How the New PPP Law Affects Loan Forgiveness Requirements
Changes have been made to the Paycheck Protection Program (PPP) to give loan recipients more leeway to qualify for loan forgiveness. President Trump signed the Paycheck Protection Program Flexibility Act (PPPFA) into law after the House and Senate passed it last week.
In addition to providing more breathing room for the loan forgiveness requirements, the PPPFA increases the minimum loan maturity date to five years for PPP loan balances not forgiven. The following takes a deeper dive into what the PPP loan forgiveness requirement now looks like.
Brief Recap on The CARES Act
The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the PPP to help small businesses and not-for-profit organizations retain their staff during the sudden disruption caused by the COVID-19 pandemic. Requirements for the Small Business Administration’s loan program include specifications for how the loan proceeds must be used to qualify for forgiveness. Loan recipients are required to demonstrate PPP loan funds are spent on eight weeks of qualified payroll expenses and other qualified expenses, including rent, utilities, and interest on mortgage and other debt obligations on real property or personal property debt.
Initially, loan recipients were required to use the majority of their loan proceeds — 75% — for qualified payroll costs during the “covered period” of eight weeks in order to qualify for full forgiveness. Loan recipients also had to certify that the loan was necessary due to the current economic conditions and that they would use the proceeds to maintain payroll, among the other qualified expenses. The covered period begins when the loan proceeds are received by the organization.
Because the CARES Act was intended to help small organizations retain their workforce, PPP loan forgiveness must be proportionally reduced by declines in a loan recipient’s headcount during the covered period. These reductions in loan forgiveness follow a calculation that compares the average headcount before the pandemic (generally a January – mid February time period) to the average headcount during the covered period. Organizations that rehire laid off employees by June 30, 2020, can avoid this reduction and therefore take advantage of the full forgiveness potential.
Impetus for PPP Changes
A number of complicating factors followed the PPP rollout, from the rate at which the initial funding for the program was distributed to the findings that some not-so-small organizations received the emergency loans. As a response, the SBA vowed to increase its scrutiny on loans, and indicated that organizations that cannot qualify for the program must return the funds.
This left many smaller organizations unsure of their loan forgiveness benefits. Pandemic-related disruption continues, and many organizations may not be able to guarantee headcount levels will return to pre-COVID levels by the end of June. The PPPFA provides some relief here, and in other core areas.
Top Beneficial Changes for Loan Forgiveness Eligibility
A number of small fixes for the program came with the PPPFA. The following are among the most significant for the loan forgiveness component of the PPP:
Extension of the Covered Period
The covered period for the loan program is now the earlier of 24 weeks after the PPP loan’s origination date or Dec. 31, 2020. Borrowers who received a PPP loan before the PPPFA’s enactment date may elect the original eight-week covered period, beginning after the loan’s origination date.
Increase in Limits on Non-payroll Costs
Many organizations sought immediate financial relief because the pandemic disrupted the ability to pay core bills. The PPPFA provide more flexibility over the amount of non-payroll related expenses that loan recipients may use for loan forgiveness purposes. Loan recipients are now permitted to use up to 40% of their PPP loan for qualified non-payroll expenses (60% must still go toward qualified payroll costs). However, some senators have expressed concern that unless 60% of the PPPFA loan proceeds are spent on qualified payroll costs, no amount will qualify for loan forgiveness. This “cliff effect” appears to be unintended, and these senators believe further legislation may be needed to clarify and resolve this drafting issue.
Rehiring Safe Harbor
Particularly in areas where stay-at-home orders and other safety precautions are still in place, the program requirement to rehire most of the employees laid off by June 30, 2020 was looking difficult. The PPPFA creates a safe harbor for the rehiring requirement for organizations that are unable to rehire an employee who was in place on or before Feb. 15, 2020, and can demonstrate it was unable to hire a similarly qualified employee on or before Dec. 31, 2020.
Unable to Return to Full Operations Safe Harbor
Loan recipients who cannot return to pre-Feb. 15, 2020 operations may also have some additional relief. The PPPFA waives the headcount requirement for organizations that can demonstrate they are unable to resume full operations as a result of guidance from a public health agency, including the Centers for Disease Control and Prevention, the Department of Health and Human Services, or the Occupational Safety and Health Administration.
Stay Tuned for More Information
There are some additional points of clarification expected from the SBA, which will likely continue to make compliance with the PPP requirements a challenge. For comments, questions or concerns about your PPP loan, please contact us or visit our COVID-19 Resource Center.
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