Article Update: As of June 5, 2020, the president signed the Paycheck Protection Program Flexibility Act into law.
On June 4, 2020, the U.S. Senate passed the House version of a bill designed at providing more flexibility for borrowers that are utilizing the Paycheck Protection Program loans to keep their businesses afloat during the COVID-19 pandemic. With unanimous bipartisan support, the bill now passes to the president, who is expected to sign.
The new legislation, the Paycheck Protection Flexibility Act (PPF or the Act), provides much-needed guidance, and more importantly, flexibility, as the COVID-19 pandemic continues to hobble the global economy and states continue to see cases rise despite moves to safely reopen the economy. The key provisions of the Act include:
- The initial eight-week period to incur qualifying expenses has been extended to 24 weeks, thus allowing more time for payroll cycles to be considered for forgiveness. Businesses retain the option to keep the original eight-week cycle. The revision to the original PPP is critical for businesses that are still affected by the pandemic and have not been able to reopen or are open in a distinctly limited capacity.
- Payroll costs remain the specific focus in terms of forgiveness of the loan. However, the new Act also acknowledges that other allowable costs are important to keep businesses afloat, so the threshold for loan forgiveness requiring that 75% of the qualifying costs be payroll costs has been reduced to 60%. Currently, this is a bright line, meaning that if payroll costs do not reach the 60% threshold, then none of the PPP loan is forgivable. It is anticipated that legislators will tweak this verbiage to instead crate a sliding scale of costs rather than a bright line.
- Given the slow restart of the economy, legislators also determined that businesses will not be back at near or full capacity by June 30th, the initial deadline to restore the workforce to qualify for loan forgiveness is now December 31st. Employers are expected to use the 24-week period to ramp up employment numbers to achieve that goal.
- The new PPF Act retains the 1% interest rate on borrowings, and employers now have the option of repaying the loan over a five-year period instead of two years. As a practice note, more clarification is needed as to whether or not the five-year repayment option is available for loans that have already been approved and funded. The language, as it is written in the Act indicates that it may be for new loans only. We recommend that you work closely with your lender to explore amending the terms of existing loans to match this new guidance.
- Under the CARES Act, upon the event of loan forgiveness for businesses that took PPP loans, the borrower was to cease delaying the depositing of the employer portion of social security payroll taxes. The new PPF Act loosens those restrictions and now allows for the continued deferral of the employer portion of social security taxes through December 31, 2020, in an effort to free up cash flow.
As is often the case, new clarity also raises new questions. We encourage you to visit our COVID-19 financial updates page and reach out to one of our LGT advisors for the most up-to-date information. We are here to help.
Additionally, follow our YouTube channel if you missed the latest webinar, ”PPP Loans: Forgiveness Guidelines" on this subject and more. And don't miss out on our great upcoming webinars coming soon.