the fence about applying, but believe these changes make this program more attractive, you may want to apply for a PPP loan now.
Please note, the material contained in this article is for informational purposes only, is general in nature, and should not be relied upon or construed as a legal opinion or legal advice. Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors.
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