Major Changes to the Paycheck Protection Program - New Flexibility Act Becomes Law

In addition, the Act also brings some additional changes that remove a number of more stringent provisions that were in place. Major changes to the PPP are summarized below.:

• New extended 24-week Covered Period, increased from 8 weeks

• Non-payroll costs increased from 25% to 40% 

• FTE rehire safe harbor period moved out from June 30 to December 31, 2020 

• Additional FTE safe harbor provisions for FTE calculations 

• Businesses can defer employer payroll taxes 

• Borrowers may now apply for and use PPP funds through December 31, 2020

• Loan duration, previously 2 years, now a minimum term of 5 years for new loans, with modification allowed for
   existing loans 

• Six-month deferral to begin loan payments has been extended 

• Some unanswered questions remain

By far, the most material change that was made is extending the 8-week covered period to 24 weeks. This gives businesses more time to spend the PPP funds received on qualified expenses. Previous to the new law, many businesses that received PPP funds quickly realized that the calculation for the loan was based on 10 weeks of payroll but they only had 8 weeks to spend the funds. Expending the funds on qualified expenses within 8 weeks and in order to apply for full forgiveness presented a challenge for many businesses, especially those with minimal non-payroll costs.

While the new Act does not change the Qualified Expenses (payroll and related benefits, mortgage interest, rent and utilities), it provides a longer time to incur and pay these expenses with the funds. This significantly increases the chances of obtaining full forgiveness for PPP funds received.

Additionally, the extended 24-week Covered Period will allow for a much easier forgiveness process, since the longer 24-week Covered Period means the entire loan amount (10 weeks of payroll) can be spent on payroll and payroll-related costs, essentially eliminating the need to even consider the non-payroll costs.

The 24-week extension period is optional. This means that businesses that were operating under the original rules and met the requirements for full forgiveness over the 8 weeks do not have to wait to apply for forgiveness.  

Other provisions provide relief for businesses in the areas highlighted above. Only 60% of the PPP funds needs to be spent on payroll and related costs. Employers who laid off employees now have more time to bring employees back to work (deadline moved from June 30 to December 31, 2020), eliminating some of those headcount limitations on forgiveness under the original provisions. The duration of the loan was moved from 2 years to 5 years, which should help businesses who don’t receive full forgiveness.

Unanswered questions remain. With respect to the new safe harbor provisions related to FTEs, how should businesses “demonstrate the inability to rehire similarly qualified employees” or “the inability to return to previous levels of business activity”? Will the “cliff” related to the 60% requirement remain in place (i.e. the original interpretation assumed partial forgiveness if less than 75% was spent on payroll costs. If the new 60% threshold is not met, will there be any situations where a borrower may still get partial forgiveness)? Will the formula for the cap per employee remain the same? Will further SBA/Treasury regulations or Congressional legislation affect forgiveness? When will the SBA application for forgiveness be updated for the new rules? How will forgiveness applications still open with no decision as of year-end impact taxes? More guidance including a Q&A document from the SBA and the Treasury is expected soon.

One of the key takeaways from our perspective is how the new rules will be implemented as guidance comes out to clarify the open questions. In particular, we are urging our clients and business owners to keep an eye out for any potential pitfalls in the area of FTE reductions and any final rules that might affect he application of those formulas. Additionally, because the SBA can ultimately review any loan, including those under $2 million, we are reminding our clients to ensure that they maintain adequate documentation of the financial health of the business at the time of application, as well as sufficient appropriate documentation to track how loan proceeds were expended.

The bottom line: The PPP Flexibility Act is good news for small businesses, easing the burden for many, however, we can certainly expect additional regulations as stakeholders digest the new rules and seek to get key questions clarified.