Highlights from the PPP Flexibility Act

Congress and the President issued a positive response to PPP borrowers (“Borrower”) by signing the Paycheck Protection Program Flexibility Act (“PPP Flexibility Act”) last Friday (June 5, 2020).  The legislation provides several critical and more liberal changes to the Paycheck Protection Program (“PPP”) created under the CARES Act.

As now is normal course for the PPP, we expect the Treasury and SBA to publish further guidance and interpretations over the coming week(s).

SUMMARY

The “Covered Period” of the PPP loan can be extended from 8 weeks to the earlier of December 31, 2020 or 24 weeks after receipt of loan proceeds. Payroll vs. Non-Payroll costs have been revised from 75%/25% to 60%/40%. FTE and Wage Reduction calculations are unchanged, but Borrower now has until December 31, 2020 to rehire to February 15, 2020 levels.  Additionally, Borrower will not be penalized if it can demonstrate good faith efforts to rehire or resume business activities. New PPP loans will have a minimum five-year maturity; existing loan maturities will remain at two year unless amended by lender. PPP principal and interest payments may be deferred until the date of loan forgiveness which is an extension of the original six (6) months. PPP borrowers can now defer the employer portion of payroll taxes through December 31, 2020.  The deferred taxes will be due and payable 50% on each of December 31, 2021 and 2022, respectively.

KEY CHANGES UNDER THE PPP FLEXIBILITY ACT

Covered Period & Loan Forgiveness

Perhaps the most important changes under the PPP Flexibility Act were the changes to the covered period and loan forgiveness provisions.  Under the PPP, the original covered period for loan forgiveness was eight (8) weeks following the first receipt of loan proceeds.  The PPP Flexibility Act now allows Borrower to choose to extend this covered period to the earlier of December 31, 2020 or twenty-four (24) weeks following the receipt of loan proceeds.  During this period, Borrower may now apply for forgiveness based on payroll and non-payroll costs.

Payroll vs. Non-Payroll %

Under the PPP, the SBA issued guidance requiring that no more than 25% of the forgiven amount could be spent on non-payroll costs.  In other words, if payroll costs did not represent 75% of the total costs eligible for forgiveness, Borrower’s loan forgiveness would be capped at the 75% level.  Under the PPP Flexibility Act, the payroll requirement has been reduced to 60% (non-payroll costs at 40%).  Just yesterday, the Treasury and SBA issued a joint statement clarifying borrower’s will be eligible for partial forgiveness of the original loan based on the new 60% payroll cost provision.

FTE and Wage Reduction Safe Harbors

No changes were made to the calculations requiring reductions to the forgivable amount based on FTE or wage reductions.  HOWEVER, the FTE safe harbor for reestablishing FTE headcount to February 15, 2020 levels has been extended six (6) months from June 30, 2020 to December 31, 2020.

Additionally, a new safe harbor was created whereby Borrower’s forgiveness will not be reduced if Borrower can demonstrate:

• an inability to rehire former employees or similarly qualified positions on or before December 31, 2020;

• an inability to return to the same level of business activity due to compliance and/or guidance issued by the Secretary of Health and Human Services, the CDC or OSHA regarding employee safety.

Loan Maturity

Previously the SBA assigned a two-year maturity for all PPP loans.  For all NEW PPP loans, the PPP Flexibility Act requires all future PPP loans to have a minimum maturity of five (5) years.  For existing PPP loans, the maturity remains two (2) years; however, lenders and borrowers may agree to mutually amend these loans to conform to the new five-year maturity.

• To summarize:

  • Loans prior to June 5, 2020: Maturity of loan = 2 years unless amended by lender

  • Loans on and after June 5, 2020: Maturity of loan = minimum 5 years

Loan Repayment

Previously principal, interest and fees on the PPP loan could be deferred for six (6) months from the date of the loan.  The PPP Flexibility Act extends the deferral period to the date the SBA provides the loan recipient its forgiven amount.  Should a recipient not apply for loan forgiveness, the deferred period ends at ten (10) months following the end of the covered period.

Payroll Tax Deferral

Previously, PPP borrowers were disallowed from deferring the employer portion of payroll taxes on the payroll costs eligible for forgiveness.  Under the PPP Flexibility Act, ALL employers can defer 2020 payroll taxes.  That means, PPP recipients can defer employer payroll taxes even after loan forgiveness.  Deferred employer payroll taxes will be due 50% on December 31, 2021 and 50% on December 31, 2022.

Inflammo reminds readers that this summary is for informational purposes only. It is not legal advice or accounting advice specific to the readers’ businesses. Inflammo reserves the right to revise this summary as new information and analyses become available.