December 14, 2020

Significant Changes to PPP Loan Forgiveness Via the New PPP Flexibility Act

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• PPP Loan recipients now have 24 weeks to spend loan proceeds—increased from 8 weeks.

• Mandatory payroll spending is reduced from 75% to 60%, with that minimum seemingly required to be spent on payroll for any forgiveness.

• Via two exceptions, full forgiveness is achievable even if the workforce is not fully restored.

• The deferral period is extended—up to 21 months!

• New PPP Loan recipients now have 5 years to pay off the loan—up from 2 years. Prior recipients can attempt to negotiate new terms with the lender.

• All PPP Loan recipients are now eligible to delay paying payroll taxes.

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On June 5, 2020, President Trump signed H.R. 7010 into law—enacting the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act). The PPP Flexibility Act makes several significant changes to the Paycheck Protection Program (PPP), which was created under the CARES Act in response to the COVID-19 pandemic.¹ The new changes are intended to provide PPP Loan recipients with more freedom, or “flexibility,” in how and when to spend the funds, while still preserving their ability to have their PPP Loan fully forgiven.

Herein, we: (1) present a breakdown of the critical changes effective with the PPP Flexibility Act; (2) note some of the remaining areas lacking guidance; and (3) urge you to reach out to a legal professional to help you make the most of the new provisions!

  1. Modifications Pertaining to Forgiveness
a. Cover Period Extension

Remember, PPP Loan forgiveness is available, up to the original principal amount based on forgivable expenditures incurred or paid during the “covered period.” Importantly, PPP Loan recipients now have a greatly extended covered period for forgiveness. Now, recipients have 24 weeks—up from 8 weeks—after PPP Loan origination (or December 31, 2020, whichever is earlier) within which to spend the funds.²

Note that those recipients already having a PPP Loan prior to the PPP Flexibility Act may opt to retain the original 8-week covered period. Also worth noting is that the new Act does not expressly address the Alternative Payroll Covered Period; thus, until the SBA issues guidance addressing this omission, practitioners may only presume that the Alternative Payroll Covered Period will extend to 24 weeks, as well.

Furthermore, unless regulations are modified, it appears that PPP Loan recipients are barred from applying for forgiveness during the 24-week period once the entire amount of the loan has been spent on forgivable expenditures. In other words, if a recipient spent 80% in the original 8-week period and then 100% after 12 weeks, it seems that they must wait out the 24-week period in order to assess both compliance and forgiveness limitations. Again, further guidance permitting recipients to choose any covered period between the 8- and 24-week periods would be welcome.

b. Using Proceeds

While the PPP Flexibility Act did not change what constitutes forgivable PPP uses of funds, it noticeably reduced the amount required to be used on payroll costs in order to qualify for forgiveness. Rather than the initial requirement that 75% of the PPP Loan amount be spent on payroll costs, the new Act provides that only 60% must go to such costs.³ In other words, recipients may now spend 40% of the funds on forgivable non-payroll expenses.

We anticipate (and hope) that the Treasury and SBA will issue guidance similar to that which they provided for the 75% threshold to clarify that this new 60% threshold is not a “cliff”—i.e., a borrower only spending 50% will still qualify for some amount of forgiveness (just not the full amount).

Although we anticipate guidance regarding the “cliff” concern, the Act expressly reads, “[t]o receive loan forgiveness under this section, an eligible recipient shall [emphasis added] use at least 60 percent of the covered loan amount for payroll costs”⁴—thus, for now, we must treat this as a cliff until the SBA advises otherwise.

c. Workforce Restoration Exceptions

Presumably, in addition to the existing guidance permitting companies to exclude those workers who decline good-faith offers of re-employment, the PPP Flexibility Act adds two new provisions to further help recipients achieve forgiveness without fully restoring their workforce.

