Did you get a Paycheck Protection Program (“PPP”) loan? Are you stressed about how you’re going to spend all that money in 8 weeks to qualify for the maximum debt forgiveness, or about how you’re going to pay back the amounts not forgiven in 18 months?
Take a deep breath.
Qualifying for loan forgiveness under the PPP just got easier.
On June 5, 2020, the Paycheck Protection Program Flexibility Act (“PPPFA”) took effect to address many of the concerns expressed by the small business community. Here’s a quick summary of the 5 key components:
- Amount of Loan Used for Payroll Expenses is Decreased
The original PPP terms required employers to use at least 75% of the funds for “payroll expenses” to obtain forgiveness of some or all the loan. In the early days, we weren’t sure what would happen if employers didn’t hit that 75% mark, including if they’d have to pay back the full amount regardless of how much was spent on payroll. Subsequent guidance clarified that if the company fell short, it would still be entitled to some forgiveness.
Since the loan amount was calculated based on 2.5x your payroll expenses, spending 75% of that amount on payroll in 8 weeks posed a challenge. More so for businesses still subject to shut down orders.
The PPPFA reduces the amount of the loan that must be spent on payroll from 75% to 60%. Keep in mind that the law does not change the list of expenses eligible for forgiveness so don’t change how you’re spending the PPP funds but take a breath since hitting the payroll expense percentage is easier under the PPPFA.
- The Time Allowed to Spend the PPP Funds is Extended
The original PPP terms required a business to spend the loan proceeds within 8 weeks of receipt. For businesses shut down or with significantly reduced work because of the shut down this posed a nearly insurmountable burden – often pushing business into choosing whether to pay employees for time not working or risk having to pay the whole loan back. Also, the 8 weeks started the moment you received the funds regardless of your payroll cycle. So, if you pay monthly and had just made your payroll the Friday before getting your funds, you had an issue.
Subsequent guidance allows companies to use an alternate payroll cycle to address the realities of when payments are made. The PPPFA extended the time to use the funds from 8 weeks to 24 weeks meaning most businesses have until year end to use the funds. Keep in mind that you can still apply for forgiveness after 8 weeks if you wish.
Also, please note that the caps of $100,000 of annualized salary and $15,385 for employer owners and contractors still exist despite the longer time period.
- The Deadline to Rehire Worker is Extended.
The PPP required business to rehire all its pre-COVID or the Full-Time Equivalent amount of workers prior to June 30 in order for those salaries to count toward forgiveness. Given the uncertainties of the shut downs and reopening phases, business were rightly concerned that they wouldn’t have the work to rehire by June 30. Now, employers have until December 31, 2020 to rehire workers.
4.The Test for When A Reduction in Workforce Won’t Negatively Impact Your Forgiveness is Eased.
The goal of the PPP was to keep the same number of employees used to calculate the loan on the payroll during the loan. It required employers to rehire or retain the same number of full-time or full-time equivalent employees by June 30, 2020 with one exception. If the employer could document in writing an attempt to rehire an employee who refused, and reported that refusal to the unemployment commission that employee would not count against the employer’s loan forgiveness. The PPPFA makes two significant changes. As noted above, the rehire deadlines is now December 31, 2020.
In addition, under the PPPFA, a business can still receive debt forgiveness if it is:
- Unable to rehire an individual who was an employee on or before February 15, 2020;
- Able to demonstrate an inability to hire similarly qualified employees on or before December 31, 2020; or
- Able to demonstrate an inability to return to the same level of business activity as it was operating at prior to February 15, 2020.
The PPPFA doesn’t define these last two criteria. Like much of the Coronavirus-enacted laws, we’re going to need to wait for further guidance. But, it does appear more business will qualify for full forgiveness under the PPPFA.
- Repayment Terms are Extended!
Under the PPP, the loans were due in 2 years and businesses had a 6-month grace-period after the funds were issued. In other words, whatever wasn’t forgiven had to be repaid over a mere 18 months. While the low interest rate (1%) would help with the repayment terms, companies with large payrolls prior to February 15, 2020 (i.e. got a lot of money), who weren’t able to return workers before June 30, 2020 (i.e. didn’t qualify for full or significant forgiveness), were looking at significant repayment obligations.
Under the PPPFA, borrowers will now have 5 years to repay any balance and the first payment won’t be due until 6 months after the SBA makes a determination of forgiveness. Under the regulations, your bank has 60 days to consider your forgiveness request and then the SVA had an additional 90 days. As a result, it may be May 2021 before you have to make your first payment. You may also now opt to defer the employer’s payroll taxes for Social Security, which was not allowed under the original PPP terms.
Keep in Mind.
Even with these eased restrictions keep in mind that the SBA can still audit the issuance of the loan and use of the funds. Penalties can be stiff if the loan should not have been issued because “credit was available elsewhere” or the funds were misused. Your business should be prepared to argue why the funds were financially necessary at the date of the application.
The PPPFA eased many of the burdens on small businesses that made obtaining debt forgiveness difficult. It’s also heartening that this was a bipartisan bill that was quickly passed into law. There are still plenty of unanswered questions with the PPPFA and more regulations and guidance from Treasury is likely forthcoming.
Remember, there are lots of nuances to how to handle the situation so before you act, please consult with your attorney and financial advisor.
Worried about the PPP forgiveness program? We can help. Contact us at