Looking back at the COVID whirlwind, the original PPP loan legislation was rapidly drafted and signed into law the week of March 23, 2020, which was concurrent with many State Governor’s forcing business closures and issuing stay at home orders due to COVID. The timing of these events was a disaster to the PPP loan program as the many Governor’s orders basically “sideswiped” the intentions and practicalities of the PPP loan forgiveness program. Legislators, recognizing the PPP loan forgiveness provisions were made unreasonable by the Governor’s orders, drafted legislation providing added flexibility to the loan forgiveness requirements for PPP loans, and on June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act (PPPFA).
The Paycheck Protection Program as originally written in March required borrowers to spend the loan funds on certain eligible expenses (known as “covered” expenses) within 8 weeks from the date the loan proceeds were received. Recognizing that parts of the original PPP legislation provisions were unclear and increasingly challenging to navigate due to the business closures, on May 15th the SBA offered some minor additional flexibility by allowing a borrower to “elect an alternative covered period” of 8 weeks starting from the first day of the payroll period after receiving the PPP funds instead of having to start the 8 weeks on the date the PPP loan was received. While this provided some relief by offering a short postponement of the 8-week start date, it still created a hardship because of the differing state by state business opening dates and removals of stay at home orders around the country. Many employers had received PPP funds but their Governor’s hadn’t provided the green light to open their offices, hence the 8-week clock had started but the spending of the PPP funds could not start. This meant employers would have to decide whether to pay employees for not working just so they could meet the forgiveness provisions of the PPP program or let the 8-week clock run and forgo a portion of the maximum eligible loan forgiveness. The PPPFA signed on June 5, 2020, dramatically eased the forgiveness time crunch and ensured the PPP would operate as intended.
The key provisions of the Paycheck Protection Program Flexibility Act are:
- The “Covered Period” for spending the PPP funds on covered expenses has been increased from eight to twenty-four weeks which is basically 5 ½ months.
- The amount of the loan forgiveness amount required to be spent on payroll to maximize forgiveness has been reduced from 75% to 60%. This change also acts to increase the amount that can be spent on the other covered expenses (rent, utilities, and interest on loans) from 25% to 40%. A new threshold has also been added where at least 60% of the PPP loan must be used for payroll or none of the PPP loan is forgivable.
- The deadline for hiring workers back to qualify for forgiveness has been extended from June 30, 2020, to December 31, 2020. It is important to note, there has been no change in calculating the amount of forgiveness for those making $100,000 or more on an annual basis. Therefore, absent further guidance from SBA, it appears the maximum compensation eligible for forgiveness remains at $15,385 for the 24-week period.
- The requirement to re-hire the same number of full-time equivalent (FTE) employees has been eased by extending the measurement date for determining the FTE’s from June 30, 2020, to December 31, 2020. This provides more flexibility for businesses who need to re-open and gradually ramp up their staff over a period of time due to reduced business activity resulting from COVID closures. Now, so long as the staff count is back by December, the early-term pressure is off to carry a full staff at full hours if business activity doesn’t warrant it. Also, if a business is unable to hire a previous employee who worked before February 15, 2020, or is unable to hire a similarly qualified employee for that position, or is unable to generate the same level of business activity as it had before February 15, 2020, then the business can meet an exception to the FTE count requirement.
- The repayment term of the PPP loan has been increased from two to five years. The interest rate remains at 1% and the payment will be deferred for six months after the SBA determines the amount of forgiveness. Under the current law, the bank has 60 days to determine forgiveness and the SBA has an additional 90 days. Practically speaking, with the new 24 week covered expense period, most businesses will use their entire PPP funds for covered expenses and have no loan left to repay making this provision generally unimportant.
At this time, the IRS rule that expenses forgiven under the PPP will not be deductible still stands as this was not addressed in the legislation. Also, although the PPPFA has eased the requirements for loan forgiveness you should still make sure to keep detailed records regarding the spending of the funds.
Given the fluid landscape, we do not expect this to be the last set of tweaks to the PPP loan program.
Support local business, don’t get lax, stay your distance, stay social, and stay safe!