On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act) into law.
The Flexibility Act makes a number of changes to the Paycheck Protection Program (PPP) that will impact borrowers, including the following (each of which is qualified in its entirety by the full text of the Flexibility Act):
1. Extends Deadline for Filling a PPP Loan Application
The deadline for filing a PPP loan application would be extended from June 30, 2020 to December 31, 2020.
2. Increases Amount of Time to Spend PPP Funds
The amount of time PPP loan recipients have to spend PPP loan proceeds would be extended from eight weeks to the earlier of (a) 24 weeks or (b) December 31, 2020. This addresses many critics’ concerns that the current eight-week forgiveness period is not enough time to help businesses remain open (specifically bars, restaurants and salons) and to spend their received funding and recover financially, particularly in light of the other restrictions these businesses face because of COVID-19. PPP loan recipients that have already received their PPP loans would have the option to extend the covered
period or continue with the original eight-week period.
3. Increases to 40% the Amount of a Loan that Can Be Spent on Non-Payroll Costs Rule
The amount of the loan required to be spent on payroll costs would be lowered from 75% to 60%, and correspondingly, up to 40% of a PPP loan may be used for other approved costs, such as mortgage payments, rent and utilities. By lowering the minimum percentage of funds required to be spent on payroll, this change allows businesses will be able to spend a greater amount on other business operating expenses without sacrificing the amount of the loan that may be forgiven. The expansion of
time to use the loan and the amount of the loan that can be used for non-payroll costs will significantly increase the likelihood that PPP loan recipients will have the entire PPP loan forgiven. Of course, those loan recipients who used the loan to pay employees even though they were not open for business will likely require additional relief to restart and ramp up their businesses.
4. Extends Time to Re-hire Employees and Provides Additional Safe Harbor for FTE Reductions
The deadline for re-hiring employees and receiving loan forgiveness reductions under the PPP would be extended six months from June 30, 2020 to December 31, 2020. The additional six-month period should operate to eliminate most loan forgiveness reductions resulting from a work force reduction. In addition, the loan forgiveness amount would no longer be decreased due to a reduction in the number of full-time equivalent (FTE) employees from February 15, 2020, through December 31, 2020, if the loan recipient can document:
(a) its inability to rehire individuals employed on February 15, 2020, and hire qualified replacements by December 31, 2020, or
(b) the company’s inability to return to its activity level before February 15, 2020, due to COVID-19- related restrictions, guidance or requirements imposed by the government between March 1, 2020, and December 31, 2020. This, in conjunction with the reduced percentage of PPP loans required to be spent on payroll and the new deadline for re-hiring employees, significantly increases a small business’s ability to maximize the impact of its PPP funding and obtain complete loan forgiveness.
5. Maturity of Loan Extended to Five Years
PPP loans would mature in five years instead of two years. While this change will apply to all PPP loans made on or after the enactment of the law, loan recipients will be able to retroactively extend the maturity of PPP loans funded before the enactment of the law.
6. Payment Deferral Period Extended to 10 Months
A loan recipient would not be required to make any payments in respect of loan balance remaining outstanding after giving effect to the forgiveness feature until ten months after the loan was received by the recipient. The deferral period is currently only six months. In addition, loan recipients must apply for forgiveness within ten months after the last day of their covered PPP loan period, which is the earlier of 24 weeks from origination or December 31, 2020.
7. Permits Employer to Defer its Portion of the 6.2% Payroll Tax
Any loan recipient can now access the CARES Act deferral for its portion of Social Security payroll taxes up to 6.2% for payments required to be made between March 27, 2020, and December 31, 2020, regardless of whether any portion of its PPP loan is forgiven. Previously, a loan recipient could not continue to defer its portion of Social Security payments after any of its PPP loan was forgiven.
In addition, the Senate added a letter to the Congressional Record clarifying its intention that the extension of the covered period does not authorize the SBA to issue any new PPP loans after the June 30, 2020 deadline established by the CARES Act.
Nevertheless, with more time to use the funds, and more time to re-hire employees, and a decrease in the mandatory minimum funds to be spent on payroll costs, more borrowers will be able to meet the loan requirements and guarantee complete loan forgiveness for themselves.
As we all continue coping with the unprecedented situation arising from the COVID-19 virus, we want to take this opportunity to notify our clients and friends that Duane Morris Government Strategies (DMGS) is here to help if you need assistance of any kind, and to assure you that the Firm is operating and fully functional. Our professionals and staff are working remotely and securely, and we remain available to assist our clients without disruption.
Martin Milita 