The Paycheck Protection Flexibility Act, H.R. 7010 signed by President Trump on June 5, 2020, relaxing the requirements on PPP small-business loans and addresses concerns of employers struggling to stay open during the shutdown.
The bill extends the time PPP recipients must spend PPP funds from 8 weeks to 24 weeks. It also lowers the portion of PPP funds borrowers must spend on payroll costs to qualify for full loan forgiveness from 75% to 60%. This would allow borrowers to direct funds to costs such as rent and utilities. The House legislation also increases the minimum term period for the loans to five years from two years and allows companies with forgiven PPP loans to delay payment of payroll taxes. This bill also includes common sense rehiring requirements while complying with government restrictions.
The bill provides for the following changes to the Paycheck Protection Program (PPP):
• Extending the covered period for using PPP loan proceeds for company’s incurred costs from eight weeks to 24 weeks from the origination date or December 31, 2020, whichever comes first. A small business who received a loan before the enactment of the CARES Act could choose to continue using the 8-week time period.
• Increasing the current limitation to 40% from 25% for nonpayroll expenses to include mortgage interest, rent, or utility payments. Lowering the current requirement from 75% to 60% for payroll costs. Apparently, no forgiveness will be granted unless at least 60% of the loan amount is used for payroll costs.
• Enhanced and reasonable rehire flexibility rules for loan forgiveness in which businesses can restore their previous staffing or salary levels and still qualify for loan forgiveness under PPP. The deadline will be extended for the re-hire exception regarding forgiveness reduction in the loan forgiveness provisions from June 30, 2020 to December 31, 2020. Currently, borrowers have until June 30 to avoid forgiveness reduction by reversing workforce reductions or pay reductions for workers making less than $100,000 annually. Borrowers should note, however, that waiting longer to restore reductions will require them to delay applying for loan forgiveness if they wish to avoid limitations on the amount forgiven.
• The business must document if they are not able to rehire employees who had been employed on February 15, 2020, and if they are not able to hire similarly qualified employees for unfilled positions by December 31, 2020. Additionally, if the business is not able to return to the same level of business activity before February 15, 2020, due to federal government compliance requirements established on March 1, 2020 through December 31, 2020. This relates to standards of sanitation, social distancing, or other worker or customer safety requirements.
• The minimum maturity period of PPP loans will be increased from two years to five years for loans made after adoption of the new act for loans or portions of loans not forgiven. The 5-year minimum period would apply automatically only to loans made after adoption of the Flexibility Act. However, lenders and borrowers may modify the term of existing PPP loans to conform to the five-year term. The interest rate will remain at 1%.
• Ensures full access to payroll tax deferment for businesses that take PPP loans. This will allow borrowers that are granted loan forgiveness to continue to defer payroll tax payments for the balance of 2020. Additionally, employers can take advantage of the CARES Act deferral of the 6.2 percent employer portion of social security payroll taxes, regardless of whether the business has PPP loan forgiven.
• PPP borrowers will be allowed to defer principal and interest payments until the SBA compensates lenders for any forgiven amounts. The program currently has a six-month deferral period. Borrowers would have 10 months after the last day of the PPP loan forgiveness “covered period” (either 24 weeks from origination date or December 31, 2020; whichever comes first). At that time the PPP loan expires, and the borrower must then begin to make payments of principal, interest, and fees on its PPP loan if they don’t seek loan forgiveness.
Your business may have experienced financial fluctuations in the last 12 months, and you aren’t sure whether your organization will qualify for the available relief. Now is the time to consider leaning on your accountant for cash flow guidance, tax deadlines, completing SBA and CWCA loan applications, Family First tax credit calculations, and interpreting the CARES Act. Our accountants are available, and we have the knowledge, skill, and information that you need right now to address your financial needs in a timely fashion adequately.
Maria is a partner at Wilke & Associates servicing closely-held businesses in manufacturing, real estate, transportation/logistics, and technology industries as well as high net worth individuals and executives in delivering effective tax strategies.