Paycheck Protection Program Flexibility Act Eases PPP Rules
On June 5, the Paycheck Protection Program Flexibility Act of 2020 (the Act) was signed into law. The new law significantly changes the Paycheck Protection Program (PPP) by giving borrowers more time to use funds, extending the time to satisfy safe harbors, relaxing payroll requirements, and more.
Extends Forgiveness Period From Eight Weeks to 24 Weeks
The Act extends the loan forgiveness period, meaning that borrowers may now spend their PPP funds until the earlier of 1) Dec. 31, 2020, or 2) 24 weeks from the date they received their loan disbursement. The extension of the forgiveness period is retroactive and effective for all borrowers regardless of when they received their PPP loan.
The extended forgiveness period will likely result in several changes, in addition to giving borrowers more time to spend the PPP proceeds. For example, the legislation implies that in order to determine the full-time equivalent (FTE) quotient, borrowers will have to compare their FTEs over a 24-week period to the FTEs during the selected base period. It also implies that the maximum cash compensation for an employee or owner during the forgiveness period may increase from $15,385 (for an eight-week period) to $46,154 (for a 24-week period). However, the full implications of these changes will remain unclear until there is definitive guidance to clarify how the extended forgiveness period will impact these calculations.
Though the forgiveness period has been extended, borrowers that received their PPP funds prior to enactment of the Act can elect to use the original eight-week forgiveness period. For those who will be able to use a majority of the PPP funds during the eight-week period, it may be worth selecting the shorter period. For borrowers who have been unable to use a significant amount of the PPP funds, it will be an easy decision to utilize the 24-week period. Each situation is different, and additional analysis will be necessary to determine the optimal forgiveness period.
Extends Time to Satisfy Safe Harbors (for Reductions That Occurred Between Feb. 15, 2020, and April 26, 2020)
By extending the safe harbor time period for rehiring FTEs, the legislation gives borrowers more time to rehire employees and avoid a potential reduction in loan forgiveness. If a borrower has a potential forgiveness reduction as a result of a reduction in FTEs (as compared to Feb. 15, 2020), the borrower now has until Dec. 31, 2020, to restore FTEs to an amount equal to or greater than the FTEs on Feb. 15, 2020.
This also applies to the salary or wage reduction safe harbor. If a borrower has a potential reduction in the forgiveness amount due to a reduction in an employee’s salary or wages in excess of 25%, the borrower now has until Dec. 31, 2020, to eliminate the reduction.
Reduces the Required Payroll Expenditure
Previously, the maximum amount of loan forgiveness was limited by dividing eligible payroll expenses by 75%. The Act reduces that requirement and instead states that only 60% of loan proceeds must be used on payroll costs for loan forgiveness. That means that borrowers may now use 40% (formerly 25%) of the proceeds on nonpayroll costs. However, unlike the former 75% rule, the interpretation could require borrowers to spend 60% on payroll to receive any amount of forgiveness.
Other Significant Changes
- Additional safe harbors allow borrowers to avoid FTE reduction in the following circumstances:
- Unable to hire individuals that were employees as of Feb. 15, 2020, and are unable to hire similarly qualified employees
- Able to document an inability to return to the same level of business activity as such business was operating at before Feb. 15, 2020, due to compliance with requirements established or guidance issued by the secretary of the Department 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 Dec. 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
- Borrowers are eligible to delay payment of employer payroll taxes (formerly only allowed to delay until loan forgiveness date).
- The loan term is changed from two years to five years. However, borrowers who received their loan prior to enactment of the Act would need to work with their lender to agree to the change in terms.
KSM Can Help
KSM is here to answer your questions, assist with the calculation of eligible expenses for loan forgiveness, and help prepare the necessary documentation to support your loan forgiveness application. Please reach out to your KSM advisor for help or complete this form.
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