Paycheck Protection Program Flexibility Act Passed by the Senate!

Sarah Russell

It took a little longer than anticipated, but after some back and forth between a few Senators, the Senate passed the Paycheck Protection Program Flexibility Act (“The Act”) on June 3 with unanimous consent. We expect the President to sign the bill before the end of the week, giving small businesses more time to utilize their PPP loan funds and achieve full forgiveness. We may see future amendments on some of the areas that caused the most contention in the Senate.

In a previous article, we provided a high-level summary of the bill drafted by the House, below we cover the specific rules in a little more detail. We also point out items that may be considered for future amendments:

1. The Act reduces the amount of loan proceeds required to be spent on payroll costs from 75% to 60%. However, it imposes an all or nothing rule. In other words, if a borrower does not spend at least 60% of their loan amount on payroll costs, none of the loan will be eligible for forgiveness. This was one issue that held up the vote in the Senate. The US Committee on Small Business and Entrepreneurship is hoping to fix this technical language in a future amendment to the legislation.
2. The covered period is extended from 8 weeks to 24 weeks or December 31, 2020, whichever is earlier. This gives borrowers up to 24 weeks to spend their PPP loan funds. At this time, we do not know how the extended period will affect other limitations imposed by the original guidance, such as the maximum amount of payroll allowed to be considered for forgiveness. This was another area of contention that held up the passage of this Act in the Senate. Some Senators are concerned this Act extends the time which borrowers are allowed to apply for the loan until December 31, 2020. Most agreed this was not the intent of the Act; the intent was to give borrowers more time and flexibility to spend the funds. We expect further guidance on this matter.
3. Borrowers will now have until December 31, 2020, to rehire employees for purposes of the FTE reduction impact on loan forgiveness. In addition, the legislation includes a new exception for businesses who are able to document their inability to return to the same level of business activity they were operating at before February 15, 2020, 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.
4. Borrowers will now have 5-years to repay the loan rather than the 2-year maturity imposed by the Administrator’s implementation guidance. In addition, the original 6-month deferment period has been adjusted. Borrowers will receive a deferment on any loan until the date on which forgiveness amounts are remitted to the lender by the SBA. As a reminder, a lender has 60 days to make a determination on loan forgiveness applications and submit to the SBA. Once received the SBA has 90 days to review the determination and remit the amount of forgiveness to the lender. This new provision ensures that borrowers do not begin repayment before the SBA has made their determination.
5. The CARES Act allowed for deferral of payroll taxes for the period March 27, 2020, through December 31, 2020. PPP borrowers were allowed to take advantage of this provision until they received loan forgiveness. Borrowers who receive loan forgiveness may now continue to defer payroll taxes.
6. A borrower may elect to apply the original 8-week covered period to their loan. In the event a borrower was able to achieve 100% forgiveness in the original covered period, the election will allow them to apply for loan forgiveness as originally planned. It is not yet certain whether borrowers who do not make this election will be able to apply for loan forgiveness at any point during the extended covered period or if they will need to wait until the 24 week period ends.
7. As a reminder, the Act did not include a fix to the IRS position that no tax deduction will be allowed for expenses paid with PPP loan proceeds to the extent such amounts are forgiven. While there is still some discussion regarding whether the IRS position is valid, Congressional action is the most likely way borrowers will have clarity on this issue. Therefore, we recommend all business owners reach out to their Congressional representatives and request legislative action on this issue.

Although we have several questions regarding the implementation of the Act, these provisions certainly provide much-needed flexibility to borrowers. Be sure to tune into our weekly PPP Check-in on Wednesday, June 10 as we discuss how the new legislation affects borrowers.

The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.