Now, recipients will not be penalized for full-time equivalent employee (FTE) reductions if the recipient, in good faith, can document its inability to:

  • Rehire former employees (who were employees as of February 15, 2020), and find qualified employees for open positions on or before December 31, 2020, or
  • Restore its previous level of business operations to the level existing before Feb. 15, 2020, levels (as a result of COVID-19 restrictions).⁵

Additionally, remember that initially, the CARES Act exception to limitations on forgiveness for FTE reductions was available if FTEs were restored by June 30, 2020. The PPP Flexibility Act extends this deadline to December 31, 2020. However, further guidance would be appreciated to clarify whether a PPP Loan recipient is able to restore FTEs on or before June 30, 2020, apply for forgiveness, and subsequently, make employee and/or wage and salary cuts before December 31, 2020.

  1. Deferral Period Extended

The CARES Act and initial implementing guidance provided that PPP Loan principal and interest payments were deferred for the first 6 months. However, under the PPP Flexibility Act, complete deferral relief is provided until the date that the forgiveness amount is remitted by the SBA to the lender (so long as the recipient applies for forgiveness within 10 months after final day of the covered period).⁶

Thus, considering the newly extended covered period (~6 months), the time allowed to apply for forgiveness (10 months), the processing time allotted for forgiveness applications (2 months), and the SBA’s window for remittance of the forgiven amount (3 months), the total deferral period may equal up to 21 months!

  • Recipients Have 5 Years to Repay

PPP Loan recipients of new PPP Loans have a 5-year minimum maturity.⁷ Note that existing PPP Loans are not automatically modified by the PPP Flexibility Act to reflect an increase in maturity; rather, the new Act permits mutually agreed upon modifications between lenders and recipients.

  • Payroll Tax Delay

Under the PPP Flexibility Act, PPP Loan recipients are permitted to delay payment of payroll taxes—even if they receive partial or full PPP Loan forgiveness.⁸

Remember, the CARES Act defers payment of the employer’s share of payroll taxes on wages paid from March 27, 2020, through December 31, 2020. Furthermore, these deferred amounts must be paid in two equal installments: (1) the first, by December 31, 2021, and (2) the second by December 31, 2022, respectively. All employers, including self-employed individuals (filing IRS Form 1040, Schedule C), can utilize these payroll tax-deferral rules.

Conclusion

Clearly, the enactment of the PPP Flexibility Act has created more flexibility in how and when to spend the PPP Loan proceeds, while still preserving their ability to have their PPP Loan forgiven. Although, we all eagerly wait for additional guidance to fill in some of the “holes,” we urge you to contact a tax law professional who can help you optimize the relief you need.

If you have questions or concerns regarding PPP Loan forgiveness, call Frost Law today at (410) 862-2890 or fill out our contact form.

Footnotes

  1. For more information on the CARES Act (Public Law 116–136) and the progression of PPP developments, you can go to https://askfrost.com/ppp-loan-forgiveness-application-key-guidance/
  2. Section 7(a)(36)(A)(iii) of the Small Business Act (15 U.S.C. 636(a)(36)(A)(iii)) and Section 1106 of the CARES Act as amended by the PPP Flexibility Act, effective as if included in the CARES Act (Public Law 116–136) and applicable to any loan made under Section 7(a)(36) of the Small Business Act or Section 1109 of the CARES Act.
  3. Section 1106 of the CARES Act (Public Law 116–136) as amended by the PPP Flexibility Act, effective as if included in the CARES Act and applicable to any loan made under Section 7(a)(36) of the Small Business Act or Section 1109 of the CARES Act.
  4. Id.
  5. Id.
  6. If the recipient fails to apply for forgiveness within 10 months after final day of the covered period, payment of principal and interest begins 10 months after the final day of the covered period. See Section 7(a)(36)(M) of the Small Business Act (15 U.S.C. 636(a)(36)(M)), as amended by the PPP Flexibility Act, applicable to any loan made under Section 7(a)(36) of the Small Business Act or Section 1109 of the CARES Act (Public Law 116–136).
  7. Section 7(a)(36)(K)(ii) of the Small Business Act (15 U.S.C. 636(a)(36)) as amended by the PPP Flexibility Act, applicable to any loan made under Section 7(a)(36) of the Small Business Act or Section 1109 of the CARES Act (Public Law 116–136).
  8. Section 2302(a) of the CARES Act, as amended by the PPP Flexibility Act, effective as if included in the CARES Act (Public Law 116–136) and applicable to any loan made under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)) or section 1109 of the CARES Act.
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