Paycheck Protection Plan Flexibility Act Increases PPP Loan Program Flexibility

What would a week be without changes to the Paycheck Protection Program (PPP)? This week doesn’t disappoint, as more changes are in store for the PPP loan program.

On June 5, 2020, the Paycheck Protection Plan (PPP) Flexibility Act was signed into law by the President. The PPP Flexibility Act could help organizations that may still be closed or partially closed meet the requirements for forgiveness.

On June 10, the U.S. Small Business Administration (SBA) issued an Interim Final Rule entitled “Revisions to First Interim Final Rule,” to implement certain changes that the PPP Flexibility Act makes to IFRs previously issued by the SBA.

The PPP Flexibility Act contains the following provisions.

Longer spend period

• PPP borrowers with existing loans will be subject to an extended covered period of 24 weeks or may elect to use the original eight-week covered period.
• The covered period for any new PPP borrowers will be 24-weeks, but cannot extend beyond December 31, 2020.
• The extension to 24 weeks for existing borrowers is very good news for some organizations that have not been able to spend the loan proceeds during the original eight-week period because they have been shut down or only able to operate at a fraction of previous capacity. For most organizations, payroll costs for 24 weeks should cover all of the loan proceeds. In many cases, costs like utilities, rent, etc. should not need to be included as part of the use of the proceeds.

60% payroll cost threshold

• Payroll costs must account for at least 60% of the use of the loan proceeds (down from the 75% threshold that the SBA had established). This requirement will be interpreted “as a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount rather than as a threshold for receiving any loan forgiveness.” In other words, forgiveness will be reduced (but not eliminated) if less than 60% of the loan was used to pay payroll costs.
• The extension of the covered period to 24 weeks, but not beyond December 31, 2020, should make it easier for organizations to hit the 60% threshold.

Increased timeline to request forgiveness and defer payment

• A borrower now has 10 months from the end of the covered period to request forgiveness. If a borrower submits a loan forgiveness application within that time period, no payments of principal or interest will be due until the SBA remits the loan forgiveness amount to the lender. If a borrower does not submit a loan forgives application within that ten-month period, the borrower must begin paying principal and interest on or after the last day of the ten-month period.
• The extension of the deferral period for PPP loans is retroactive to March 27, 2020, and applies to all loans under the PPP.

Modified FTE requirement

• The FTE requirement is modified so it will not cause a reduction in forgiveness if a borrower can, in good faith, do one of the following:
  • Document the inability to rehire individuals who were employed on February 15, 2020;
  • Document the inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
  • Document that adhering to safety, sanitation, and social distancing orders for customers or workers prevented a return to the same level of business activity that existed as of February 15, 2020.

Extended repayment term for new loans

• New loans granted after the date of enactment will have a minimum repayment term of five years. If you have an existing loan and your lender agrees, your two-year loan can be extended to up to five years.

Option to defer social security tax

• Organizations may now defer the employer portion of social security tax until December 31, 2020. Initially, the deferral was only allowed until loan forgiveness was granted.

Income tax deduction

• Unfortunately, the bill does not address whether funds used for forgiveness can be deducted for income tax purposes. We continue to watch other bills being discussed — some include provisions that would override the guidance the IRS released in April, stating forgiveness expenses would not be deductible for federal income tax purposes.

We expect the PPP loan forgiveness application will be revised. If you planned to submit your forgiveness package in the near future, you may want to consider waiting in light of the increased flexibility this new legislation would provide.

How we can help

We can help borrowers determine the most appropriate covered period to select to achieve maximum forgiveness. Whether you need just a short consultation or full support throughout the process, we’re here to help.

• See our forgiveness package options.
• View our livestream series.

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