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Good News for PPP Borrowers – The Paycheck Protection Flexibility Act

UPDATED: In response to the Paycheck Protection Flexibility Act, the Small Business Administration amended its rules governing the Paycheck Protection Program (PPP) to allow small businesses to qualify for partial loan forgiveness even if 60% of the government-financed loan wasn’t directed toward loan forgiveness.

H.R. 7010 – Paycheck Protection Flexibility Act (PPFA) is now signed into law.

The Act enhances the Paycheck Protection Program (PPP) by increasing the time small businesses can use PPP funds and receive forgiveness from eight weeks to twenty-four weeks and by reducing the payroll cost rule from 75 percent to 60 percent (partial forgiveness is allowed) and more. The SBA and Treasury are now tasked to update regulations, guidance and the forgiveness application.

Borrowers have longer to repay any loan proceeds that are not forgiven.

After passage of the CARES Act, the SBA assigned a 2-year maturity date to the portion of any PPP loan that was not forgiven. H.R. 7010 extends this period to five years. While technically, this prolonged repayment period applies only to PPP loans made AFTER passage of the bill, lenders and borrowers are free to renegotiate the terms of any existing PPP loan to match the permitted 5-year period.

In addition, while the CARES Act required lenders to defer the payment of principal and interest for six months, H.R. 7010 allows for deferral until the date the lender receives the forgiveness amount from the SBA, which in most cases will be significantly longer.

Forgiveness is easier to come by. 

H.R. 7010 will greatly increase the likelihood that a large percentage of a borrower’s PPP loan will be forgiven. It does so in four ways: 

1. Extension of covered period. The CARES Act granted borrowers eight weeks from the moment they received the PPP proceeds to incur costs eligible for forgiveness. H.R. 7010, however, extends that “covered period” to 24 weeks from the date of the loan’s origination, or December 31, 2020, whichever comes earlier.

Limits, however, remain. The maximum amount paid to any one employee that will be forgiven is capped at an annualized salary of $100,000; as a result, for a 24-week covered period, this limit will be reached once an employee receives $46,153 in cash compensation. H.R. 7010 does not make that clear, but hopefully soon-to-be-released guidance will.

2. You can spend more of your proceeds on non-payroll costs and partial forgiveness is allowed.  The expanded covered period pulls four months of additional mortgage interest, rent and utility costs into the forgiveness timeframe.  The new bill provides that the 25% cap for non-payroll costs is raised to 40%.

The bill states that “to receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs….”

The SBA offered an example: “If a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its total loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs ($54,000 is 90% of $60,000), the maximum amount of loan forgiveness the borrower may receive is $90,000 or 90% of the $100,000 total loan amount. $54,000 in payroll costs constitute 60 percent of the forgiveness amount and $36,000 in non-payroll costs represent 40 percent of the possible forgiveness amount.

3. You’ll have longer to replace FTEs/restore salaries.  A borrower can spend all of its PPP loan on payroll costs, and still will not have the entire loan forgiven if either:

    1. The borrower lost full-time equivalent employees (FTEs) during the covered period relative to one of several base periods, or
    2. The borrower significantly reduced the average annual salary or hourly wage of certain employees during the covered period relative to the first quarter of 2020.

In either scenario, however, the borrower could restore any reduction in the forgiveness amount if it either fully restored FTEs or salary/hourly wage to their February 15th, 2020 levels before June 30, 2020.

H.R. 7010 extends the June 30th deadline to December 31, 2020. Thus, as long as the FTEs or salary/hourly wage are restored to February 15th levels any time prior to the end of 2020, no reduction in forgiveness will be required.

4. Businesses that remain partially or fully closed through the end of the year will get new relief.  Finally, H.R. 7010 offers a new way out for borrowers with reduced FTEs. The bill provides that during the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness will NOT be reduced when a borrower experiences a loss of FTEs if the borrower, in good faith, is able to document any of the below:

    1. There was an inability to rehire individuals who were employees of the eligible recipient on February 15th,
    2. There was an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or,
    3. There was an inability to return to the same level of business activity as such business was operating at before February 15th due to compliance with requirements established or 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 during the period beginning on March 21 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID– 19.  This point basically provides that if the world is such that on December 31st, restaurants and bars, for example, are unable to fully open due to government orders, any loss in FTEs resulting from such restrictions should NOT be taken into account in computing a required reduction in the forgivable amount.

The 8-week covered period remains an option

H.R. 7010 does not require all borrowers to adopt a 24-week covered period. To the contrary, any business that borrowed its PPP loan prior to the date the bill is signed into law (June 5, 2020) can elect to use the 8-week period beginning on the date it received the funds. This will appeal to those businesses who have spent all of their proceeds and qualify for full forgiveness and who do not wish to wait until the end of the year to apply.

You can now defer certain payroll taxes even if you received a PPP loan

This CARES Act incentive allowed employers to defer the employer’s 6.2% share of 2020 Social Security tax until the end of 2021 (50%) and 2022 (50%). This deferral was only available, however, to a borrower of a PPP loan until the moment the loan is forgiven.

H.R. 7010 allows a borrower of a PPP loan to now also defer all of its 2020 Social Security tax burden into 2021 and 2022, even if the PPP loan is forgiven prior to December 31, 2020.

Questions Remain

H.R. 7010 is great news for borrowers. But there are still some sources of confusion including if all of the many loan forgiveness calculations will now be adjusted from 8 to 24 weeks.

Now that H.R. 7010 has been signed by the President, hopefully the SBA will quickly release its updated FAQs and other guidance.

Please visit the Warady & Davis LLP COVID-19 Resource Center for a wealth of information on stimulus assistance, new legislation and much more.  This information is updated regularly.  Please do not hesitate to reach out to us with any questions or concerns at 847-267-9600 or info@waradydavis.com.

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