PPP Forgiveness Update
On June 3, 2020, the Senate passed the Paycheck Protection Program Flexibility Act of 2020 (the “Act”), which had previously passed the House. If signed into law by the President, the Act will change several aspects of the Paycheck Protection Program as described in the CARES Act and subsequent SBA guidance.
Changes to Forgiveness
- The Act extends the covered period during which a borrower can accrue forgivable expenses from 8-weeks from first disbursement, under the CARES Act, to the earlier of 24-weeks from loan origination or December 31, 2020. This provision triples the covered forgiveness period for many borrowers. Borrowers who received a loan prior to the Act may elect for the original 8-week covered period to apply.
- The CARES Act provided that the forgiveness amount could be reduced based on a borrower employing fewer FTEs or paying lower salary and wages during the covered period. The CARES Act included an exception to that reduction so long as the borrower restored FTEs and Wages on or before June 30, 2020. The Act replaces the June 30, 2020 deadline with December 31, 2020.
- The Act creates several exceptions to a forgiveness reduction based on inability to restore FTEs. Those exceptions include: (1) inability to rehire employees; (2) inability to hire similarly qualified individuals for unfilled positions by December 31, 2020; and (3) inability to return to the same level of business activity due to federal guidance between March 1, 2020 and December 31, 2020 regarding worker or customer safety requirements related to COVID-19. All exceptions must be appropriately documented.
- The Act states that 40% of the forgiveness amount may be non-payroll costs and 60% must be payroll costs. The CARES Act was silent on this issue, but the SBA had previously stated that only 25% of the forgiveness amount may be non-payroll costs.
Changes to Repayment
- If a borrower's PPP loan is not entirely forgiven, the borrower will have to repay the remaining balance of the loan. The SBA and Treasury previously issued guidance stating that all loans would be payable over a two year term. The Act now provides for a term with a minimum maturity of five years and a maximum maturity of ten years.
- The change to the repayment term of a PPP loan applies only to PPP loans made after enactment of the Act, however, lenders and borrowers may mutually agree to extend the term of a pre-existing PPP loan to the new five year term.
- The Act extends the payment deferral period from six months from loan origination to the date on which a loan forgiveness determination is made and remitted to the lender. However, if a borrower does not apply for forgiveness within ten months of the covered period, payments on the loan may start.
Changes to Tax Deferral
- The CARES Act provided that employers that did not receive PPP forgiveness could defer payment of applicable employment taxes due between enactment and January 1, 2021. Under the CARES Act, 50% of such taxes would be due on December 31, 2021 and the remaining balance would be due on December 31, 2022. The Act now permits PPP borrowers to defer these taxes as well, reversing the prohibition in the CARES Act.
If you have any questions regarding how the Act affects your PPP loan, your MacDonald Illig attorney is here to help you.