On June 5, 2020, President Trump signed into law the Paycheck Protection Program (PPP) Flexibility Act of 2020. This act made several key modifications to the PPP that was created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Here are the updates.
- To be eligible for forgiveness, borrowers must spend at least 60% of the proceeds from the PPP loan on payroll costs. This is down from the previous 75% requirement. Partial loan forgiveness is available if borrowers do not meet the 60% threshold.
- Each borrower has a “Loan Forgiveness Covered Period,” which is the period of time during which a borrower must use the proceeds in order to maximize the loan forgiveness amount. For loans made on or after June 5, 2020, the Loan Forgiveness Period is 24 weeks. For loans made before June 5, 2020, the borrower can choose to use eight weeks or 24 weeks. Loans are considered “made” on the date the SBA assigned a loan number to the borrower’s PPP loan. The Loan Forgiveness Covered Period generally begins on the date the PPP funds are received (or if received on more than one date, the first date PPP funds were received) and must be end no later than Dec. 31, 2020. The previous timeframe was eight weeks.
- Another change is the new exemptions related to the workforce restoration. This new provision modifies the requirement of restoring the number of employees to the borrower’s Feb. 15 levels. The amount of the loan eligible for forgiveness will not be reduced if:
- The borrower is able to document that (a) the business was unable to rehire the employees employed on Feb. 15 due and (b) the borrower was unable to hire anyone similarly qualified or unfilled positions by Dec. 31; or
- The borrower is able to document that the business has been unable to return to the Feb. 15 level of business activity due to certain COVID-19 related restrictions.
In states that are still under COVID-19 restrictions, the second provision could become an alternative for those businesses to avoid reductions in forgiveness under this program.
Also, in the event a borrower is unable to achieve full forgiveness on the PPP loan, two modifications were made:
- For PPP loans made on or after June 5, the minimum loan maturity period changed from two years to five years, but is still at a 1% interest rate. For loans made before June 5, 2020, the borrower and lender may agree to extend the maturity period from two to five years.
- Deferral of PPP loan repayments has been modified. Borrowers who apply for forgiveness within 10 months after the last day of the 24-week forgiveness covered period can defer principal and interest payments until SBA pays the forgiveness amount to the lender or notifies the lender that the borrower is ineligible for forgiveness. Borrowers who do not apply for forgiveness must begin making payments 10 months after the earlier of the end of the last day of the 24-week covered period or Dec. 31, 2020.
One last modification is related to the deferral of payroll tax payments. Previously, those who received forgiveness on a PPP loan were not able to take advantage of this CARES Act provision; now, they may be eligible for deferral.
No extensions were provided for submitting an application to apply for a PPP loan, so potential borrowers have until June 30 to apply.
Points of advice
While this PPP Flexibility Act provides much more latitude on the eligibility for PPP loan forgiveness, it’s still a good idea to make sure your clients have documentation in order related to these loans. In reviewing the application process by the banks to grant PPP loans, it can be surmised the processing of the lengthy forgiveness application will require greater substantiation. Further, even if PPP loans are forgiven, in whole or in part, if certain requirements are met, it would not preclude the potential for inspections and audits years down the road.
Significant guidance from the accounting industry includes setting up separate banks accounts for these funds, as well as increased recordkeeping for payroll expenses and non-payroll expenses. Remember that the use of these funds is restricted for non-payroll related expenses. Maintaining records on mortgage interest, rents, and utilities these funds are spent on is highly suggested.
If your clients’ records aren’t always in good shape, this is a good time you reach out and advise them to get them in order – they are looking to you for advice and guidance.