PPPFA Enacts Favorable Changes for PPP Borrowers
UPDATE: On June 8, the SBA and Department of the Treasury announced that borrowers using less than 60% of PPP loan funds for eligible payroll costs will continue to be eligible for partial loan forgiveness, contrary to the provisions in the PPPFA legislation discussed in the second bullet point below. The SBA is expected to release guidance on this and other PPPFA matters shortly.
By: Chris Anderson, Shareholder
The President signed the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”) into law on June 5, 2020, after passage in both chambers of Congress with wide bipartisan support. The legislation makes several borrower-favorable changes to the CARES Act, which established the Paycheck Protection Program (“PPP”) and other pandemic relief provisions, as follows:
- Extension of Covered Period: The previous 8-week Covered Period has been revised to the earlier of 24 weeks from the origination of the PPP loan or December 31, 2020. A borrower who received its PPP loan before the enactment of PPPFA may elect to use the original 8-week period.
- 75% payroll provision for loan forgiveness changed to 60%: Previously, a borrower that did not spend at least 75% of PPP funds on eligible payroll costs faced a reduction in the amount of loan forgiveness. PPPFA changes this rule to require borrowers to spend at least 60% of loan funds on eligible payroll costs. However, borrowers that do not meet the 60% requirement will not receive any loan forgiveness. Eligible expenditures for rent, interest, and utilities continue to qualify for loan forgiveness, but only if the 60% payroll costs rule is satisfied.
- New FTE loan forgiveness exemption: Under PPPFA, loan forgiveness will be determined without regard to a proportional reduction in the number of full-time equivalent (FTE) employees if the borrower in good faith is able to document:
- The inability to rehire individuals who were employees on February 15, 2020 and the inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
- The inability to return to the same level of business activity as existed before February 15, 2020 due to compliance with the requirements for the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 during the period from March 1, 2020 to December 31, 2020.
- Changes to PPP loan provisions: For PPP loans received after enactment, the maturity of any remaining loan balance after forgiveness will be 5 years. Lenders and borrowers of loans made before the enactment of PPPFA may mutually agree to change the 2-year maturity period specified in the CARES Act to 5 years. Also, the 6-month payment deferral provision has been changed to “the date on which the amount of forgiveness determined under section 1106 of the CARES Act is remitted to the lender.” Borrowers are now required to apply for loan forgiveness within 10 months after the last day of the Covered Period.
- FICA tax deferral allowed for PPP borrowers: Prior to the enactment of PPPFA, borrowers who sought PPP loan forgiveness were prohibited from availing themselves of the delayed payment of FICA and self-employment taxes. The CARES Act specified that deposits and payments of these taxes required to be made during the period from March 27, 2020 to December 31, 2020 could be delayed such that 50% of the amount is due on December 31, 2021 with the remaining 50% due December 31, 2022. PPPFA removes the prohibition for PPP borrowers, meaning that such borrowers are eligible for the FICA/self-employment tax deferrals.
We expect the Department of the Treasury and the SBA to provide additional guidance about PPPFA in the near future. We will continue to monitor any new developments and promptly provide this information to you. If you have any questions, please contact your M+N team member or use this online contact form.
Note: The information presented in this post and in linked articles is informational in nature. It should not be relied on by anyone for any purpose without consultation with a competent advisor that is fully aware of your business and tax situation.