The CARES Act provided US business owners various programs designed to mitigate the damage wrought by the COVID-19 pandemic. A key component was the Paycheck Protection Program (PPP), which offers low-interest loans that can be forgiven if the funds are used for payroll, rent, mortgage interest, or utilities.
This week, Congress passed, and the President signed into law some key revisions that give PPP recipients more flexibility in how and when to use the funds and receive forgiveness of their loans.
Covered Period: Under the CARES Act, owners were given 8 weeks from the date of loan issuance to use the funds in order to receive forgiveness. Now, under the new Paycheck Protection Program Flexibility Act (PPPFA), that timeframe has been extended to 24 weeks, or up to December 31, 2020 at the latest. Business owners who found it challenging to spend all of their funds will now have much more time to do so.
Minimum Percentage Used for Payroll: In order to receive forgiveness, PPP recipients were originally required to use at least 75% of the forgiven amount for payroll. Under the PPPFA, this threshold has been reduced to 60%, meaning the more of the funds can be used for rent, interest, or utilities.
One potential snag is that the new law explicitly refers to “60 percent of the covered loan amount”, suggesting that this threshold applies to the entire loan. The SBA had interpreted the original law differently, allowing recipients to simply reduce the amount of forgiveness requested so that the payroll portion met the 75% threshold. The current language sounds less flexible, but there may be more to come on this front, as the SBA will need to issue new regulatory guidance and draft a new forgiveness application form.
Loan Maturity: The PPP loans originally had a two-year term for the unforgiven portion. The PPPFA extends this to five years, which will significantly reduce the monthly payments required for repayment.
Repayment Deferral: Repayments of principal and interest on the unforgiven portion of PPP loans were originally deferred for six months. This deferral is now effectively extended to ten months under the PPPFA.
Rehire Provisions: In order to receive full loan forgiveness, business owners who reduced headcount and wages in response to the pandemic were originally given until June 30th, 2020 to restore headcount and wages to pre-pandemic levels. This deadline has now been extended to December 31st, 2020. In addition, full loan forgiveness will be available to owners who are unable to rehire similarly qualified employees, or unable to return to pre-pandemic levels of business activity due to new governmental requirements for sanitation, social distancing, or other safety requirements related to COVID-19.
Payroll Tax Deferral: The CARES Act provision allowing businesses to defer 2020 payroll taxes until next year was originally denied to PPP recipients who received loan forgiveness. This exception is eliminated in the PPPFA, enabling these borrowers to continue to defer payroll taxes.
In general, the new law is good news for many business owners who have taken out PPP loans. As always, business owners should confer with their tax and legal advisors to assess whether to apply for the PPP.