On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “Act”) became law. The Act provides recipients of loans through the Paycheck Protection Program (“PPP”) with more flexibility in how and when they spend their loan proceeds, while remaining eligible for forgiveness of a portion of or all of the PPP loan. Some of the important changes include:
- More money for business expenses other than payroll. The Act reduces the percentage of PPP funds that must be spent on payroll to qualify for loan forgiveness from 75% to 60%. As a result, a business that received a PPP loan may now spend up to 40% of the proceeds on approved business expenses other than payroll (e.g., rent, mortgage interest, and utilities).
- More time to use funds. Previously, borrowers were eligible for forgiveness of only amounts from the PPP loan that they spent within eight weeks of receiving the loan. The Act increases that time period to twenty-four weeks. This change provides businesses with the flexibility to spend their PPP funds over a much longer period of time, without forcing them to spend funds when they are not needed.
- Deadline to rehire workers is extended. The PPP loan program provides that forgiveness will be reduced if the borrower reduces its average number of full-time equivalent employees or the salaries paid to those employees during the period beginning February 15, 2020, as compared to either the period February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020. Previously, borrowers were eligible for a “safe harbor” and could avoid this reduction if, by June 30, 2020, they rehire all employees who were employed on or before February 15, 2020 and have been laid off. The Act has extended that date, giving businesses until December 31, 2020 to rehire their workers to avoid the reduction in loan forgiveness.
- Additional exceptions for rehiring fewer employees. The new Act also makes it easier to qualify for the “safe harbor” if a business is unable to rehire all of its laid off workers. Previously, an employer could still qualify for the safe harbor if it could document in writing an attempt to rehire an employee who rejected its offer. The Act adds additional exceptions, allowing a business to qualify for the safe harbor without rehiring all of its employees employed before February 15, 2020, if it: (1) can demonstrate an inability to hire similarly qualified employees on or before December 31, 2020; or (2) can demonstrate an inability to return to the same level of business activity as it was operating at prior to February 15, 2020.
- Repayment term extended. The Act extends the repayment period for PPP funds that are not forgiven from two years to five years. This means that a PPP borrower will now have five years at 1% interest to repay any portion of their loan that is not forgiven.
- Payroll tax deferral. The CARES Act granted a payroll tax deferment for the remainder of 2020 to employers who did not receive a PPP loan. The new Act allows PPP borrowers to defer payment of their payroll taxes like all other businesses. As a result, even if forgiveness of the loan is not granted, a borrower will have the ability to defer its share of payroll taxes for 2020. Fifty percent of the deferred amount must be paid by December 31, 2021, with the remaining 50% due December 31, 2022.
It is important to note that additional guidance regarding the interpretation and application of these provisions will be forthcoming from the Small Business Administration. This guidance must also be taken into account by borrowers seeking loan forgiveness.
If you have any questions regarding this new guidance or if there are any other issues with your PPP loan, please let one of our COVID-19 team members know at your earliest convenience:
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Webber & Thies, P.C. is a full-service law firm based in Champaign-Urbana whose attorneys have been serving Central Illinois for more than 70 years.