Congress united in a bipartisan effort to assist small businesses last week by easing the PPP loan rules amid the COVID-19 pandemic when on June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act (“PPPFA”) into law. The new law addresses concerns expressed by small business owners and flaws identified in the CARES Act.
Importantly, the PPPFA addressed small business owners’ concerns that borrowers use the funds in a 75%/25% ratio. That is, 75% of the loan funds must be used for payroll and 25% for allowed operational expenses. The PPPFA reduced the amount required to be spent on payroll from 75% to 60%. Thus, allowing a 15% shift from payroll to allowable operational expenses. In other words, 60% of PPP funds must be used for payroll and 40% are now allowed for permitted operating expenses. Although the amount allowed for permitted operational expenses increased to 40%, the new law remains silent on the addition of permitted operational expenses eligible for forgiveness. This is a significant relief to those businesses just opening back up as state stay orders are lifted.
Next, a key concern amongst small business owners is the requirement to spend the funds within the eight-week period from the date the funds are received. This requirement presented an array of challenges for businesses that were forced to close due to government mandate but still had to meet the eight-week requirement. Under PPPFA, the time period to exhaust the funds is extended to 24 weeks. While PPP loan recipients must still spend the funds on payroll and allowable operational expenses, they now have until the end of the year to do so. This is a significant victory for those businesses that were awarded loan funds but were unable to operate under government stay mandate.
The extended time period gives those businesses awarded a PPP loan more flexibility to spend the funds as needed and maximize the likelihood of enjoying loan forgiveness. In any case, a business need not wait the full 24 weeks to apply for loan forgiveness; businesses may apply after the initial 8-week term.
Furthermore, PPPFA extends the PPP requirement that all workers must be rehired by June 30, 2020, to December 31, 2020, in order to avoid decreases to the forgiveness amount. PPP loan recipients now have until December 31, 2020, to rehire workers in order for their salaries to be considered toward the forgivable amount. However, the law did not change how salaries are calculated when determining the forgivable amount. Thus, the payroll calculation is still capped at $100,000 per employee to be eligible for full forgiveness.
As previously noted, the deadline to rehire full-time equivalent is extended to December 31, 2020, but the new law does not stop there. There are two significant changes to the re-hiring of full-time equivalent employees that will ease requirements for small business owners. First, the extended deadline to December 31, 2020, and secondly, it adds additional exceptions for a businesses’ reduced headcount of employees for loan forgiveness. The law states a business can still enjoy forgiveness if it:
- Is unable to rehire an individual who was an employee of the eligible recipient on or before February 15, 2020;
- Is able to demonstrate an inability to hire similarly qualified employees on or before December 31, 2020; or
- Is able to demonstrate an inability to return to the same level of business activity as such business was operating at prior to February 15, 2020.
The next question the Small Business Administration (“SBA”) must address is how it will require a business to “demonstrate the inability to rehire similarly qualified employees.” Therefore, it is important all loan recipients document all offers and rejections of employment.
Furthermore, the PPPFA extends the repayment period from 2 to 5 years. This eases repayment terms for those loan portions not eligible for forgiveness. Now, a business will have 5 years at 1% interest to repay the loan. Also, the first payment is deferred for 6 months after the SBA makes a determination on how much of the loan is forgivable. Also of note, the PPPFA provides that borrowers may defer employer’s payroll taxes for Social Security.
Lastly, although requirements are eased under PPPFA, the SBA may still conduct audits on the certification piece of the loan application. It is vital that all PPP loan recipients keep accurate records on payroll spending and workforce retention. In any event, the PPPFA is a step in the right direction in getting small businesses back up and running in the face of COVID-19. Look to the SBA website for additional information on loan forgiveness and updates on its audit procedures.
Please contact one of our business or employment attorneys for more information by calling Quinlivan & Hughes at (320) 251-1414.