On June 5, 2020, the President signed H.R. 7010, a bill entitled the Paycheck Protection Program Flexibility Act of 2020 (the PPPFA). The act amends several key provisions of the CARES Act that was passed in late March as a relief package in response to the COVID-19 pandemic.  The most significant provision of the CARES Act was the creation of a new Small Business Administration (SBA) administered loan program known as the PPP which put money into the hands of small businesses and could potentially be forgiven. The PPP has evolved several times since its passage in March and the PPPFA now provides even more changes for borrowers.

Extends Loan Repayment from 2 Years to 5 Years 

H.R. 7010 extends the repayment period for unforgiven loans from 2 years to 5 years. This extended period applies only to PPP loans made AFTER passage of the bill, but lenders and borrowers are free to renegotiate the terms of existing PPP loans that do not have the 5 year maturity.

Expands Covered Period to 24 Weeks 

The most meaningful change in the act is the expansion of the covered period in which the borrower was required to use the PPP loan in order to later obtain forgiveness. The covered period has been increased from 8 weeks from the receipt of the loan to now the earlier of 24 weeks or December 31, 2020. This is the most significant change since many businesses are still closed or only partially open and their initial 8 week covered period will expire soon. This gives all borrowers several more weeks to use the PPP funds for payroll and other allowable expenditures.  Borrowers are not required to adopt the 24 week period and can elect to use the 8 week period.

Decreases the Current Payroll Costs Percentage 

In addition to the expansion of the covered period to 24 weeks there are other important changes related to how the borrower spends the PPP loan. The first of these items contains both good news and bad news.  The new bill decreases the requirement that the borrower spend at least 75% of the loan on “payroll costs” down to 60% of the loan. This is very good news and allows a company to use up to 40% on non-payroll costs such as rent, mortgage interest and utilities. However, the language in the new bill is worded poorly and now says

“to receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs…”   

The problem with this language is that it implies that unless you spend at least 60% on payroll costs there will be NO loan forgiveness. It is possible that this could be altered by legislative action, but we will have to wait for further guidance on this.

Extends Time to Cure Salary Reductions and FTEs to December 31, 2020 

The next item to help borrowers is that they now have a longer period of time to restore salaries and replace employee staffing up to pre-February 15, 2020, levels. The new law extends this deadline from June 30, 2020, until December 31, 2020.

Deferral of Social Security Payroll Taxes

Deferral of the employer’s portion of social security taxes was allowed to be deferred under the CARES Act until the borrower received notice that his PPP loan was forgiven. Under the PPPFA, a borrower may now defer all of its 2020 Social Security tax to 2021 and 2022 even if the PPP loan is forgiven prior to December 31, 2020.

More Clarification Needed  

While the Flexibility Act will help borrowers in many ways, especially increasing the opportunity for full forgiveness, there are still questions that need to be answered. For example, with the expansion of the covered period from 8 weeks to 24 weeks, one can assume that the maximum forgivable payroll to an individual will increase from $15,385 to $46,154 ($100,000 limit/52 weeks * 24 weeks).  However, this is only an assumption at this point, and we expect the Small Business Administration to release another round of FAQs to answer many of these issues.

Bland Garvey continues to monitor developments in Washington and will keep you informed on any new clarifications. Please feel free to reach out to the team at Bland Garvey to see how the Flexibility Act may impact your PPP Loan.

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