On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) became law providing additional relief to borrowers under the Paycheck Protection Program (PPP). The PPPFA amends the original Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to loosen restrictions placed on small businesses that received PPP loans, making loan terms more favorable for borrowers.
Below is a summary of the key updates to the PPP.
- Extends “covered period” to use PPP funds from 8 to 24 weeks
For all PPP loans made on or after June 5, 2020, the period during which borrowers must use their PPP loan proceeds for approved purposes (known as the “covered period”) in order to be eligible for PPP loan forgiveness has been lengthened to 24 weeks following loan disbursement from the 8-week period originally imposed by the PPP.
- Existing borrowers may choose to keep the 8-week “covered period”
For PPP loans made prior to the June 5, 2020, borrowers will also be subject to the new 24-week covered period unless they elect to remain subject to the 8-week covered period that was originally applicable to them. Choosing to remain under the 8-week covered period may be in a borrower’s best interest under some circumstances. Helpfully, the new 24-week covered period gives a borrower more time to spend its loan proceeds. But the change also extends from 8 weeks to 24 weeks the covered period during which borrowers must avoid layoffs or excessive pay reductions that could reduce the amount of their PPP loan that can be forgiven. Borrower’s should consider whether this could unacceptably reduce their flexibility to make necessary headcount and compensation decisions. Additionally, choosing to retain the 8-week covered period would speed up the borrower’s ability to apply for loan forgiveness.
- Reduces the minimum payroll cost expenditures from 75% to 60%
Borrowers are now only required to spend at least 60% of their loan proceeds on payroll costs to obtain PPP loan forgiveness.
- Eases rehiring requirements to avoid reductions in loan forgiveness
The new law makes two significant changes to these requirements. First, it extends the rehire date to December 31, 2020. Second, businesses which are having difficulty bringing their workforce back to pre-COVID-19 levels can still obtain full forgiveness of their loan if they can show that they are (1) unable to rehire former employees and unable to hire similarly qualified employees, or (2) unable to return to the same level of business activity due to compliance with federal requirements or guidance related to COVID-19.
- Extends the repayment term to five years and extends payment deferral
For PPP loans made on or after June 5, 2020, businesses now have five years at 1% interest to repay the portion of their loan that is not forgiven, rather than the two year term required before the PPPFA. Additionally, if a borrower timely applies for loan forgiveness, the borrower’s first payment on its PPP loan will be deferred until the SBA both determines how much of its loan is eligible for forgiveness and pays that forgiveness amount to the lender.
- Allows PPP borrowers to defer employer’s Social Security payroll taxes
Previously, businesses that received loans that are forgiven under the CARES Act were not eligible for the payroll tax deferral under the CARES Act. PPPFA modifies this provision and allows a borrower that obtains loan forgiveness to take advantage of the CARES Act provision that permits a business to defer payment of the employer’s share of Social Security taxes over a two-year period.