PPP Borrowers Breathe a Great Sigh of Relief as Senate Passes Bill

The Senate passed the bill on the popular Paycheck Protection Program on Wednesday allowing small businesses to have more flexibility on spending these funds. The bill passed the House on a 417-1 vote and was signed by President Trump into law on June 5, the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act).

PPP Flexibility Act relaxes several requirements of and restrictions on the PPP allowing businesses who received the PPP forgivable loan more leeway on how to spend those funds.

Many individuals and small businesses had called on the federal government to make changes to the PPP due to its complexity and uncertainty created by the SBA. The unclear terms and the ever-changing rules scared business owners who opt to forgo applying for the funds or returning the funds fearing they may be forced to take on debt even before they fully recover.  

New Loan Forgiveness Rules

The Act addresses concerns around the use of PPP funds and loan forgiveness, the main attractions of the Paycheck Protection Program. The Act has 7 pivotal provisions giving flexibility to borrowers in the Paycheck Protection Program:

1. Deadline to use the loan proceeds – current borrowers who received their loans before June 5 can choose to keep the original 8-week period or extend it to 24 weeks. New borrowers will have a 24-week covered period, not extending beyond December 31, 2020. This will allow borrowers to easily reach full or almost full forgiveness.

2. Payroll expenditure requirements – the payroll expenditure requirement drops from 75% to 60%. However, it is stricter, businesses must spend at least 60% on payroll or none of the loans will be forgiven, clarity is still needed however as SBA and Treasury gave an update on June 8 that the 60% threshold is not a cliff and partial forgiveness if the 60% is not attained. Borrowers currently required to use 75% for payroll costs could still be eligible if the 75% threshold isn’t met.

3. Safe harbor for rehiring workers – Borrowers can use the 24-week covered period to rehire workers and restore their wages levels to the pre-COVID 19 levels eligible for full forgiveness. The entire workforce can be replaced by Dec. 31, a change from the previous June 30 deadline.

4. New exemptions from rehiring workers – the Act provides two new exemptions for borrowers to achieve full forgiveness even if they do not fully restore their workforce. Current guidance excluded from calculations employees who turned down good-faith offers to be rehired at the same hours and wages as before Covid-19.

  • Borrowers can adjust because they could not find “similarly qualified employees” before Dec. 31.
  • The forgiveness will not be reduced due to a reduced FTE count if the borrower, in good faith, can document an inability to return to the same "same level of business activity" as pre-COVID-19 due to sanitation, social distancing, and worker or customer safety requirements.

5. Loan maturity date – the Act extends the maturity date of any portion of PPP loan that is not forgiven to five years from the previous two years. This provision only applies to new loans disbursed after June 5; existing borrowers are however not prohibited from mutually agreeing with their lenders to modify the maturity terms of a covered loan. The interest rate remains at 1%.

6. Loan deferral period -  the principal and interest payments can be deferred until the date the lender receives the forgiveness amount from SBA, it will most likely be longer than the 6-12 months previously allowed.

7. Payroll tax deferral – the ban on deferring payment of employer payroll taxes for has been lifted for borrowers whose loans were partially or fully forgiven. The payroll tax deferral is now open to all borrowers.

The PPP borrowers can rest easy as the Act provides much-needed flexibility on how they can spend the funds. The Treasury and SBA should provide more regulations with regards to the initial roll-out of the PPP under the PPP Flexibility Act.