The Paycheck Protection Program (PPP) Reform Bill: How More Flexibility Impacts Your Loan

On Friday June 5th, the President signed into law bipartisan legislation giving small business owners who received a PPP loan more flexibility in how they spend the funds. The legislation is called the Paycheck Protection Program Flexibility Act (PPPFA). This is the latest update to the guidelines put in place to lessen the economic impact of the coronavirus pandemic.

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The Paycheck Protection Program, part of the CARES Act, provided forgivable loans of up to $10 million to businesses with fewer than 500 workers and the self-employed. The intent of the Act is to help small businesses keep employees on the payroll after the pandemic forced them to shutter their operations.

Why were the new reforms put into place?

The call for revisions to the program arose quickly when business owners began looking at the restrictive terms outlining the use of funds, especially in the restaurant and hospitality industry. The timing of this legislation is crucial - the eight-week spending period began expiring on May 29th for the first loan recipients after the SBA’s PPP program opened April 3.

What is the new legislation?

The legislation impacts small businesses who received a PPP loan by putting in place the following regulations:

1. PPPFA changes amount of loan needed for payroll to 60%

The biggest item related to PPP loan forgiveness was that it required businesses to spend 75% of the loan on payroll. The CARES Act provides that each PPP borrower may determine the forgiveness amount of its PPP loan without regard to the proportional reduction in the number of full-time equivalent employees. The PPPFA reduces the amount of the loan needed to be spent on payroll from 75% to 60%, increasing the amount of funds available for other expenses , like rent and utilities, from 25% to 40%.

Some businesses still need funds for inventory, personal protection equipment, expenses around remote working, and other needs. Business groups will continue to lobby for an expansion of eligible expenses.

2. PPPFA extends time period to use funds from 8 to 24 weeks

Businesses initially had an 8-week period to spend funds from the date the PPP loan was funded. This amounted to spending funds when saving them would be a better strategy. Business owners wanted he flexibility to spend the loan after reopening, especially on payroll when workers returned to work.

The time period to spend the loans is extended to 24 weeks. Businesses still need to spend the money on authorized expenses and now have until the end of 2020 to do so. Additionally, the PPPFA also does not require businesses to wait for 24 weeks to apply for forgiveness but, if preferred, they can still apply after eight weeks.

3. PPPFA pushes back the June 30 deadline to rehire workers to December 31, 2020

Business owners were concerned they might not be open or be at full capacity by June 30th. Under the new law, businesses now have until December 31, 2020, to rehire workers in order for their salaries to count towards forgiveness.

Note 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.

4. PPPFA eases rehire requirements

The new law extends the employee rehire date to December 31, 2020 as well as adding exceptions for 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 15, 2020;
  • Is able to demonstrate an inability to hire similarly qualified employees on or before December 31, 2020; 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 15, 2020.

Of course, a business will need to document in writing as thoroughly as possible its efforts to rehire employees through December 31, 2020.

5. PPPFA extends the repayment term from 2 years to 5

A business now will have five years at 1% interest to repay the loan. The first payment will be deferred for six months after the SBA rules on your forgiveness application. The regulations mean you could have up until May of 2021 to make the first payment on the loan.

6. Tax deferment permitted

The PPPFA also allows PPP borrowers to take advantage of the CARES Act provision allowing deferment of the employer’s payroll taxes for Social Security. Previously, PPP did not permit deferment of these taxes on the forgivable portion of the loan.

Additional resources

For additional information from government sources, visit these sites:

DISCLAIMER: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult a certified accountant or tax professional for further information.

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