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New PPP Loan Forgiveness Rules Allow for Much Needed Flexibility

On June 5th, the President signed a bill into law which grants PPP borrowers more flexibility in spending loan funds. The key changes made by the Payroll Protection Program Flexibility Act of 2020 (the “Act”) are:

Change in the Covered Period

Under the CARES Act, a borrower had 8-weeks to pay expenses with PPP funds, and still be eligible for forgiveness. This was known as the “Covered period.” However, Congress and the SBA soon realized the difficulty in achieving full forgiveness under this restriction, especially for the businesses that could not fully re-open or re-hire to pre-shutdown levels.

As a result of the PPP Flexibility Act, the borrower can now elect a “Covered period” for which “forgivable” expenses are incurred 24 weeks from the date of the loan origination (but not beyond December 31, 2020).

Therefore, payroll costs and eligible non-payroll costs either paid or incurred in the 24 week period can be included in your loan forgiveness application. These costs are, of course, capped at your maximum loan amount and are subject to defined payroll costs limitations.

NOTE:   Borrowers with a loan issued prior to the Act can still elect to maintain their original 8-week period, although if there is any concern about full forgiveness during the truncated period, this seems unwise.

Relaxed Restrictions on Eligible Expenditures

Prior to the PPP Flexibility Act, SBA guidance noted that forgiveness was restricted, such that non-payroll costs (eligible interest/rent/utilities) could not be more than 25% of the total forgiveness amount.

The new Act increases that 25% limitation to 40%, allowing businesses with more overhead and fewer employees a chance at full forgiveness. This is a likely scenario for a business that struggled to re-open to pre-crisis levels.

There was early speculation on a possible “60% Cliff” meaning that no loan forgiveness would have been allowed if a borrower spent less than 60% of loan funds on payroll. The Treasury and SBA quickly quashed this issue with a joint statement on Monday, June 8th, noting that forgiveness is still available “subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.”

Employment Levels

The PPP Flexibility Act also gives business owners until December 31, 2020, to bring their Full Time Equivalent Employees (FTEs) and (comparative) wages paid up to the level needed for maximum loan forgiveness. Even if borrowers cannot increase their employment levels to the required level, some reductions in FTEs will not be counted against them.

In addition to the exceptions from previous forgiveness guidance (offers of employment that were declined, an employee fired for cause, etc.), a reduction in the number of FTEs will not be counted against a borrower if the borrower can document in good faith that either:

1) the borrower had an inability to rehire individuals who were employees on February 15, 2020, AND is unable to hire qualified employees for unfilled positions before the end of the year;

OR

2) the borrower can document their inability to return to the same level of business activity at loan forgiveness application, as compared to February 15, 2020, due to compliance with government COVID-19 health and safety rules.

Applying for Forgiveness

The Act revises the deferral period for loan repayment, allowing recipients to defer payments until the forgiven loan amount is sent by SBA to the lender. Recipients have 10 months after their covered period to apply for forgiveness, and those who do not apply for forgiveness have 10 months from the program’s expiration or from the date the SBA makes a partial forgiveness to the lender to begin making payments, whichever is earlier.

Repayment Extension

New borrowers can extend repayment of PPP loans for up to 5 years. For those with existing loans, borrowers and lenders by mutual agreement may extend the loan repayment to 5 years.

PPP Borrowers Now Allowed to Defer of Payroll Taxes

The CARES Act allowed employers to defer payment of the 6.2% employer share of Social Security taxes for the rest of 2020 but disallowed this benefit for PPP recipients that have a loan forgiven. The new Act removes this restriction, allowing PPP borrowers to also defer payment of their payroll taxes from March 27 to December 31, 2020. (While the payroll deferral can be nice short-term cash flow benefit, it may not always make sense to defer these payments, so please talk to your tax professional to determine the risks of deferral.)

The PPP Flexibility Act has addressed some of the key concerns with the original CARES act. Businesses that have been shut down, and have struggled to re-open (and re-hire), now have more time and flexibility to take advantage of the PPP and related forgiveness.

The PPP application deadline is still June 30th, so if you are still considering applying under these more generous terms please reach out to an SBA lender quickly.

If you have questions about the PPP program, please visit our PPP website, contact our PPP team, or reach out to your Frazier & Deeter professional.

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