On June 5, 2020, in a rare act of bipartisanship, President Trump signed into law the Paycheck Protection Program Flexibility Act (PPPFA). It was done to address most of the concerns expressed by the small business community surrounding the Paycheck Protection Program (PPP), which had been signed to provide relief from COVID-19 to small businesses.
The House passed the PPPFA by 417-1 on May 27, 2020, and the Senate approved it unanimously on June 3. The PPPFA proposes the following changes:
- Loan Amount Needed for Payroll Changed to 60%
One of the biggest issues with the PPP loan program had been that it required businesses to spend around 75% of the loan on the payroll. Businesses that had been shut down due to the Coronavirus couldn’t expect to do that.
The PPPFA has reduced the amount of the loan required to be spent on the payroll from 75% to 60%. This has increased the funds available for expenses from 25% to 40%, ensuring that small businesses are in a healthier position. Even though the new breakdown is less than the 50-50 split that business groups had wanted, it is still a massive improvement.
However, the law doesn’t change the list of expenses that were eligible for forgiveness. It still has rent, utilities, mortgage payments, and interest on loans. This does not include inventory, expenses around remote working, personal protective equipment, and other needs. Business groups are going to continue lobbying to expand the list of eligible expenses.
- Time Period to Use the Funds Extended from 8 to 24 Weeks
The second major issue was that businesses were required to spend the funds in the eight weeks from the date they were received. Businesses that were shut down due to government mandate would be forced to either spend the money unnecessarily or pay back the loan.
The PPPFA has addressed this issue. Businesses now have 24 weeks to spend the loan. This change gives business owners a chance to reopen and spend the loan on qualified business expenses.
The PPPFA doesn’t require businesses to wait for 24 weeks to apply for forgiveness. They have the flexibility to apply once the funds have been used up.
- June 30 Deadline to Rehire Workers Pushed Back to December 31, 2020
Most small businesses had a problem with the PPP requirement that the amount of forgiveness would be reduced if they didn’t hire all of their workers back by June 30. They were concerned that they might not be open or reach their full capacity by this date. Under the new law, businesses now have a full 24 weeks to rehire the workers and avoid being penalized.
However, it should be noted that the law on how salaries are calculated towards forgiveness hasn’t changed. The payroll calculation that is used in the loan application will still apply to the forgivable amount. That means the employee compensation eligible for forgiveness will still be capped at $100,000.
- Exceptions to Full-Time Equivalent Requirement
The PPPFA has added additional exceptions for a reduced headcount. The law clearly states that a business can still receive forgiveness on their payroll amount if they meet the following conditions:
- Unable to rehire an individual who was an employee of the eligible recipient on or before February 15, 2020.
- Able to demonstrate an inability to hire similarly qualified employees on or before December 31, 2020.
- Able to demonstrate an inability to return to the same level of business activity as when the business was operating before February 15, 2020.
It’s still not clear how to ‘demonstrate the inability to rehire similarly qualified employees’ or what the standard ‘to demonstrate the inability to return to previous levels of business activity’ would be, but there is hope that further guidance is going to elaborate on that.
The good news appears to be that even with a reduced headcount (based on these exceptions), if 60% of the loan is still used on the payroll for 24 weeks, it is going to be forgiven. However, a business will need to document in writing as thoroughly as possible their efforts to rehire employees.
- Repayment Term Extended from 2 to 5 Years
The new law will also ease repayment terms if the loan isn’t completely forgiven. A business is now going to have 5 years at 1% interest to repay the loan. On top of that, the first payment is deferred for 6 months after the SBA has decided on the forgiveness amount.
Under current regulations, the bank has 60 days to make a forgiveness determination, and the SBA has an additional 90 days. This means you might have up until May of 2021 to make your first payments on the loan.
The PPPFA is also going to allow borrowers to take advantage of the CARES Act provision, allowing the employer’s payroll taxes to be deferred for Social Security. In the past, the PPP didn’t permit deferment of these taxes on the forgivable portion of the loan.
- Treasury Guidelines Still Provide for SBA Loan Audits
This new law certainly addresses many of the concerns that small businesses have, and it should ease the requirements for full forgiveness of PPP loans. It isn’t a complete fix. The one thing it doesn’t do is address the issues around the SBA audits of loans(as outlined in the Treasury Department ‘Interim Final Rules’ on PPP loans).
According to the FAQs of PPP loans, the SBA can audit any loan they want to determine if ‘the borrower may be ineligible for a PPP loan, or maybe ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.’ This includes loans under $2 million, which have a ‘safe harbor’ on whether economic uncertainty has made the loan necessary.
The SBA can still look at how a business has calculated the original loan amount, and review whether it had ‘access to credit elsewhere,’ when determining if all or a portion of the loan needs to be forgiven. All businesses, especially the ones with loans that are more than $2 million, should be prepared to explain why the funds had been financially necessary at the date of their application.
That also comes down to the issue of liquidity. Did a business have large cash reserves or lines of credit it could have tapped to stay afloat during the shutdown? If that’s the case, the SBA can determine the borrower was ineligible for the PPP loan. Even though borrowers shouldn’t worry about criminal penalties if a determination is made, except for outright fraud, they could be required to repay the loan amount in full.
There is still some doubt that the SBA will conduct many audits of the PPP loans (almost 4.5 million have been doled out currently), and it doesn’t have the capacity to review that many. However, thorough documentation of the financial health of the business at the time of the loan application and detailed tracking of how the loan has was spent will prevent any major problems down the road. It’s important to note that the responsibility for accurately calculating the loan amount and the forgiveness amount is going to rest with the borrower.
The PPPFA is a major win for small businesses. The law is designed to ease many of the burdens placed on businesses receiving PPP loans. It’s also a positive thing that politicians on both sides of the aisle are listening to small business owners and have taken quick and decisive action.
There are still a lot of questions that have been left unanswered, but more regulations are expected to come. PPP loan forgiveness is a moving target, but we are here to help guide you through the process.
The author, Matthew Contardi, the owner of Sharp Payroll Service, can be reached at 732-759-5114 or firstname.lastname@example.org