New PPP Law Provides Further Relief for Small and Medium Sized Businesses
On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “Flex Act”), which amends several key provisions of the Paycheck Protection Program (PPP) established under the CARES Act.
- Extension of covered period: Existing PPP borrowers can now elect to extend the eight-week covered period for paying and incurring forgivable expenses an additional 16 weeks, for a maximum covered period of 24 weeks (but extending no later than December 31, 2020). Borrowers who have been shut down as the result of governmental orders or who have otherwise been unable to spend the full amount of their loan proceeds may wish to take advantage of this election. On the other hand, borrowers who have already expended their loan proceeds may wish to stay with the original eight-week period to expedite their loan forgiveness. In addition, the election would seemingly impact a borrower’s flexibility with respect to making changes in its workforce (e.g., terminating an employee who is simply not working out but without having to establish cause for termination), as reductions in the number of full-time equivalents or salary reductions during the extended covered period could reduce loan forgiveness. New PPP borrowers after June 5 will not have an election – they will just get the 24 weeks (or until December 31, 2020, if earlier than 24 weeks out from the date of origination). Also, the covered period for permissible (but not necessarily forgivable) uses of a PPP loan is extended in all cases from June 30, 2020, to December 31, 2020.
- Limitation on non-payroll costs increased: Previously, at least 75% of the loan proceeds had to be used for payroll costs in order to achieve 100% forgiveness. The Flex Act lowers this threshold to 60%, thereby increasing the amount of permissible spending on non-payroll costs from 25% to 40%. The text of the Flex Act suggests that the 60% requirement is a cliff, i.e., borrowers who do not reach this threshold are ineligible for forgiveness of any amount. The Treasury Department and Small Business Administration (SBA) have indicated, however, that partial loan forgiveness will still be available for borrowers who do not meet the 60% threshold.
- Extension of safe harbor re-hire provisions: Businesses now have until December 31, 2020, to rehire furloughed employees or restore any salary reductions without having such furloughs or reductions impact the amount of their loan forgiveness. The Flex Act also creates several new exceptions under which a borrower’s loan forgiveness will not be impacted for workforce reductions – namely, if the borrower can document an inability to (1) rehire individuals who were employees on February 15, 2020, and hire similarly qualified employees for unfilled positions on or before December 31, 2020, or (2) return to the level of business activity at which it was operating prior to February 15, 2020.
- Increased loan terms: While the CARES Act did not specify a minimum loan term, the Treasury Department and the SBA required that all PPP loans have a term of two years – meaning that borrowers would have this long to repay the unforgiven portion of their loans. For PPP loans made on or after June 5, however, the Flex Act mandates a minimum repayment term of five years for balances that are not eligible for forgiveness. PPP borrowers and lenders are permitted but not required to amend outstanding PPP loans to allow five years for repayment. Principal and interest payments are also deferred until any forgiven amount of a PPP loan is remitted by the SBA to the lender, or until 10 months after the 8 or 24 week covered period ends if the borrower fails to apply for forgiveness during those 10 months.
- Payroll tax deferral: The CARES Act allowed employers to defer employer-side Social Security taxes on wages paid between March 27, 2020, and December 31, 2020 – 50% until December 31, 2021, and the other 50% until December 31, 2022. PPP borrowers were rendered ineligible to take advantage of this deferral once their loans were forgiven. The Flex Act eliminates this ineligibility for PPP borrowers, meaning that they can now take advantage of this deferral (but still not the payroll tax credits provided under the CARES Act) to the same degree as other taxpayers.
If you have any questions about how the provisions of the Flex Act apply to you or your business, please contact Jason Navarino, Rich Lomuscio, Hannah Greendyk or any member of Riker Danzig’s Corporate and Tax Departments.
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