Written by Brooke Shroyer
President Trump recently signed into law the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) to extend loan forgiveness under the Paycheck Protection Program (PPP) and defer employer payroll taxes, among other things. The Act amends the PPP as outlined in the Small Business Act and Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the mandated closures of millions of businesses across the country during the COVID crisis.
The PPP is outlined in various provisions of both the Small Business Act of July 30, 1953 and the CARES Act of 2020.
The CARES Act was unanimously passed by the Senate with bipartisan support and signed into law by President Trump on March 27, 2020. This Act provided emergency relief for individuals during the COVID crisis by distributing Economic Impact Payments to qualifying households.
In May of 2020, the Small Business Association (SBA) and the Treasury introduced PPP loans to assist small businesses operating at a loss from weeks without business while encouraging the retention of employees.
The SBA and CARES Act have become key players in remedying the nationwide financial crisis from COVID. The PPPFA has amended both the Small Business Act and CARES Act to incorporate these PPP business loans now with extended maturity terms, relaxed loan forgiveness, and employer payroll tax deferment.
Extended Maturity Terms
The PPPFA implemented a 5-year minimum maturity term where business owners will now be able to receive loan disbursements for at least five years. The maximum loan term remains ten years.
The caveat is that such extension only applies to loans made on or after the date of PPPFA’s enactment. Pre-PPPFA, the minimum maturity term for loans was two years. Thus, small business owners with loans predating the enactment of PPPFA on June 5, 2020 are bound by the original two-year loan terms.
Extended “Covered Period”
Prior to the PPPFA, the covered period for loans was eight weeks. A “covered period” is the duration for which the loan is intended to cover. Business owners were required to spend the loan within eight weeks of initial disbursement. The PPPFA extended this covered period to the earlier of 24 weeks from the date of origination or December 31, 2020. Business owners now have until this time to spend the proceeds for qualified purposes including payroll and business expenses.
Pre-PPPFA, business owners were required to spend 75% of the loan proceeds on payroll expenses and 25% on non-payroll expenses such as rent and other utilities. However, the PPPFA reduced the 75/25 requirement down to 60/40 where only 60% of the loan proceeds must be spent on payroll for total forgiveness eligibility. If business owners fail to meet the new 60/40 requirement, they may still be eligible for partial loan forgiveness.
The 60/40 amendment and the extended covered period addressed the concern that some small business owners were not able to use 75% of loan proceeds on payroll costs within the original eight weeks prior to the reopening. While the reduction from 75/25 to 60/40 is somewhat slight, this modification may provide more business owners the opportunity to achieve complete loan forgiveness.
Headcount Provision And Payroll Stipulation
Prior to the Act, business owners could avoid reductions in PPP loan forgiveness amounts if any decrease in employment or salaries from February 15, 2020 to 30 days after the enactment of the CARES Act (April 26, 2020) was restored by June 30, 2020.
The PPPFA extended this restoration deadline until December 31, 2020. Employers now have until this date to restore their businesses back to their pre-pandemic headcounts and salaries. However, if employers are unable to rehire employees, the PPPFA provides additional exceptions to avoid reductions in loan forgiveness amounts. Employers, in good faith, must document (1) their inability to rehire previous employees of February 15, 2020 and the inability to hire qualified employees for such unfilled positions, or (2) the inability to return to normal capacity or business operations prior to February 15, 2020 as a result of the COVID crisis.
Extension Of Deferral Period
The Small Business Act previously prescribed that lenders must provide deferment relief for debtors with covered loans for no less than six months and no more than one year. However, the PPPFA struck this provision and replaced it with an extended deferral period. If business owners have any portion of the loan that is not forgiven, they now have until the SBA remits the loan forgiveness back to the lender.
Employer Payroll Tax Deferment
Under the CARES Act, employers could defer the 6.2% employer payroll tax for the period of March 27, 2020 through December 31, 2020. However, the provision excluded employers who already obtained loan forgiveness through the PPP. The PPPFA struck this provision and applied it to all employers regardless of whether they received loan forgiveness. Under the PPPFA, the first 50% of the employer payroll tax that was deferred is now due December 31, 2021 with the residual 50% due the following year on December 31, 2022.
With the PPPFA now signed into law, small business owners will benefit from the various amendments and provisions in place designed to relax PPP loan forgiveness. Under the Act, employers now have more time to recover their workforce and attain economic stability in the aftermath of the COVID crisis.
CARES Act, H.R. 748, 116th Cong. §§ 1101, 1106 (2020).
Kyle Westaway, How the Latest PPP Updates Impact Entrepreneurs, Forbes.com (June 10, 2020).
Neil Hare, Trump Signs New Law Relaxing PPP Rules: What You Need to Know, Forbes (June 5, 2020).
Organization, SBA.gov (June 10, 2020, 11:15 p.m.).
Paycheck Protection Program, SBA.gov (June 10, 2020, 1:54 p.m.).
Paycheck Protection Program Flexibility Act of 2020, ADP.com (June 5, 2020, 8:37 p.m.).
Paycheck Protection Program Flexibility Act of 2020, H.R. 7010, 116th Cong. (2020).
SBA and Treasury Release Paycheck Protection Program Loan Forgiveness Application, Treasury.gov (May 15, 2020).
Small Business Act, SBA.gov (June 10, 2020, 10:51 a.m.).
Small Business Act of 1953, 15 U.S.C. §636 (2020).
Small Business Owners Share Stories About the Devastation of COVID-19 Crisis, CPA Practice Advisor (May 12th, 2020).
H.R.748 – Cares Act Bill History, Congress.gov (June 24, 2020, 10:57 AM).
Photo courtesy of New York Times.