When the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, the weeks that followed were marked by a flood of loan applications under the Paycheck Protection Program (PPP) set up by the new legislation. Under the PPP, employers are able to borrow forgivable loans to help cover payroll costs - including salaries, healthcare premiums, paid leave benefits, and state taxes on employee wages - during the coronavirus shutdowns.
However, the execution of the program and its lack of concrete details left many unanswered questions. And, the fact that the coronavirus shutdowns lasted longer than anticipated and have even been extended in some states has left many business owners with financially devastating ripple effects.
On June 5, President Trump signed the Paycheck Protection Program Flexibility Act, which is designed to address and remedy concerns left in the wake of the PPP. This new law contains a few key provisions that will be welcomed by PPP loan recipients.
1. Timeline for repayment extended
While the PPP was designed to offer fully forgivable loans, there are instances where a portion of the loan must be paid back. Initially, borrowers had a 2-year repayment period. That repayment period has been extended to 5 years.
Strictly speaking, this only applies to PPP loans made after passage of the Paycheck Protection Program Flexibility Act. However, lenders and borrowers can renegotiate the loan terms in order to secure the new, more favorable 5-year repayment period.
2. Forgiveness made drastically easier
The first iteration of the PPP granted borrowers 8 weeks to incur forgivable costs - but as shutdowns were extended it quickly became clear that 8 weeks was simply not enough for many businesses, especially those in hard-hit industries.
The Paycheck Protection Program Flexibility Act grants more time to incur forgivable costs: 24 weeks from the date of the loan's origination or December 31, 2020, whichever occurs sooner. But, there are still limits: the maximum amount paid to any one employee that will be forgiven is capped at an annualized salary of $100,000; as a result, for a 24-week covered period, this limit will be reached once an employee receives $46,153 in cash compensation. The act does not make that clear, but guidance is expected.
Please note: The bill does not require borrowers to switch to a 24-week covered period. For borrowers who spent the full PPP loan amount and qualify for forgiveness, the 8-week covered period remains available.
3. Timeline for replacing FTEs and wages extended
Under the PPP, even if 100% of the loan was used on payroll costs, the entire loan may not be forgiven if full-time employees (FTEs) were laid off or significant reductions in salaries / hourly wages occured. Borrowers initially had until June 30, 2020 to correct these scenarios; the Paycheck Protection Program Flexibility Act grants borrowers additional time to restore FTEs and salaries / hourly wages with a December 31, 2020 deadline. FTE and wage levels must be restored to February 15, 2020 levels.
4. New relief for hard-hit businesses
As we all know, some industries and businesses have felt the pain of coronavirus shutdowns more than others. For businesses that remain partially or fully closed through the end of the year, their PPP loan forgiveness amount will not be reduced due to FTE and/or wage reductions provided the borrower can document any of the following:
Inability to rehire FTEs who were employed by the borrower on February 15, 2020.
Inability to hire similiarly qualified FTEs for unfilled positions on or before December 31, 2020.
Inability to return to the same level of business activity by December 31, 2020 (e.g. bars and restaurants).
5. Non-payroll cost cap increase
The non-payroll cost cap was initially set at 25%; however, the Paycheck Protection Program Flexibility Act increases that cap to 40%. But, the bill makes clear that if the borrower does not spend at least 60% of the loan amount of payroll, then none of the loan would be forgiven. Regulations should be forthcoming on this adjustment.