On Friday the president signed into law the PPP Flexibility Act which became effective immediately. (It is amazing how these laws always seem to happen on a Friday thereby messing up accountant’s weekends…but then again, what’s a weekend?)

The final bill is only a few pages long but does carry some significant changes to the laws already in effect. We are sure you will have more questions after reading the following. So do we and we are expecting more clarification to follow. It has been rumored that the SBA was waiting to publish another 30 FAQs to provide additional guidance. Those FAQs were never released, presumably because the SBA was waiting for additional Government action. The new law in no way will answer those 30 FAQ’s. Hopefully they will be published immediately (before Friday at least).

Following are the highlights of the new law:

Maturity Dates Extended

The SBA originally assigned a 2-year maturity date to the portion of any PPP loan that was not forgiven. The law extends this period to five years. While technically, this prolonged repayment period applies only to PPP loans made AFTER passage of the bill, lenders and borrowers are allowed to renegotiate the terms of any existing PPP loan to match the permitted 5-year period.

In addition, the six month deferment period of the payment of principal and interest has been extended until the date the lender receives the forgiveness amount from the SBA, which in most cases may be significantly longer. Essentially you will have longer to repay any unforgiven loan amount.

Forgiveness is much easier to attain

The bill will greatly increase the likelihood that a large percentage of a borrower’s PPP loan will be forgiven. It does so in four ways.

1. Extension of covered period
As you may recall, the original Act granted borrowers eight weeks from the moment they received the PPP proceeds to incur costs eligible for forgiveness. The new law extends that “covered period” to 24 weeks from the date of the loan’s origination, or December 31, 2020, whichever comes earlier. We believe that this is a critical recognition of the needs of businesses who have thus far been unable to open.

While the new law is unclear on the $100,000 annualized salary maximum, presumably the 24-week period now brings that total amount to $46,154 up from $15,385 under the 8-week period (you can still stick with the 8 week period if it suits you).

2. More proceeds can be spent on non-payroll costs but with a very important caveat
The expanded covered period now allows four months of additional mortgage interest, rent and utility costs as forgivable which under the guidance thus far would be limited to only 25% of the total PPP that could be forgiven.

However the new Act also addresses this issue. The new bill provides that the 25% cap for non-payroll costs is raised to 40%, which is very positive news for borrowers. But this additional flexibility comes with a caveat. The bill specifically states that “to receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs….”

As you may recall the SBA capped forgiveness attributable to non-payroll costs at 25%, but the SBA didn’t care how much of the borrowed proceeds you spent. If you borrowed $90,000 and spent $40,000 on payroll costs and $30,000 on non-payroll costs, your total forgivable costs would be limited to $53,333 ($40,000/75%), but you’d still get the $53,333 of forgiveness.

However the new bill appears to create a “cliff”: if a borrower fails to spend 60% of the loan proceeds on payroll costs, NONE of the loan will be forgivable. In the example above, because only $40,000 of the proceeds (44%) were spent on payroll costs, NONE of the loan would be forgiven. A number of lawmakers have asked the SBA to address the issue favorably in regulations. We will have to wait and see.

3. Requirements to replace FTEs and restore salaries are relaxed

As previously discussed, a borrower could spend all of its PPP loan on payroll costs, and still will not have the entire loan forgiven if either:

1. The borrower lost full-time equivalent employees (FTEs) during the covered period relative to one of the available base periods, or
2. The borrower significantly reduced the average annual salary or hourly wage of certain employees during the covered period relative to the first quarter of 2020.

In either scenario, however, the borrower could restore any reduction in the forgiveness amount if it either fully restored FTEs or salary/hourly wage to their February 15th, 2020 levels before June 30, 2020. However, the continuing effects of Covid-19 make that date extremely problematic.

The new Act solves this issue by extending the June 30th deadline to December 31, 2020. As long as the FTEs or salary/hourly wage are restored to February 15th levels any time prior to the end of 2020, no reduction in forgiveness will be required.

4. New relief for businesses that remain partially or fully closed through the end of the year

Last but not least, The Act offers relief for borrowers who lose FTEs. It provides that during the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness will NOT be reduced when a borrower experiences a loss of FTEs if the borrower, in good faith, is able to document any of the below:

1.    There was an inability to rehire individuals who were employees of the eligible recipient on February 15th, 2020.
2.    There was an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or,
3.    There was an inability to return to the same level of business activity as a business was operating at before February 15th due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID– 19. This last one basically provides that if the world is such that on December 31st, restaurants and bars, for example, are unable to fully open due to government orders, any loss in FTEs resulting from such restrictions should NOT be taken into account in computing a required reduction in the forgivable amount.

Deferral of Payroll Taxes

The new Act also now allows employers to defer the employer share of 2020 Social Security tax until 2021 and 2022, even if the PPP loan is forgiven. Previously you had to stop deferment immediately when the loan was forgiven.

That’s about it. I am sure you have questions as we do. Hopefully we will be getting more direction from the SBA — sooner rather than later. If you need us, you know where to find us.

Stay healthy

Partners and Staff
LHF