The Paycheck Protection Program Flexibility Act (PPPFA)
Yesterday, 6/5/2020, the President signed the Paycheck Protection Program Flexibility Act of 2020 (the PPPFA) into law. The PPPFA changes the rules of the PPP program to make it more favorable to businesses, in most cases. Here are the major changes:
Increased amounts allowed for non-payroll costs
Prior to the PPPFA, if businesses spent at least 75% of the PPP funds on payroll costs and the remaining 25% on other eligible expenses then the entire amount could be eligible for forgiveness. Under the new law, the 75% threshold is reduced to 60%. This means businesses can use more of the money on things like rent and utilities and still qualify for the full forgiveness if the other criteria are met.
However, this change has one potential pitfall. The original legislation allowed for the forgiveness portion to be reduced formulaically if less than 75% of the PPP loan was spent on qualified payroll costs. As it currently stands, the PPPFA would appear to create a ‘forgiveness cliff’ so that NONE of the loan would be forgiven if a business fails to spend 60% of the PPP funds on qualified payroll costs.
Covered Period Increased to 24 weeks
With the original law, you had 8 weeks to spend the PPP loan funds to qualify for the loan forgiveness, and the clock started ticking when the loan was funded. You now have 24 weeks to incur costs eligible for forgiveness (or until December 31, 2020 if it comes first).
However, many businesses are nearing the 8 week mark and have been diligent to spend the funds according to the original rules. The 8 week covered period is still an option and can be elected for use in lieu of the 24 week period. If you qualify for full forgiveness with an 8 week coverage you may want to consider electing the shorter term so that you can apply for forgiveness sooner than if you elected the 24 week coverage period.
Longer period to restore wages and/or replace FTEs
Businesses now have until December 31, 2020 to restore wages and full-time equivalents (FTEs) to February 15th levels to avoid a reduction in forgiveness based on those factors. Previously, the deadline for restoration was June 30th.
Additionally, the PPPFA provides two new exceptions for borrowers to qualify for forgiveness even if their workforce isn’t fully restored. The first exception is for businesses who could not find qualified employees. The other exception is for businesses that are unable to restore operations by the end of 2020 to February 15, 2020 levels due to COVID-19 related restrictions.
Longer repayment period
New borrowers will have 5 years to payback unforgiven amounts. If you already have a PPP loan, your repayment period can be extended from the original 2 years to 5 years if both you and the lender agree on the change. The interest rate under both scenarios is still 1%.
The new legislation provides many favorable changes with a few caveats. Now that the legislation is signed into law we are awaiting detailed guidance and forms for implementation. We will keep you posted as new details emerge.