Alerts and Updates
Major Changes in Store for Paycheck Protection Program Loans
June 9, 2020
New PPP borrowers will now have a
24-week covered period, tripling the amount of time allotted under the original program.
On June 3, 2020, the U.S. Senate passed the House version of the Paycheck Protection Program Flexibility Act, which enacts changes to key components of the program initially established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act). On June 5, 2020, the new act was signed into law by President Trump.
Below is a summary of the most prominent changes made to the Paycheck Protection Program (PPP):
Extension of Covered Period for Forgivable Loans
New PPP borrowers will now have a 24-week covered period, tripling the amount of time allotted under the original program. Current borrowers will have the option of extending to 24 weeks, but may opt to retain the original eight-week agreement. In either instance, the covered period cannot extend beyond December 31, 2020. This extension of time will make it easier for more borrowers to reach full, or almost full, forgiveness. We initially wrote about PPP loan forgiveness in our previous Alert.
Adjustment of Payroll Expenditure Requirement
Under the original program, borrowers were required to use at least 75 percent of the loan proceeds on payroll expenditures in order to be eligible for the maximum loan forgiveness. Under the PPP Flexibility Act, the payroll expenditure requirement drops to 60 percent, freeing up 40 percent for nonpayroll expenditures.
Similar to the original law, partial loan forgiveness will also be available under the 60 percent threshold. Initial language indicated that this would be an all-or-nothing cliff, but this was clarified in a joint statement by the Small Business Administration and the Treasury on June 8. Under the original law, a borrower was required to reduce the amount eligible for forgiveness if less than 75 percent of eligible funds were used for payroll costs, but forgiveness was not eliminated if the 75 percent threshold was not met.
Extension of Time for Workforce Restoration
Under the act, borrowers can now use a 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by December 31, 2020, a change from the previous deadline of June 30, 2020. Many employers were looking toward bonuses to bolster payroll levels in efforts to maximize forgiveness. Under the new guidance, extending the time period to 24 weeks has made this strategy less significant.
Exemptions for Borrowers Unable to Restore Workforce
The PPP Flexibility Act includes two new exceptions allowing borrowers to achieve full loan forgiveness even if they are unable to fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be re-hired at the same hours and wages as before the pandemic. The act allows borrowers to adjust for the following reasons:
- Borrower is unable to find qualified individuals to meet the requirements of the vacant positions, or
- Borrower is unable to return to the same level of business activity it had on February 15, 2020, due to compliance with sanitization or social-distancing activities outlined by the Centers for Disease Control and Prevention.
Borrowers that can substantiate any of the items above with documentation may still be eligible for full forgiveness of their PPP loan.
Extension of Loan Repayment Period
New borrowers now have five years to repay the loan instead of two years. PPP loans issued prior to the new program can be extended up to five years subject to agreement between the lender and borrower. The interest rate remains unchanged at 1 percent.
Adjustment to Payment Deferral
The new program will eliminate the six-month deferral period for principal and interest payments by allowing borrowers to defer payment until the forgiven amounts of the loan are remitted to the lender. Borrowers that do not apply for forgiveness will be allowed to defer payments for at least 10 months from the time the loan program expires.
Payroll Tax Deferral Permitted
The act now allows businesses that took a PPP loan to also delay payment of their payroll taxes, which was prohibited under the CARES Act.
Outstanding or Questionable Items
As with many newly enacted pieces of legislation, there are some items within the PPP Flexibility Act that some may find ambiguous or in need of additional clarification. Items which may require technical corrections include, but are not limited to:
- Whether a borrower can apply for forgiveness in advance of the 24 week expiration date;
- Tax implications for the borrower if a final decision regarding the amount of loan forgiveness has not been made by the time of return filing; and
- A more precise definition of the types of expenses includable as utilities, transportation and interest costs.
The act contains many new beneficial provisions for small and medium-sized business owners. The updated provisions should significantly increase the likelihood of having PPP loans forgiven as well as affording more flexibility in terms of how the requirements are met. However, while the requirements for obtaining PPP loan forgiveness are now less stringent, it is still of paramount importance that borrowers not jeopardize their eligibility. As with the original PPP, it is vital that the following steps are taken:
- Identify and track eligible expenses.
- Maintain supporting documents.
- Prepare a budget and closely monitor your progress over the 24-week period.
For More Information
If you would like more information about this topic or wish to discuss your own unique situation, please contact Joann I. Camm, Luke J. Bartlinski, Sean R. Schoppy, any of the practitioners in the Duane Morris Tax Accounting Group or the person in the firm with whom you are regularly in contact. For information about other pertinent tax topics, please visit the Tax Accounting Group publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.