Good News for Small Businesses – PPP Guidelines Loosened for Loan Forgiveness

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Christina R. Gallagher

June 10, 2020

Small businesses now have greater flexibility in spending their Paycheck Protection Program loans.  On June 5, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020, which is aimed at helping businesses qualify for loan forgiveness.

The Flexibility Act amends provisions of the Paycheck Protection Program (PPP), which was passed as part of the CARES Act in March.  Under the PPP, small businesses can receive fully forgivable loans, as long as they satisfy the program’s requirements.  However, some of the requirements proved to be too rigid, as stay-at-home orders forced many businesses to remain closed for months after the program’s creation.

The Flexibility Act contains the following changes.

• Timeframe to Spend Loan Extended

Businesses now have 24 weeks after the loan’s origination date, or until December 31, 2020 (whichever date comes first), to spend loan proceeds on qualified payroll costs, interest on mortgages, rent, and utility payments.  Under the original PPP, a business had only eight weeks to spend the funds.  This timeframe is called the “covered period.”

Businesses that received a loan prior to the enactment of the Flexibility Act still can elect to use the eight-week covered period.

• Payroll Spending Requirement Decreased

Under the original PPP, a business had to spend 75% of loan proceeds on payroll costs to qualify for forgiveness.  The Flexibility Act loosened the requirement to 60%.  Now, businesses can spend 40% of loan proceeds on mortgage payments, rent, and utilities and still qualify for forgiveness.

• Time to Rehire Employees Extended

Businesses now have until December 31, 2020, instead of June 30, 2020, to rehire employees.  If a business does not restore its full-time employee headcount to where it was before the pandemic, a lender may reduce the forgiveness amount.

If a business is unable to restore its workforce to pre-pandemic levels, the Flexibility Act allows businesses to qualify for full forgiveness if a business can document:

1. an inability to rehire individuals who were employees on February 15, 2020;
2. an inability to hire similarly-qualified employees for unfilled positions on or before December 31, 2020; or
3. an inability to return to the same level of business activity at which the business was operating before February 15, 2020, due to compliance with requirements or guidance related to sanitation, social distancing, or worker/customer safety, which was issued by the U.S. Department of Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration from March 1, 2020 to December 31, 2020.

• Repayment Term Extended

Businesses now have five years, instead of two, to repay any loan amount that is not forgiven.  The interest rate remains 1%.  The Flexibility Act will not extend the maturity date for existing PPP loans, but the Flexibility Act allows borrowers and lenders to mutually agree to extend the term to five years.

The Flexibility Act also extends the deferment period.  Payments of principal, interest, and fees are deferred until the date that the borrower learns of the amount of the loan that the lender will forgive.  Previously, payments were deferred only for six months from the loan’s origination date.

• Deferral of Payroll Tax Permitted

Section 2302 of the CARES Act allows employers to defer payroll taxes (Social Security and certain railroad retirement taxes).  However, the CARES Act contains an exception that prohibits PPP borrowers from deferring payroll taxes after the borrower receives a decision about forgiveness.  The Flexibility Act eliminates this exception and now allows PPP recipients to defer payroll taxes through December 2020, in accordance with the CARES Act.