To help ease the economic strain caused by COVID-19, the federal government established the Paycheck Protection Program (PPP) through the CARES Act. The PPP was created to furnish loans to small businesses so that they could continue to pay their employees even, in some cases, while their businesses were closed.
On June 3, 2020, Congress authorized various changes to the PPP by passing the Paycheck Protection Program Flexibility Act, which was signed into law by the President on June 5, 2020. These changes are geared toward providing greater flexibility to borrowers and making it easier to obtain forgiveness of PPP loans.
The following is a summary of some of the key provisions of the Flexibility Act that may help your family business obtain loan forgiveness for funds received through the PPP.
Loan Use Period
The first iteration of the PPP required that businesses use the loan proceeds they received within eight weeks of disbursement in order to maximize loan forgiveness. Any loan proceeds spent after that would not qualify for forgiveness. Now, PPP recipients have the option to extend this period to 24 weeks (although the maximum loan amount is not increased).
Percentage of Loan Spent on Payroll Costs
For a recipient of a PPP loan to qualify for forgiveness, it was originally required that 75 percent of the funds received be spent on payroll costs. With the recent changes in the Flexibility Act, borrowers need only spend 60 percent of the money on payroll costs to qualify for forgiveness. This change allows for businesses to spend more money (up to 40 percent) on other permissible uses such as rent and lease payments, mortgage interest, and utilities.
The PPP stipulates that if, as a result of the pandemic and related complications, a borrower reduces its number of full-time equivalent (FTE) employees or reduces wages by more than 25 percent (as compared to specific prior reference periods), the amount of the loan that can be forgiven will also be reduced.
The PPP originally allowed borrowers who made such FTE or wage reductions between February 15 and April 26, 2020 to remedy such reductions by reinstating employees and wages by June 30, 2020, in order to avoid reductions to the forgiveness amount. The new law extends this deadline to the end of the year, up to December 31, 2020.
The Flexibility Act and SBA guidance also gives borrowers the opportunity to avoid reductions in their loan forgiveness if they can demonstrate they were not able to rehire employees for specific COVID-19-related reasons or that they were not able to find and fill certain positions with qualified candidates. There are other ways in which borrowers can avoid reductions to their loan forgiveness amount, and these are outlined in the forgiveness application and related interim final rule on forgiveness, which are available on the U.S. Treasury website.
Initially, borrowers could defer payments on their PPP loans for six months from the disbursement of the loan. Now, borrowers that apply for forgiveness are able to have their loans deferred until the date on which the lender receives the forgiveness amount from the SBA.
Paired with the extended covered period, this has the potential to significantly extend the deferral period. If a company does not apply for forgiveness, they are required to begin making payments ten months after the end of their loan use period.
Payroll Tax Deferral
The CARES Act originally allowed most businesses to postpone payment of their payroll taxes until December 31, 2020. However, PPP recipients were not afforded the same exception. The new law has changed this, and now PPP recipients qualify for the same deferral.
If you are a small family business owner and have not yet received PPP funds, it is not too late—applications for a PPP loan are open until June 30.
While the new requirements surrounding PPP forgiveness are more favorable to businesses than before, it is important to remember that your family business still needs to apply for forgiveness to be eligible, and you must carefully follow SBA and U.S. Treasury guidance in order to obtain forgiveness.
Additional guidance from SBA is also forthcoming. If you would like help applying for forgiveness, or have any other questions about the PPP, be sure to contact legal counsel. We also encourage you to review these resources on our website for more in-depth analysis about the CARES Act, PPP loans, and the Flexibility Act.
The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.
DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.