The Paycheck Protection Program Flexibility Act & You

The Paycheck Protection Program Flexibility Act & You

The Senate on Wednesday cleared the way for crucial changes to the Paycheck Protection Program, the now-$669 billion forgivable loan program, to make funding more accessible and less rule-bound for small businesses hamstrung by the effects of the coronavirus.

The Paycheck Protection Program Flexibility Act, which passed the Senate by a vote of unanimous consent, extends the amount of time in which businesses can use their loans and offers more leeway on how to spend funds. The same bill passed the House on May 28. As expected, it quickly signed into law by President Trump.

The bill includes significant revisions to the way funds can be used, including eliminating the requirement that employers spend 75 percent of their PPP funds on payroll costs, which should ease some of the tensions that have arisen among businesses seeking to get their PPP loans forgiven.

Passage of the Paycheck Protection Program Flexibility Act, says Tom Sullivan, U.S. Chamber of Commerce vice president for small-business policy, “will help Main Street’s efforts to reopen, providing flexibility for almost 4.5 million small businesses that have received PPP loans administered by the U.S. Small Business Administration.”

Sullivan points to the Chamber’s latest Small Business Coronavirus Impact Poll, which found that while 8 in 10 businesses are in the process of reopening, 55 percent of owners believe it will take six months or more to be fully operational. That’s up from 50 percent in April and 46 percent in March.

The bill transforms the PPP in nine key ways:

  1. Extends the deadline to use a PPP loan to December 31, 2020, from June 30, 2020. Currently, there’s north of $100 billion left in the program’s coffers. The deadline to apply remains June 30, 2020.
  2. Reduces the proportion of the loan that businesses must spend on payroll to be eligible for full forgiveness. Under this bill, 60 percent of PPP funds must be spent on payroll costs like salaries and benefits, while the rest can be spent on other allowable expenses. Currently, the expense ratio for forgiveness is 75:25.
  3. Extends the repayment period for PPP loans to five years from the current two. But if you have already taken out a loan, you are out of luck–the bill did not make the extension retroactive.
  4. Eliminates an earlier rule that penalizes businesses in their loan forgiveness calculation if they don’t maintain their pre-crisis head counts, because many can’t reopen at their previous level of operation.
  5. Codifies an earlier ruling providing safe harbor for business owners who made a good-faith effort–but were ultimately unable–to rehire furloughed or laid-off staff.
  6. Gives borrowers 10 months from the last day of the covered period–or alternative covered period — to apply for loan forgiveness.
  7. Defers principal payments, interest, and fees until the final forgiveness decision is made between lenders and the SBA. Currently, borrowers can defer payments for up to six months. But recently updated forgiveness guidance allots banks 60 days to review forgiveness applications, and then the SBA gets another 90 days to make a ruling. Accumulated delays mean some businesses might have to start payments on a loan that would eventually get forgiven. The bill prevents that scenario from happening.
  8. Expands the forgiveness period for expenses to 24 weeks from eight weeks or until the end of the year, whichever comes first. Currently, only money that gets spent in eight weeks from the loan disbursement date — or the date of the first pay period after the loan is disbursed–is eligible for forgiveness.
  9. Employers can now defer their portion of payroll taxes. The bill strikes wording in the Cares Act that bars business owners who receive forgiveness on their PPP loans from deferring their payroll taxes. Taxes incurred in 2020 are to be paid in two installments: Half is owed by December 31, 2021, and the other half by December 31, 2022.

The bill passed despite concerns by Senator Susan Collins (R-Maine) over the provision that reduces the amount borrowers are required to spend on payroll. Currently, the PPP allows for partial loan forgiveness if a company uses less than 75 percent of a loan’s proceeds for payroll. By contrast, she said, the House bill suggests that none of the loan would be forgiven if the 60 percent requirement is unmet.

Senator Marco Rubio (R-Fla.), chairman of the committee that oversees small businesses, also questioned whether employers would still be required to rehire or retrain workers. Last week, in a tweet, he said he is seeking guidance from the U.S. Treasury on both issues. In a statement on Wednesday, he said he appreciates the Administration’s “flexibility and commitment to address the bill’s inadvertent technical errors that could create unintended consequences for small businesses as they seek forgiveness.”

Should this bill become law, as expected, the SBA and the Treasury Department will both need to offer additional guidance on how businesses qualify for loan forgiveness. “We ask that it be clear and speedy,” says Karen Kerrigan, president of the Small Business & Entrepreneurship Council, a nonpartisan advocacy group in Vienna, Virginia. Time is of the essence, as the first PPP deadline has already passed. May 29 marked eight weeks since the start of the program.

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