The Paycheck Protection Program Flexibility Act – 5 Welcome Revisions

(PPPFA) was signed into law on June 5, 2020 with nearly full bipartisan support.  It provides several important revisions to the Paycheck Protection Program (PPP) summarized below.

Expanding the Forgiveness Spending Period

Prior to the PPPFA, loan proceeds had to be used within 8 weeks after the loan was made for certain expenses including payroll, rent, mortgage interest, and utilities to qualify for forgiveness.  The PPPFA extends this period from 8-weeks to 24-weeks.  Borrowers with existing loans have the option to keep their original 8-week period under the CARES Act or use the new 24-week period under the PPPFA.  Keep in mind the 24-week period cannot extend beyond December 31, 2020.

Lower Required Payroll Spending

Prior to passage of the PPPFA, 75% of the proceeds used during the initial period must be spent on payroll, including salaries, commissions, and health insurance premiums.  The PPPFA lowers this required percentage to 60%.  The wording in the PPPFA indicated failure to meet the 60% threshold would result in a cliff where no loan proceeds would be forgiven.  In a joint statement on June 8, 2020, however, the SBA Administrator and Treasury Secretary announced borrowers may still qualify for partial forgiveness even if they fall under the 60% payroll threshold.

More Time to Rehire

The PPPFA provides several safe harbors allowing borrowers to avoid reductions in loan forgiveness if they are unable to return to the same level of business activity, or if they are unable to rehire employees or qualified replacements for unfilled positions.  Borrowers now have until December 31, 2020 to rehire employees or meet the safe harbors thereby avoiding reductions to the amount of loan forgiveness.

Longer Loan Maturity

Loans made after June 5, 2020 will carry a 1% interest rate and 5-year maturity for any portion of the loan that doesn’t qualify for forgiveness.  Payments will begin six months after a forgiveness determination is made by the SBA or 10 months from the program’s expiration for borrowers who don’t apply for forgiveness.  Loans made prior to June 5thcarry a 1% interest rate and 2-year maturity.

Coordination with Payroll Tax Deferral

The CARES Act allows employers to defer social security payroll taxes incurred between March 27, 2020 and December 31, 2020 with 50% of the amount due by December 31, 2021 and the remaining 50% due by December 31, 2022.  Once informed by the SBA that their loan has been forgiven, however, borrowers must then resume payroll tax remittance as they did prior to March 27th.  The PPPFA removes this requirement so that all borrowers, whether their loan is forgiven or not, can defer 2020 payroll taxes incurred between the dates above.

The PPPFA contains many favorable changes that make a lot of sense.  Relaxing rules on how businesses spend PPP money and enhancing forgiveness are welcomed updates that stride the spirit of economic stimulus. Unfortunately, the final version of the PPPFA has not addressed the imminent tax hit that I refer to as the double-dip double-cross in Loss of PPP Expense Deduction Could Mean Higher Taxes Later.  The IRS ruled in Notice 2020-32 that expenses paid with forgiven proceeds are not tax deductible because forgiven PPP proceeds are not considered taxable income under the CARES Act.  As Congress continues to review the state of the economy, here’s hoping they overhaul this shortcoming which will surely hurt struggling businesses.