In a show of bipartisanship, the House and the Senate quickly passed the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) which addresses several flaws under the original program introduced by the CARES Act. The law, signed by the president on June 5, relaxed several requirements for borrowers and makes loan forgiveness more attainable for small business owners.
With new rules and regulations being issued, on what seems like a daily basis, it can be hard for small business owners to keep track of all the changes. How should I spend the PPP funds? How much time do I have to spend all the PPP proceeds? These questions and many more will be addressed in this article.
The following are the top 5 takeaways from the PPPFA which every PPP loan applicant should know.
1) Time Period to Use PPP Loan Proceeds Extended From 8 weeks to 24 weeks
Probably the most important development from the PPPFA is the extension of the covered period from 8 weeks to 24 weeks (not to go past December 31, 2020). Borrowers will now have additional time to use their PPP loan proceeds to maximize the amount that is eligible for loan forgiveness.
Borrowers also have the option to elect the 8 week period if they don’t want to use the 24 week covered period in calculating loan forgiveness. Many borrowers who received PPP loan proceeds and have already exhausted the funds during an 8 week period can apply now instead of waiting until the end of the 24 week period.
Borrowers should also be careful with extending the 24 week period if they are eligible for forgiveness under an 8 week period because other factors may negatively impact their forgiveness amount.
2) Relaxed Rules For Business Owners With High Overhead
A major debate regarding the PPP loan forgiveness rules was that business owners with high overhead cost would be negatively impacted. The SBA rules regarding usage of loan proceeds that would be eligible for loan forgiveness required borrowers to use 75% of the funds on payroll and 25% of funds on rent, utilities and mortgage interest.
The PPPFA relaxes those rules to allow borrowers to use up to 40% of the funds on overhead cost such as rent, utilities and mortgage interest. This is a huge relief for business owners with high rent cost in large cities like New York.
3) Additional Safe Harbor Rules For Rehiring Workers
In calculating PPP loan forgiveness, borrowers will have to factor in any reduction in employee headcount, employee hours and employee wages. Under the CARES Act, employers had until June 30 to correct any reductions in employment to pre-pandemic levels.
The PPPFA extended this date until December 31, 2020 and added additional exemptions for employers who are unable to rehire their employees.
- Employers will generally be able to exclude reductions in employee headcount if the employer is unable to rehire previous employees or are unable to rehire similarly qualified employees; and/or
- The employer was able to document its inability to return to the same level of business activity as it 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.
4) Deferral of Employer Portion of Payroll Taxes
The PPPFA amends the CARES act by striking Section 2302(a)(3) which excluded taxpayers from delaying the employer portion of social security taxes if they received any PPP loan forgiveness. Therefore, borrowers will be able to defer their share of payroll taxes whether or not they apply for loan forgiveness.
5) PPP Loan Terms Extended From 2 Years to 5
The PPPFA amends the Small Business Act to extend the terms of new PPP loans for any portion that does not qualify for forgiveness from 2 years to 5. The amendment takes effect on the date of enactment of the PPPFA and only applies to new PPP loans made after such date.
However, the PPPFA clarifies that nothing in this Act, the Cares Act, or the Paycheck Protection Program and Healthcare Enactment Act prohibits lenders and borrowers from mutually agreeing to modify the terms of a covered loan to conform to the extended terms under the PPPFA.
Lastly, borrowers who don’t qualify for loan forgiveness on any portion of their PPP loan will have until the date on which the lender receives final determination from the SBA to make their first loan payment. The PPPFA gives applicants 10 months to file an application after the end of the covered period.
Since the lender has 60 days from receipt of a complete application to issue a decision to the SBA and the SBA has 90 days after the lender issues its decision to remit the appropriate forgiveness amount to the lender, some small business owners may not have to make a loan payment until 2022.
The information contained herein is is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined though consultation with your tax adviser. This article represents the views of the author only and does not necessarily represent the views or professional advice of this publication or the author’s employer.
Curious if you are able to expand on this point “Borrowers should also be careful with extending the 24 week period if they are eligible for forgiveness under an 8 week period because other factors may negatively impact their forgiveness amount.”
Thank you!
Since loan forgiveness is based on the employer’s number of full time equivalent employees and employee wages during the covered period, the amount of loan forgiveness could change when using the 8 week vs 24 week period. For example, let’s say the business owner qualifies for forgiveness using the 8 week period and used all the funds in that timeframe while maintaining the same level of employment. However, when the business owner opened up they simply didn’t have enough business to warrant that level of employment. If they needed to reduce employment after the 20th week they could do so without worrying about how it might impact loan forgiveness since they already applied and were approved based on the 8 week covered period.
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