On June 5, 2020 the Paycheck Protection Program (PPP) Flexibility Act of 2020 was signed into law. The passage of the PPP Flexibility Act of 2020 should be a big win for borrowers, but business owners need to be prepared for the unexpected. There was a great disconnect between Congress and the SBA/US Treasury for the rollout of the PPP, and until technical guidance is issued borrowers need to be ready to act if the regulatory agencies’ interpretation of the PPP Flexibility Act of 2020 makes the 8 week covered period advantageous based on their specific circumstances. BerganKDV advisors will be monitoring this development closely and will have content breaking down the guidance soon after it is issued.
The following changes to the PPP became effective with the passage of this legislation:
- Extending the covered period during which expenses eligible for loan forgiveness are paid and incurred from 8 weeks to the earlier of 24 weeks or December 31, 2020. Borrowers who received a loan before the bill’s enactment would have the option to continue using the 8 week covered period.
- Reducing the payroll cost requirement to obtain full forgiveness from 75% to 60%.
- Extending the period to restore employee wage reductions of greater than 25% from June 30, 2020 to December 31, 2020.
- Extending the period to restore Full Time Equivalent (FTE) employees from June 30, 2020 to December 31, 2020.
- Eliminating the 6 month deferral of payments on unforgiven PPP loan proceeds, and instead deferring the start of the payments until the date the loan forgiveness application is remitted to the lender. If a borrower fails to apply for loan forgiveness, payments would begin 10 months after the conclusion of their covered period.
- Extending the loan term from 2 years to 5 years. This would only apply to loans entered into after the passage of the PPP Flexibility Act of 2020, although lenders would not be prohibited from modifying maturity dates of PPP loans disbursed prior to passage.
- Allowing PPP borrowers to defer payment of the employer portion of social security taxes through December 31, 2020.
- Allowing FTE reduction exemptions for businesses that are unable to find qualified employees or are unable to restore operations to February 15, 2020 levels due to COVID-19 restrictions.
- The House bill was modified to retain the application deadline of June 30, 2020 (the House bill had extended the deadline to apply to December 31, 2020). As of June 7, 2020, there was still approximately $130 billion in unused funds earmarked for the PPP.
The intent of the Act is to make maximum PPP loan forgiveness easier to achieve for borrowers, and was necessary due to Small Business Administration (SBA) and US Treasury guidance issued subsequent to the passage of the CARES Act not aligning with the intent of the original legislation. In a joint news release, the SBA and US Treasury announced on June 8, 2020 that they will promptly issue rules and guidance, a modified application form, and a modified loan forgiveness application. This guidance needs to be issued immediately, as approximately 25% of PPP borrowers are in their 8th week of the covered period, and clarity is needed in several areas that will impact whether the 24 week covered period or optional 8 week period is advantageous based on their specific circumstances.
Some of the significant issues requiring clarification include:
- If a borrower does not elect to use the 8 week covered period, can they apply for loan forgiveness with their lender as soon as the required funds have been spent, or do they need to wait until the end of the 24 week covered period?
- Will wage or FTE reductions be applied to qualifying PPP costs incurred and paid during the covered period (as in the original application), or will those reductions be applied to the PPP principle?
- Will all borrowers have until December 31, 2020 to restore FTE count and wage reductions under safe harbor, or will borrowers that elect to use 8 week covered period have to satisfy those conditions by June 30, 2020?
- Will the amount of compensation for each employee allowable towards loan forgiveness be pro rated to 24 weeks (not to exceed $46,154, or 24/52 weeks proration of 2019 for employee-owner compensation), or will it remain limited to 8 week proration ($15,384, or 8/52 proration of 2019 comp for employee-owner compensation)?
- What will be necessary to document FTE reduction exemptions for businesses unable to find qualified employees?
- What is the threshold the SBA will use to define “businesses that are unable to restore operations to February 15, 2020 levels due to COVID-19 restrictions”?
- Will the application be simplified?
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