Paycheck Protection Program Flexibility Act Gives Borrowers Up to 24 Weeks to Qualify for Forgiveness of Loan Proceeds

Ivan H. Golden

The Paycheck Protection Program Flexibility Act (the “Act”), which has passed the House and Senate and is expected to be signed shortly by the President, makes several changes to the Paycheck Protection Program (“PPP”), the low-interest forgivable loan program intended to help small businesses maintain payroll during COVID-19.  Some of the highlights of the Act include the following:

  • The “covered period” during which borrowers may qualify for forgiveness of PPP loan proceeds has been extended to up to 24 weeks. The covered period now is defined as the period beginning on the loan origination date and ending on the earlier of:
    • the date that is 24 weeks after the loan origination date, or
    • December 31, 2020.

Previously, the covered period was limited to 8 weeks from the loan origination date. Borrowers still have the option to elect an 8-week covered period. This change should make it easier for borrowers to qualify for forgiveness with respect to the entire amount of their PPP loan proceeds.

  • A borrower must use at least 60 percent of its PPP loan proceeds for payroll costs and not more than 40 percent for allowable nonpayroll costs such as rent and utilities. Previously, the Small Business Administration, which administers the PPP, had ruled that not more than 25 percent of a borrower’s forgiveness amount could consist of nonpayroll costs. However, the Act is stricter than the SBA rule insofar as borrowers who spend less than 60 percent of their loan proceeds on payroll costs will receive zero loan forgiveness.
  • The deadline for borrowers to eliminate reductions in their average number of full-time-equivalent (“FTE”) employees and/or the salaries or wages paid to certain employees has been extended from June 30, 2020 to December 31, 2020. Previously, borrowers were subject to automatic reductions in their forgiveness amount if they reduced FTE levels or certain employees’ compensation between February 15 and April 26, 2020, and did not eliminate the reductions on or before June 30, 2020.
  • A borrower will not have its forgiveness amount automatically reduced if it can document either:
    • an inability to rehire individuals who were employed on February 15, 2020, or to hire similarly qualified employees on or before December 31, 2020; or
    • an inability to return to the same level of business activity that existed on or before February 15, 2020, due to compliance with federal requirements or guidance related to the maintenance of standards for sanitization, social distancing, or other worker or customer safety requirements related to COVID-19.
  • Borrowers may defer all payments of interest, principal, and fees with respect to PPP loans for up to 10 months after the last day of the covered period. Previously, payments of interest, principal, and fees were deferred for 6 months from the loan origination date. In effect, this provision will require borrowers to submit their loan forgiveness applications not less than 10 months after the end of the covered period.
  • PPP loan recipients may defer payment of the employer’s share of payroll taxes for up to two years. Under a provision of the Coronavirus Aid, Relief, and Economic Security Act, employers may defer payment of their share of payroll taxes otherwise due for the period ending on December 31, 2020. One-half the deferred amount is due December 31, 2021, and the other half is due December 31, 2022. Previously, employers could not benefit from the payroll tax deferral if they also received forgiveness of a PPP loan. However, the Act eliminates that restriction.
  • The Act extends the repayment term of PPP loans made on or after the Act’s enactment date from 2 years to 5 years. This provision does not apply to existing loans; however, the Act provides that borrowers and lenders are not prohibited from modifying the maturity date of an existing PPP loan.
  • The Act does not address the Internal Revenue Service’s ruling that borrowers may not deduct otherwise deductible expenses such as payroll costs and rent to the extent the borrower pays the expenses with PPP loan proceeds that are forgiven. Several members of Congress have said they will attempt to overturn that ruling legislatively; however, no such provision is in the Act.

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