Dear Clients and Friends,
On Friday June 5th, 2020, the Protection Program Flexibility Act (PPPFA) was signed into law, which attempts to address certain concerns from the original Paycheck Protection Program (PPP). Much of what we previously wrote about on how to file for forgiveness of a PPP loan still stands. However, there are important changes to note that many of us have been anticipating. These changes will benefit many by loosening some of the tighter terms of the forgiveness, however, there are still nuances to this new piece of legislation which we explain below.
Length of Loan Updated to 24 Weeks
The first headline change is that borrowers can now spend the loan money over a period of 24 weeks instead of just eight. This takes the pressure off businesses struggling to rack up enough allowable expenditure in the original time frame. Those that have already done so, however, can elect to have the eight-week period apply, which would enable them to have their forgiveness confirmed sooner thereby eliminating the liability off their balance sheet. This remains a wise course of action for those businesses in a position to make this election, as it will reduce uncertainty and make it easier to secure ordinary commercial loans in the months ahead.
75% Payroll Requirement Reduced to 60%
The second big change is a double-edged sword. The good news is that the previous requirement that 75% of the loan amount be spent on payroll costs has been reduced to just 60%. This will make things easier, especially for firms in high-rent areas or with high non-payroll overheads. This will also make it possible for self-employed individuals to meet the minimum amount of payroll requirement and have their total amount of loan forgiven. On the other hand, the previous rule stated that if the 75% requirement was not met, the amount forgivable would be reduced accordingly. The new PPPFA now appears to make the 60% more of a cliff edge. This means that if it the 60% threshold is not met, none of the loan amount will be forgivable.
It seems clear that the PPPFA is geared at employment and means to keep people in their jobs as much as possible. There has always been a requirement that borrowers have the same number of employees at the end of the process as at the beginning—even if some are temporarily let go and rehired or replaced. The original June 30th deadline to rehire employees has been extended to December 31st, 2020, granting more flexibility in the interim to rehire or replace staff in line with your company’s needs.
The PPPFA also provides an exception for businesses that are unable to rehire staff (because the staff declines the offer) or to find suitable replacements. A reduction in the number of employees will also not count against a borrower if they have been unable to restore their business to previous levels of activity due to compliance with social distancing or other federal health guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration between March 1 and December 31, 2020.
There is also good news for businesses that will have to repay all or some of their PPP loan, as the repayment period has been extended from two to five years. The interest rate remains at 1% and payments on any unforgivable amounts are now deferred 6 months after the SBA’s determination of the forgiveness amount. Additionally, all borrowers—regardless of whether their loan is eligible for forgiveness—can now benefit from the two-year payroll tax deferral of the employer’s share of Social Security payroll taxes. 50% of the amount due for 2020 can be paid in 2021 and the remaining 50% in 2022.
In summary, there are ambiguities to be clarified, especially concerning the 60% payroll cliff edge, but overall, we hope passing of the PPPFA will give our clients greater confidence in the PPP and how best to move forward. This new measure certainly provides more room to maneuver in terms of how the loan can be spent. As always, we will continue to keep you updated as we await additional clarification and guidance.
Stay Safe and Healthy,
The CJBS Team