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From Seim Johnson: Paycheck Protection Flexibility Act

Posted By Administration, Friday, June 5, 2020

On Wednesday evening, June 3rd, 2020, the Senate passed the House version of the Paycheck Protection Flexibility Act, sending the bill to President Donald Trump, who is anticipated to sign it. This legislation would give flexibility for those small businesses that are receiving Paycheck Protection Program (PPP) funds.

Among the amendments included within the Paycheck Protection Flexibility Act (Flexibility Act) are the following:

  • PPP borrowers would be able to choose to extend the 8-week covered period to a 24-week period or December 31, 2020, whichever is earlier. Limits still remain on the maximum that can be forgiven per employee. The maximum amount paid to any one employee that will be forgiven is capped at an annualized salary of $100,000. We will have to wait for guidance for how this affected by the new 24-week covered period.
  • Under the original PPP program, the Small Business Administration (SBA) stated that 75% of costs must be spent on payroll related expenditures in order to be eligible for loan forgiveness (although this was never explicitly listed in the legislation). If the amount is less than 75% for payroll expenditures, borrowers are currently required to reduce the amount eligible for forgiveness. The Flexibility Act would reduce this percentage to 60% payroll expenditures and 40% non-payroll expenditures. However, if borrowers spend less than 60% of the PPP funds on payroll expenditures, then none of the loan would be forgivable. Some in Congress have already noted that they are uncomfortable with this "cliff" effect and have asked the SBA to address this issue favorably in regulations.
  • Borrowers can use the extended 24-week period, if elected, to restore their full-time equivalent (FTE) workforce levels and wages to those on February 15, 2020.  Under the original PPP program, employers only had until June 30, 2020 to restore their workforce levels and wages.
  • The Flexibility Act includes three new exceptions to allow for full forgiveness in relation to a reduction in FTEs that cannot be restored by the December 31, 2020 deadline:
    • The employer was unable to rehire individuals who were employees of the eligible recipient on February 15th;
    • The employer was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or;
    • The employer was unable to return to the same level of business activity as such business was operating at before February 15th due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

This essentially provides that if on December 31st, restaurants and bars, for example, are unable to fully open due to government orders, any loss in FTEs resulting from such restrictions should NOT be taken into account in computing a required reduction in the forgivable amount.

  • Currently the period for paying back any portion of the loan that is not forgiven is 2 years with a 1% interest rate. The new legislation would increase the payback period to 5 years with a 1% interest rate; however, it appears that this option is only automatic for loans made after the effective date of the new law. The new law does give flexibility to lenders to extend paybacks for up to 5 years for loans made before this change, but that option is up to the lender.
  • The bill would allow businesses that took out PPP loans to also delay payment of the employer portion of Social Security taxes. Deferral would still not apply to employee income tax withholding, employee or employer portion of the Medicare tax, or the employee portion of the Social Security tax. Prior to the Flexibility Act, you were unable to utilize the deferral of payment of payroll taxes if you received a PPP loan.

The deadline for applying for a PPP loan remains at June 30, 2020. This new Act definitely provides PPP loan recipients with much needed relief; however, there are still some questions that have been left unanswered.  We will provide you with any clarification the SBA provides in the coming weeks.

Tags:  COVID  COVID-Finance 

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