The Paycheck Protection Flexibility Act (the “Act”) is now signed into law! It provides favorable changes for employers to the forgiveness provisions under the Paycheck Protection Program (“PPP”). The Act provides welcomed relief to borrowers as they seek forgiveness for their PPP loan amounts.
Below is a summary of the main changes provided by the Act:
1. Extension of covered period
Borrowers ini ally had 8 weeks from the date of their loan disbursement to use the funds for allowable purposes to ensure forgiveness. Borrowers can now choose to extend their 8-week covered period to the earlier of 24 weeks or December 31, 2020.
2. Payroll percentage dropped to 60%
Payroll costs can now be just 60% of the total amount to be forgiven (formerly 75%), increasing the percentage of non-payroll costs from 25% to 40%. While there is debate regarding how this change will be implemented and applied by the SBA, as written if you fail to spend at least 60% on payroll, NONE of the loan will be forgiven. This is a stark change to the previous guidelines, as before a borrower was merely required to reduce the amount eligible for forgiveness if less than 75% of eligible funds were used on payroll costs, and so forgiveness was not eliminated if the 75% threshold was not met.
3. More time to replace full time employees (“FTEs”) and restore salaries
The previous safe harbor deadline of June 30, 2020 for curing any reductions in staff and/or wages has been extended to December 31, 2020.
4. Relief for Borrowers who remain par ally or fully closed through the end of 2020
The Act includes new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce this year. Previous SBA guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the COVID-19 pandemic.
The Act provides that during the period beginning February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness will NOT be reduced when a borrower experiences a loss in FTEs, if the Borrower can, in good faith, document:
(a) There was an inability to rehire individuals who were employees of the eligible borrower on February 15th;
(b) There was an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or
(c) There was an inability to return to the same level of business opera ons as borrower’s business had been operating at before February 15, 2020, due to compliance with CDC requirements related to maintenance standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
5. You will have longer to repay unforgiven PPP loan proceeds
Originally, the SBA assigned a 2-year term for the repayment of the por on of the PPP loan that was not forgiven. The Act extends this period to 5 years. Technically, this longer repayment period applies only to PPP loans issued a er the Act comes into effect, but lenders and borrowers are free to negotiate the terms of their existing loans to allow for this longer repayment period.
6. Payroll taxes can be deferred even if your PPP loan is forgiven
The CARES Act provided that those who took advantage of the PPP, would not be eligible to defer the payment of social security taxes during 2020. The IRS then amended this rule, so that a PPP borrower could defer payment of social security taxes un l it received the lender’s decision to forgive its PPP loan.This latest legislation now allows an employer to defer payment of all of its 2020 social security taxes until 2021 and 2022, even if the employer’s PPP loan is forgiven in full.
As has been the case with the CARES Act and the SBA’s PPP guidance provided to date, this Act also raises a number of questions that the SBA will need to address in future guidance. Questions include how these recent changes will affect the limits on owner-employee compensation, compensation on of those earning over $100,000 per year, and whether a borrower needs to wait out the full 24-week covered period before applying for forgiveness. When we get more guidance on these points, we will update you.