What You Need to Know About the Paycheck Protection Flexibility Act

The Paycheck Protection Program (PPP) has been an important lifeline for businesses impacted by the COVID-19 emergency. Many businesses were required to manage expenses while obeying stay-at-home orders and forced business closures. To provide immediate help, the PPP – a key feature of the Coronavirus Aid, Relief, and Economic Security (CARES) Act  – was launched to provide a much-needed cash infusion via low-interest loans, with favorable terms. Given the need to get PPP loans distributed, the traditional process of developing detailed regulations and guidance was skipped. Unfortunately, this has resulted in a bevy of updates, which has left many with more questions than answers.

Today, President Trump signed the Paycheck Protection Flexibility Act of 2020 (the Act), which makes several significant changes to the PPP and is a welcome relief to loan recipients and potential borrowers. The changes made to the PPP are as follows:

• Extended Loan Utilization Covered Period – There has been a concern for businesses in many industries that the eight week period was too short. The Act addresses this by extending the covered period to 24 weeks after loan origination or December 31, 2020, whichever is earlier.
• Non-Payroll Expenses – Many businesses have expressed concern about the requirement to spend 75% of loan funds on payroll to be eligible for forgiveness. The issue is many borrowers also have fixed expenses that need to be paid using PPP funds. The Act addresses this by reducing the amount that must be spent on payroll to 60%, allowing the other 40% to be used for covered mortgage, rent, or utility expenses. However, under the Act, if 60% of payroll costs are not obtained, then none of the loan will be forgiven. There is currently a discussion about addressing this change.
• Rehire Deadline for Loan Forgiveness – The Act also extends to December 31, 2020, the deadline to rehire employees (FTE requirement). Under former regulations, borrowers were required to rehire their workforce by June 30, 2020, or face a reduction in loan forgiveness. This extension addresses the concern that many businesses will remain closed past the June 30, 2020 deadline due to state and local lockdown requirements.
• Loan Repayment Deferral – There was concern that borrowers would need to start repaying the loan before they have information about their approved loan forgiveness. To resolve this, the Act extends the repayment period from 6 months to the date the lender receives the SBA determined loan forgiveness amount. If a borrower fails to apply within ten months after the last day of the Covered Period, they must begin making payments on principal, interest, and fees.
• Loan Term Extended – The Act extends the potential loan term from 2 years to 5 years, expanding the maturity date. Unfortunately, this is not a retroactive change, so if enacted, it would only apply to new loans taken after the Act passage. It is important to note that lenders and borrowers would be permitted to revisit loan terms and make modifications.
• Loan Forgiveness Reduction – The Act outlines changes to the proportional reduction in loan forgiveness due to a decrease in full-time equivalent (FTE) headcount. Borrowers will be able to receive relief if they can document in good faith that for the period between February 15, 2020, and December 31, 2020, if the following conditions are met. First, they must have been unable to rehire employees who were employed on February 15, 2020, or hire another qualified professional for unfilled positions by December 31, 2020. Second, they were unable to return to the same business level before February 15, 2020, due to compliance with federal regulations published between March 1, 2020, and December 31, 2020, related to sanitation, social distancing, and other employee/worker safety guidance.

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The Paycheck Protection Flexibility Act provides significant changes to the Paycheck Protection Program designed to make loan forgiveness easier. However, it will leave some issues open and will most likely raise a few new ones. We will closely monitor further developments and guidance. Still, in the meantime, if you have questions about the information outlined above or need assistance with another COVID-19-related business or operational issue, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.

The above represents our best understanding and interpretation of the subject matter covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This material is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.