By Erica Houskeeper on July 13, 2020
The new Paycheck Protection Program Flexibility Act of 2020 is good news for small business owners. Changes to the PPP loan forgiveness rules and guidance will ease many of the burdens placed on businesses that received the loans and offer a more significant opportunity for PPP loan forgiveness.
Signed into law on June 5, the act extends the Payment Protection Program loan maturity date, provides borrowers more control over how to use the funds, and makes it easier to obtain forgiveness.
Here are the six main things you need to know about the new Paycheck Program Flexibility Act and how it may affect your small business.
Extended Maturity Date From 2 Years to 5 Years
The Payment Protection Program Flexibility Act (PPPFA) modifies the Paycheck Protection Program, which was first introduced under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Under the CARES Act, the minimum maturity date for loan amounts was initially not defined. The new law now states that “The covered loan shall have a minimum maturity of 5 years and a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness under that section.”
Extension to Make Expenditures to a Maximum of 24 Weeks
The extension allows borrowers who received PPP loans before June 30, 2020, to continue to make expenditures for allowable uses until December 31, 2020.
The covered period of the loan was originally an eight-week timeframe between February 15, 2020 to June 30, 2020. The Flexibility Act now extends the covered period to 24 weeks from the origination date of the loan, or December 31, 2020, whichever is earlier.
Extension of Timeline to Rehire Employees
Under the new law, businesses now have until December 31, 2020, to rehire workers in order for their salaries to count toward forgiveness. However, according to an article in Forbes, the new law does not change how salaries are calculated toward forgiveness. Employee compensation eligible for forgiveness is still capped at $100,000, and until further guidance, employer owners and contractors are still capped at $15,385.
PPP loan forgiveness amounts would be determined without regard to employment reductions for companies that document their inability to rehire employees employed as of February 15, 2020, and their inability to find similarly qualified employees by December 31, 2020. Under the bill, such companies would need to show that they could not resume business levels from before February 15, 2020, because they were complying with Federal COVID-19 safety, sanitization, or social distancing guidelines.
Mandatory Payroll Spending Reduced from 75% to 60%
The reduction lowers the minimum percentage of loan proceeds required to be used for payroll costs to qualify for loan forgiveness from 75% to 60%. However, the payroll costs percentage threshold may not be as much of an issue anymore due to the extended 24-week covered period where more payroll costs can now be included in the loan forgiveness calculation.
Extension of Loan Deferral Period
Allows borrowers to defer principal and interest payments on PPP loans until the SBA compensates lenders for any forgiven amounts—or notifies the lender that no loan forgiveness is allowed—instead of the previous six-month deferral period. Borrowers that do not apply for forgiveness within 10 months after the end of the loan forgiveness covered period must start making payments right after the end of that period.
Questions remain about the PPAFA. Small businesses seeking loan forgiveness or deferment should consult with their accounting professional and legal advisor to determine how to best proceed.