Many of our clients for whom we facilitated PPP loans appropriated by the CARES Act have been very concerned about the restrictive nature of the forgiveness provisions. Passage of the Paycheck Protection Program Flexibility Act of 2020 (HR 7010) on June 3, 2020, by the U.S. Senate finally provides the flexibility and expansion of the “covered period” timeframe that loan recipients have been clamoring for.
Where We Were
At the inception of the CARES ACT, companies that obtained a PPP loan were required to spend 75% of the proceeds on payroll expenses as defined by the legislation, and the remaining 25% could be spent on utilities, rent, and mortgage interest, provided that these expenses were related to contracts entered into prior to February 15, 2020. There were also stringent rules regarding “Full Time Equivalent Employees” having to be equal to pre-COVID levels. To make things more difficult, companies were required to make a written job offer to laid-off employees who weren’t necessarily eager to come back to work mostly due to enhanced unemployment benefits. However, of greatest concern was the “covered period” of only eight weeks to spend the PPP loan proceeds on payroll for measurement of forgiveness.
Extension of Covered Period
Passage of this recent legislation in effect makes this program workable for the many companies that need help the most. What changed? Of greatest impact is the “covered period” has been expanded to the earlier of 24 weeks from loan origination or December 31, 2020. Tripling the “covered period” for usage of PPP funds on payroll allows businesses that weren’t able to operate due to state and local shutdowns an opportunity to take advantage of the program instead being denied forgiveness due to conditions beyond their control.
Easing Restrictions on Eligible Payroll Expenses
Adding even further flexibility is the reduction from 75% to 60% of loan proceeds that must be spent on payroll costs in order to qualify for forgiveness. This is especially valuable to businesses that may take longer to bounce back to full operations, allowing them to allocate more forgivable funds to the overhead costs of rent or mortgage interest, and utilities. The legislation did not expand the expense categories for which the PPP funds can be used, however, it does include a provision for delaying payment of employer payroll taxes, which is a new development and a departure from the CARES Act. We can provide guidance on whether delaying the payment of payroll taxes would be advantageous for your company or not.
Flexibility in Retention and Rehiring of Employees
Relaxed language regarding Full Time Equivalents is also in the bill, including provisions for businesses that cannot hire similarly qualified employees or are able to document an inability to return to the same level of business activity.
Changes to Payback Period
There is also an expansion of the payback period to five years for any non-forgiven portion of the loan. With regard to forgiveness, loan recipients now have ten months from the end of the defined covered period to apply for the loan to be forgiven. One caveat in the bill that must be paid attention to is the provision that at least 60% of the loan proceeds must be spent on payroll costs or none of the loan is forgivable. Previously, only the portion of the loan that was not used for eligible expenses would have to be paid back.
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