PPP Flexibility Act: Breaking Down the Significant Impact on Borrowers

Updated 7/2/2020 at 9:05am ET

UPDATE 7/2: Congress has voted to extend the deadline to apply for forgivable Paycheck Protection Program loans. Businesses now have until Aug. 8 to apply for the aid. President Trump is expected to sign the bill.

SC&H’s Key Takeaways

  • Extension of the covered period from 8 weeks to 24 weeks; existing borrowers (those with loans issues prior to the date of enactment) still have the option to remain at 8 weeks.
  • Borrowers can spend more of their proceeds on nonpayroll costs, but if they do not spend 60%+ of the initial loan amount on payroll costs, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.
  • The deadline to replace FTEs/restore salaries has been extended to not later than December 31, 2020 by the Paycheck Protection Program Flexibility Act (“PPPFA”).
  • An employer who has a PPP loan and forgiveness thereof, may continue to defer their portion of Social Security tax burden into 2021 and 2022.
  • Loan repayment period has been extended to five years for new loans, and payments will be deferred until the lender receives the forgiveness amount from the SBA – previously it was six months from loan distribution. Business owners with loans issued prior to the enactment date of the PPPFA will need to negotiate maturity with their lender.
  • Businesses that didn’t apply for PPP due to the restrictions in place previously should reconsider that decision – as of June 3rd, approximately $120 billion in funding is still available. Loan applications will not be approved after June 30, 2020.
  • Treasury will be issuing modified loan application and loan forgiveness forms to conform to the PPPFA.

On Friday, June 5, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010), a reform bill that gives business owners more flexibility and time to use loan proceeds and still maximize PPP loan forgiveness. It will significantly impact the likelihood that borrowers will see a large portion of their loan proceeds forgiven. On June 8th, Treasury and SBA issued some important guidance that primarily notified borrowers there is no 60% “cliff”, which was a concern when the law was passed last week. Here’s the full release from the Treasury and SBA.

Let’s dive into the details of the key changes within the PPPFA:

Covered Period Extension from 8 Weeks to 24 Weeks

Previously, the program gave borrowers 8 weeks from the loan disbursement date to incur/pay costs eligible for forgiveness. This bill extends the covered period to 24 weeks, or December 31, 2020 – whichever is earlier.

This is a big win for businesses that need more time to incur and/or pay costs eligible for forgiveness, particularly restaurants, hotels, certain medical offices and other businesses who were close to seeing their 8-week window expire while they were partially or fully closed as mandated by federal/state/local government.

One of the nuances to this is that current borrowers—defined as any borrower receiving a PPP loan prior to the date the bill is signed into law—have the option to stick with the 8-week covered period beginning on the date it received the funds.

For all new borrowers, they are only availed of the 24-week covered period.

Changes to Payroll/Nonpayroll Costs Split

Under the new bill, borrowers will see the nonpayroll cost cap increased from 25% to 40%.

The bill reads “to receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs…”.

This stands to reason that any borrower not meeting this payroll cost threshold of 60% will not see any portion of their loan forgiven, whereas previously a failure to meet the 75% minimum would merely decrease the amount of potential forgiveness – not eliminate it entirely. As noted above however, the June 8th statement from Treasury provides that partial forgiveness will be available, as long as 60% of the total loan forgiveness was related to payroll costs.

FTE and Wage Reduction Penalty Changes

Opportunity to Avoid FTE Reduction Penalties

In the original PPP guidelines, borrowers were able to maintain full loan forgiveness eligibility so long as they either fully restored FTEs and salary/hourly wages to their February 15th, 2020 levels before June 30, 2020.

The Flexibility Act extends the June 30th deadline to not later than December 31, 2020.

It is still unclear if current borrowers can keep the June 30th safe harbor date should they so desire,  additional guidance is required from the SBA to address this issue.

New Exceptions for FTE Reduction

The bill provides that during the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness will NOT be reduced when a borrower experiences a loss of FTEs if the borrower, in good faith, is able to document an inability to:

  1. Rehire individuals who were employees of the business on February 15, 2020,
  2. Hire similarly qualified employees for unfilled positions on or before December 31, 2020, or,
  3. Return to the same level of business activity as before Feb. 15, 2020, due to compliance with federal agency requirements established or guidance issued, related to COVID–19.

The last one is critical as it basically says that any business still unable to fully restore pre-COVID FTE levels by December 31, 2020, due to ongoing federal government orders, should NOT be penalized with a corresponding reduction in their forgivable amount with respect to the FTE issue.

Deferral of Employer’s Share of Payroll Taxes

While the spirit of the PPP relief loans is for businesses to retain as many of their people as possible, one of the additional incentives allowed employers to defer their 6.2% share of 2020 Social Security Tax until the end of 2021 (50%) and 2022 (50%). However, this deferral was only available to a PPP borrower until their loan was forgiven.

Now, thanks to H.R. 7010, employers can defer all of their 2020 FICA tax burden to 2021 and 2022, even if their loan is forgiven prior to December 31, 2020.

Loan Repayment Period Extended to Five Years with 1% Interest

Originally, the SBA provided for a 2-year maturity date to any PPP loan proceeds that were not forgiven; this bill extends that repayment period to five years. The CARES Act provided for a 10-year term, which the SBA overruled. It stipulates that this benefit is only available to new borrowers (those receiving a loan after this bill is signed by President Trump), but existing recipients are free to negotiate with their lender to extend terms up to the permitted five-year period – Planning point – discuss this with your bank now, along with issues such as when applications will be accepted, format of data, etc.

Additionally, borrowers will receive deferred loan payments (including interest) until the date the lender receives the forgiveness amount from the SBA. However, if the borrower does not apply within 10 months following the final day of their covered period, the payments will be required at month ten. This is a change from the loan program as stated in the CARES Act, which provided a six-month deferral.

Open Items to Monitor – What’s Left for SBA to Address?

  • May existing borrowers apply for forgiveness now, using the “old” application and 8-week period?
  • If a business restores its FTE count over the next few months, may they apply for forgiveness then or do they need to have FTEs restored on December 31?
  • May an existing borrower utilize the June 30, 2020 FTE reduction safe harbor instead of December 31, 2020?
  • Congress did not take this opportunity to make expenses related to loan forgiveness tax deductible and overrule the IRS guidance issued on April 29th.
  • What changes will there be related to salary and wage limitations and reductions – 8/52 or 24/52 of $100,000? Safe harbor changes in terms of amounts, dates, etc.?
  • Will owner employee, self-employed and partner compensation amounts still be limited to 8/52 of 2019 or will it become 24/52? Or perhaps some other amount?
  • Many other open items remain regarding definitional guidance on retirement plan contributions, utility payments, etc.
  • We are hearing that the SBA has 25-30 FAQs ready to publish that were held back while this legislation made its way around Congress.
  • We are also hearing the SBA and Treasury are listening to suggestions on how to simplify the loan forgiveness application and proceed, particularly for smaller companies and loan amounts.

Stay tuned, we will update our thinking as new information is available. In the meantime, if you have any questions for the SC&H Group Team, please reach out to us directly through our website.