Congress Adds Much Needed Flexibility to PPP Loans

June 05, 2020

On June 3rd, Congress passed the Paycheck Protection Program Flexibility Act of 2020 (the “Act”) which amends certain portions of the CARES Act and Small Business Act.  The Act ushers in considerable changes for the Paycheck Protection Program (PPP), particularly for borrowers in the restaurant, hospitality, and other industries struggling to utilize PPP funds while still subject to extended shutdown orders as a result of COVID-19.  Moreover, increased exceptions to the loan forgiveness limitations reflect the reality that re-hiring and/or replacing employees can be a difficult task under present conditions.  The easing of these limitations should enable more and more borrowers to qualify for full loan forgiveness.  Below is a summary of the changes imposed by the Act:

–  The 8-week covered period for spending PPP loan funds has been extended to twenty-four (24) weeks.  This is a significant increase in the amount of time borrowers have to spend PPP loans funds that are eligible for later forgiveness.

–  In order to qualify for loan forgiveness, the minimum amount of PPP funds that must be spent on payroll costs during the covered period has been lowered to 60% (down from 75%).  This frees up borrowers to spend more PPP funds on other non-payroll items such as rent, utilities, and mortgage interest.  However, this new 60% threshold is now a "cliff" – failure to achieve 60% payroll spending disqualifies the entire loan from forgiveness

–  The previous June 30th "re-hire deadline" has been extended to December 31, 2020.  This extends the timeframe for borrowers to restore their full-time equivalent employees (FTEs) & compensation to pre-shutdown levels to avoid the application of the employment and/or compensation-based reduction formulas that could decrease loan forgiveness.  

–  For purposes of computing the above-mentioned reduction formulas, decreases in FTEs will be ignored if borrowers can, in good faith, document that they were (1) unable to re-hire their employees (employed as of February 15, 2020) and re-hire a similarly qualified employee for the same position; or (2) unable to return to pre-February 15th business levels due to continued governmental restrictions relating to COVID-19.

–  Loan terms for new borrowers have been extended to five (5) years.  Existing loans can also be extended to five (5) years upon agreement between the lender and borrower.  The interest rate for all PPP loans remains fixed at 1%.

–  The Act now allows all taxpayers to defer payment of the employer-share of FICA taxes (6.2%) during 2020.  While deferral was previously available to PPP loan recipients, prior rules required the deferral to stop as soon as the loan was forgiven. For large employers, this new deferral rule should provide a significant source of additional cash in the short term.

John George Archer (Primary Author) - About John George / More from John George

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