President Trump Signs Paycheck Protection Program Flexibility Act

Marcia Swihart Orgill

By Marcia Swihart Orgill

The Paycheck Protection Program Flexibility Act (Flexibility Act) makes key changes to the Paycheck Protection Program (PPP) that provide borrowers with more flexibility to obtain loan forgiveness, including extending the time period to spend PPP loan proceeds, reducing the payroll expenditure requirement for PPP loans, and extending the time period to restore employment and wage levels. The following is a summary of the modifications the Flexibility Act makes to the PPP.ppp update

1. Extension of Time to Spend Loan Proceeds. The Flexibility Act extends the covered period that a borrower must spend its loan funds from eight weeks after the loan origination date to 24 weeks or until December 31, 2020, whichever is earlier. The Flexibility Act allows borrowers that already received a PPP loan prior to enactment of the Flexibility Act to elect an eight week covered period, which may be beneficial for borrowers who have already spent most of their PPP loan proceeds and are near the end of their original eight week covered period.

2. Payroll Expenditure Requirement. The Flexibility Act reduces the payroll expenditure requirement from 75% to 60%. The remaining 40% of loan funds may still only be used for payments of interest on any covered mortgage obligation, rent and utilities.

In an Interim Final Rule issued on April 3, the SBA established the requirement that at least 75% of the PPP loan proceeds be used for payroll costs. If less than 75% of the of loan funds are spent on payroll costs, the SBA Loan Forgiveness Application requires a borrower to reduce the amount eligible for loan forgiveness. In changing the payroll expenditure requirement to 60%, the Flexibility Act added the following language to the CARES Act: “To receive loan forgiveness”, a borrower “shall use at least 60% of the covered loan amount for payroll costs.” Based on this language it is not clear whether a borrower will still be able to obtain partial loan forgiveness if the 60% threshold is not obtained.

3. Restoration of Workforce and Wages/Salary. The CARES Act provided an exception to the limitations on loan forgiveness due to a reduction in the number of full-time equivalent (FTE) employees and wages/salary if the borrower restored employment and salary/wages no later than June 30, 2020. The Flexibility Act extends this deadline for restoring the number of FTE employees and salary/wages to December 31, 2020

4. Additional Exemptions to Loan Forgiveness Limitations. The Flexibility Act provides that a borrower will not have its loan forgiveness reduced if it can document in good faith that it was unable to (A) rehire individuals that were employees on February 15, 2020, and hire similarly qualified employees for unfilled positions on or before December 31, 2020, or (B) return to the same level of business activity it was at before February 15, 2020, due to compliance with guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention or the Occupational Safety Health Administration during the period beginning on March 1, 2020 and ending on December 31, 2020.

5. Term of Loan and Repayment. The SBA in its Interim Final Rule of April 3 provided a two-year maturity term for PPP loans. For new loans, the Flexibility Act provides for a minimum five-year maturity term for any loan balance that is not forgiven. The Flexibility Act permits existing lenders and borrowers to mutually agree to modify the maturity term of existing PPP loans to conform to the new minimum five-year requirement.

The CARES Act required PPP lenders to defer payments of principal and interest on PPP loans for at least six months and not more than one year. The Flexibility Act requires that lenders provide complete payment deferral until the date on which the amount of loan forgiveness is remitted to the lender by the SBA, provided that the borrower applies for forgiveness within 10 months after the last day of the covered period. If the borrower fails to apply for forgiveness within this 10-month period , payments of principal and interest commence 10 months after the last day of the covered period.

Taking into account the extended covered period (24 weeks), the ten-month period to apply for loan forgiveness, the time for lenders to process a loan forgiveness application (up to 60 days), and the time for the SBA to remit the forgiven loan amount to the borrower (up to 90 days), the total deferral of payments of principal and interest could be up to a period of approximately 21 months.

6. Deferral of Payroll Taxes. The CARES Act prohibited employers with forgiven loan amounts  from taking advantage of the payroll tax deferral. The Flexibility Act allows PPP borrowers to defer payment of payroll taxes from March 27 to December 31, 2020, even if some or all of the PPP loan is forgiven.

For additional COVID-19 related information, go to our Coronavirus/COVID-19 Resource Center.

Posted by Attorney Marcia S. Orgill. Orgill concentrates her practice in the area of business and personal taxation—especially complex domestic and international tax strategies. 

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