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How the Paycheck Protection Program Flexibility Act Affects PPP Loan Forgiveness

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Written by Jeremy E. Warring
Posted Jun 5, 2020

As communities are starting to rebuild and reopen, an amendment to the CARES Act was signed into law on June 5th, which will provide some much needed relief to borrowers under the PPP. The Paycheck Protection Program Flexibility Act of 2020 will provide PPP loan recipients with some added flexibility on how funds may be spent, forgiveness, and payment terms. Here are some of the highlights:

  1. Borrowers now have twenty-four (24) weeks from the date their loan was funded to use their PPP Loan proceeds.

  2. Previously, seventy-five percent (75%) of the amount forgiven must be attributable to payroll costs; the new law states 60% of the loan proceeds must be used on payroll for borrowers to be eligible for forgiveness.

  3. The repayment period is extended to five (5) years instead of two (2).

  4. Borrowers had until June 30, 2020 to replace FTE levels to where they were on February 15, 2020 to eliminate reductions in forgiveness attributed to decreased FTE levels which occurred between February 15, 2020 and April 26, 2020 – this has been extended to December 31, 2020. The Act also codifies the PPP FAQ which provided that employers who attempted, but were unable, to rehire individuals who were employees, and who could not find suitable replacements, will also not suffer reduction in forgiveness.

  5. The Act also creates an exception to the requirement that employers restore FTE to February 15 levels based on health and safety considerations. This new exception applies when an employer cannot restore its operations to comparable levels of business activity as a result of social distancing, sanitation requirements, or other customer safety needs. The requirements must have been established by the Secretary of Health and Human Services, Director of the Centers for Disease Control and Prevention (CDC) or the Occupational Safety and Health Administration (OSHA) between March 1, 2020 and December 31, 2020. Where employers are unable to restore FTE to February 15 levels because of these requirements, such reduction will not impact forgiveness.

  6. Businesses were previously allowed to defer the employer portion of Social Security taxes until such time as the loan was forgiven. This has been extended under the new law, and businesses can now defer Social Security payments until 2022 (50% to be paid in 2021 and the rest in 2022).

Observations

  1. It’s nice to see the reduction from 75% to 60%, but the new law re-creates a previous issue we thought was resolved. There was a lot of speculation about whether, originally, 75% of the loan must be used for any forgiveness eligibility, or if 75% of the amount forgiven must be payroll. Under current SBA guidance and the Loan Forgiveness Application, it became consensus that borrowers would still qualify for forgiveness if payroll fell below 75%, it is just limited so that 75% of the amount forgiven must be payroll. The new law reads as though borrowers must use at least 60% of their loan proceeds on payroll to qualify at all. The SBA needs to provide additional guidance.

  2. How does this affect the amount of compensation per employee eligible for forgiveness? Previously, compensation which exceeded $100,000/year annualized was not eligible for forgiveness. This was the prorated over the 8-week period to arrive at eligible compensation per employee of a little over $15,000. Is the $100,000/year now prorated over the 24-week period, which would allow for three times the amount of compensation per employee eligible for forgiveness? This is unlikely as loan applications were based on 2.5x average payroll costs, but the new law is not clear.

  3. Again, the elimination of reduction attributable to FTE still only applies to the extent the reduction occurred prior to April 26, 2020.

Unfortunately, the amendment does not expand the categories of Covered Expenses (Payroll, rent, certain mortgage interest). For businesses which simply cannot reopen as a result of the recent damage in our communities, this may make utilizing PPP loan proceeds on Covered Expenses difficult, if not impossible. If you have questions about how these changes impact you, or about what to do with your PPP Loan if you cannot reopen, please contact one of our attorneys today.

Learn More about Messerli Kramer’s Attorneys Jeremy E. Warring
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