President Donald Trump signed the Paycheck Protection Program Flexibility Act (PPPFA) into law on June 5, 2020, which amends the CARES Act and gives business owners much more leeway in how they use their PPP funds. Although the PPP was conceived as a way to help small businesses impacted by nationwide shutdowns during the COVID-19 pandemic, many believed that the original restrictions were too limiting to be useful, and, some were saying, could actually increase a small business’s financial burden.
The PPPFA aims to loosen restrictions on PPP funds and to ease the stress of small businesses trying to get their loans forgiven. The act extends the time period that business owners have to use the funds, loosens requirements for how business owners use them and expands the forgiveness reduction safe harbors.
The SBA has also released a simplified forgiveness application (Form 2508EZ) that requires fewer calculations and fewer documentation, shares Matt Vondersaar, first vice president and credit supervisor at East West Bank. The EZ form is meant for self-employed individuals and independent contractors who do not have employees, businesses that did not reduce salaries or wages of their employees more than 25 percent, businesses that did not reduce full-time equivalent employees (FTEs) and businesses who experienced reductions in business activity due to COVID-19 health and safety guidelines.
Here’s what you need to know about the new updates to the PPP.
The PPPFA has primarily extended the timeframe in which borrowers can use their PPP funds and rehire employees to maximize forgiveness, as detailed below.
Under the new law, only 60 percent of the total PPP loan needs to be used for payroll costs for the loan to be forgiven, instead of 75 percent. The remaining funds can still be used toward interest on covered mortgage obligations, lease and utility payments. If you don’t meet the 60 percent payroll cost threshold during the Forgiveness Covered Period (see below), your forgivable loan amount will be proportionally reduced. According to the National Law Review, that means you must reduce your forgiveness so that the payroll costs equal 60 percent of the forgiveness amount.
The definition of the covered period has now been changed and is now called the Forgiveness Covered Period. Previously, the CARES Act required borrowers to expend the entirety of their PPP loan in a designated eight-week period (either the Covered Period or Alternative Payroll Covered Period). The PPPFA now defines the Forgiveness Covered Period as starting on the date when the loan is first funded, and ending either 24 weeks later or on December 31, 2020, whichever comes first.
If your PPP loan was made before June 5, 2020, you may still choose to use the eight-week Covered Period or Alternative Payroll Covered Period. If your loan was made on or after June 5, then your covered period is automatically 24 weeks. You may also use Alternative Payroll Covered Period over the 24-week period, adds Vondersaar.
Because of the extension of the Forgiveness Covered Period to 24 weeks, you can now pay employees who make $100,000 or more annually up to $46,154 ($100,000 annualized), which Vondersaar says can be very helpful to people trying to maximize loan forgiveness. However, “the most you can pay an owner, a general partner, a sole proprietor or an independent contractor is $20,833,” explains Vondersaar.
The PPPFA has made the minimum loan maturity five years from the date the borrower applied for the loan, instead of two years. Paycheck Protection loans made before June 5, 2020, still retain their original two-year maturity, but that can be renegotiated between the borrower and the lender.
The PPPFA also extended the payment deferral period. Instead of only one year, payments of principal, interest and fees can be deferred until forgiveness is remitted to the lender. However, the borrower must apply for forgiveness within 10 months after the last day of the covered period. If a borrower doesn’t apply, then payments will begin the day that is 10 months after the last day of the covered period.
Under the SBA’s guidelines, borrowers can maximize loan forgiveness by restoring employee FTE levels. Previously, the deadline was June 30, 2020, but has been extended to December 31, 2020 under the PPPFA.
The PPPFA has also added new safe harbors to help prevent reductions in loan forgiveness. In addition to protecting forgivable amounts if an employee was fired for cause, voluntarily resigns or voluntarily reduces the number of hours worked, the PPPFA also allows two more safe harbors.
Firstly, you don’t have to reduce forgiveness if you were unable to rehire employees or fill positions with similarly qualified individuals. Secondly, you are also exempt if you aren’t able to return to the same business activity levels as before February 15, 2020, due to compliance with health mandates or guidance (e.g., social distancing) from the Centers for Disease Control and Prevention, the U.S. Department of Health and Human Services, or the Occupational Safety and Health Administration.