More Changes to the Paycheck Protection Program

The Paycheck Protection Program Flexibility Act (PPPFA) signed by President Trump

The PPPFA is a huge win for small businesses as it will ease many of the burdens placed on businesses that received PPP loans. Regardless of your political affiliation the bipartisan approval of the adjusted PPP loan forgiveness process gives us all hope that the government is listening and cares.
On June 5, 2020, President Trump signed into law the PPPFA to address the many concerns expressed by the small business community around the Paycheck Protection Program (PPP) and the loan forgiveness process. Here are the key elements of the PPPFA that small business owners are likely most interested in.

PPPFA changes amount of loan needed for payroll to 60%

The biggest concern regarding the PPP loan program was that it required businesses to spend 75% of the loan on payroll. For those businesses shut down due to COVID-19, that meant playing the role of unemployment office while paying their workers to stay home and do nothing. The PPPFA reduces the amount of the loan needed to be spent on payroll from 75% to 60%, and as a result increases the amount of funds available for non-payroll related expenses from 25% to 40%. However, bear in mind that the law does not change the types of expenses eligible for forgiveness. Those expenses include rent, mortgage payments, utilities, and interest on loans.

PPPFA extends the time to use PPP funds from 8 to 24 weeks

Another big issue for small businesses was that the PPP required businesses to spend the funds in 8-week period from the date funds were received. Small business owners appealed to have the flexibility to spend the loan after reopening, especially on payroll when workers returned to work and were not sitting at home. The PPPFA fixes this issue by extending the time to spend the loans to 24 weeks. While businesses will still need to spend the money on payroll and authorized expenses, they now have until the end of 2020 to do so. This should make receiving complete loan forgiveness more likely since the loan amount was based on one month of 2019 payroll multiplied by 2.5X, which equals approximately 10 weeks. Businesses will now have the flexibility to spend the PPP funds when they need to for the remainder of 2020. Also, the PPPFA does not require businesses to wait for 24 weeks to apply for forgiveness, however they can still do so after eight weeks if they prefer.

PPPFA pushes back a June 30th deadline to rehire workers to December 31, 2020

Small businesses did not like the PPP requirement that all workers had to be rehired by June 30, 2020 so that their salaries would count towards forgiveness. Many businesses owners were concerned they might not be open or not at full capacity by the end of June. Under the PPPFA, small businesses can now wait until December 31st to rehire workers so that their salaries to count towards forgiveness. Be aware that the payroll calculation used in the loan application still applies to the forgivable amount. So, employee compensation eligible for forgiveness is still capped at $100,000, and until further guidance, employer owners and contractors are still capped at $15,385.

PPPFA lessens rehire requirements

The intention of the PPP was to keep the same number of employees on the payroll as was used to calculate the loan, and it required a business to rehire the same number of full-time employees or full-time equivalents by June 30th. The only exception to this rule was if an employer could document in writing an attempt to rehire an employee who rejected this offer. The PPPFA makes two important changes to these requirements; (1) it extends the rehire date to December 31st, and (2) it adds additional exceptions for a reduced head count. The law states a business can still receive forgiveness on payroll amounts if it is unable to rehire an individual who was an employee of the eligible recipient on or before February 15th, is able to prove an lack of ability to hire similarly qualified employees on or before December 31st, or is able to demonstrate an inability to return to the same level of business activity as such business was operating at prior to February 15th. It is unclear how to “demonstrate the inability to rehire similarly qualified employees” or what the specification “to demonstrate the inability to return to previous levels of business activity” is. However, if 60% of the PPP loan is used on payroll throughout the remainder of this year, the PPP loan will be forgiven.

PPPFA repayment term is extended from 2 to 5 years

The PPPFA reduces the repayment terms in the event some or all the loan is not forgiven. A small business will now have 5 years at 1% interest to repay the PPP loan. Also, the first loan payment will be deferred for 6 months after the SBA decides on forgiveness. In accordance with the current regulations, lenders have 60 days to make a forgiveness determination and the SBA an additional 90 days. As a result, you could have up until May of 2021 to make the first payment on the PPP loan.

SBA loan audits are still a possibility

While the PPPFA addresses numerous small business owners’ concerns, there are still areas of program that create some angst. For example, it does not address concerns about SBA audits of loans as outlined in the Treasury Department “Interim Final Rules”. According to the Treasury Department’s PPP Loans FAQs, the SBA could audit any loan at its discretion to determine if “the borrower may be ineligible for a PPP loan, or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.” This includes loans under $2 million, which have a “safe harbor” on the issue of whether economic uncertainty made the loan necessary. Small businesses, particularly those with PPP loans of $2 million or more, should prepare to defend why the PPP funds were financially needed. For instance, did the small business have large cash reserves or lines of credit it could have tapped to stay afloat during the shutdown? If so, the SBA could determine the borrower was ineligible for the PPP loan in the first place. While borrowers should not get overly concerned about criminal penalties, they could be required to repay the PPP loan in full (i.e. denied forgiveness of the PPP loan). Most experts do not expect the SBA to conduct many PPP loan audits based on the sheer number of loans granted. Almost 4.5 million PPP loans have been issued, and there are not enough resources for lenders and the SBA to deploy thousands of auditors. Most believe that the focus of any audit efforts will be directed at PPP loans of $2 million or more. Remember too that the responsibility for accurately calculating the PPP loan amount and the forgiveness amount is the responsibility of the borrower.

Lastly, all PPP loan borrowers need to consult with their lenders for specific advice concerning their loan forgiveness processes. Not all lenders will offer the same interpretation of the PPP loan forgiveness guidelines, so getting your lender’s interpretation concerning your PPP loan is crucial. Overall, we believe that the PPPFA is just what the doctor ordered for small businesses.

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