PPP Update: Funds Remain but Deadline Approaching Fast
Since the Paycheck Protection Program (PPP) was passed by Congress and signed into law by the president on March 27th, 2020, some 4.5 million in loans, totaling more than $510 billion dollars, have been awarded. As of the writing of this article on June 10, the PPP still has funds available for small businesses owners who have not yet applied and received a PPP loan.
Although many small businesses have received their loans and have started using them to the best of their abilities, there has been growing concern and opposition to some of the more stringent rules that limit the use of the loan. Receiving a loan that can pay eight weeks’ worth of payroll sounds really good when you get started. But what if you have no employees during those eight weeks, due to government shutdowns and economic downturns, or maybe you have employees that decline to come back to work? Maybe you received your loan back in April, but you do not need it until right now, when your business is getting started back up and employees are heading back into work.
On May 28, 2020, the House passed HR 7010, The Paycheck Protection Program Flexibility Act of 2020, which was unanimously passed by the Senate a few days later and signed by the president on June 5, 2020. The bill updates the original provisions under the CARES Act and addresses some further limitations that were later imposed by the Treasury.
For most small businesses, this update will be very positive. It adds an incredible amount of flexibility to the loan and addresses some major concerns shared by most small business owners.
So, what are these changes and how do they affect business owners that currently have their original PPP loans in place?
The eight-week covered forgiveness period has been extended to twenty-four weeks. This is an additional sixteen weeks that small businesses can use their PPP funds to pay for covered expenses. This is arguably the provision that will have the largest impact on small businesses with PPP loans. Many employers with PPP loans are closing in on the end of their eight-week period and still have unspent PPP proceeds. The start of their eight weeks may have been slow going. With businesses just beginning to open over the last few weeks, now is the critical time when the PPP will be needed. These additional sixteen weeks will provide small business owners with the flexibility they need to get employees back to work and use the PPP to cover the associated payroll cost.
One confusing contention about the modification from eight weeks to twenty-four is whether this means small businesses can apply for additional PPP funds, since the original award was for two-and-a-half times average payroll. Currently, that is not an option. The extension to twenty-four weeks simply gives enough flexibility in spending that business owners are almost assuredly going to exhaust the original proceeds as intended, without the mad rush to try and squeeze everything into eight weeks. However, if you think your original loan application may have been incorrectly calculated, you may work with your lender to modify your original loan and potentially get additional proceeds.
The second major change in the Flexibility Act is a modification to the Treasury-imposed requirement that PPP proceeds be used exclusively 75 percent for covered payroll costs and 25 percent (or less) for covered non-payroll costs. Although payroll cost may be the major driver for many small businesses, this strict requirement, which was not part of the original CARES Act, imposed some challenges for business owners that either had larger non-payroll costs or had such minimal active payroll costs due to COVID-19, that they were unable to comply with the 75/25 rule. The Flexibility Act decreased the 75/25 percentage requirement down to 60 percent covered payroll and 40 percent covered non-payroll cost.
In light of the extension to twenty-four weeks, complying with the previous 75/25 rule may have been achievable for most business; however, the relaxation of that rule will capture a greater cross-section of small business owners and still maintain the original intent of Congress for the PPP to primarily cover payroll cost.
The two changes above will immediately impact small businesses that already have PPP loans and, hopefully, also make the PPP a more desirable option for small business owners that have so far not applied for a PPP.
If the small business had a PPP loan before the Flexibility Act was passed, they may elect to follow the original eight-week covered period, rather than stretching out to the twenty-four weeks. There is a big difference between eight and twenty-four weeks, so business owners will need to think carefully about where they may be in twenty-four weeks. Larger fluctuations in both employee count and business activity can happen in twenty-four weeks that may not take place in the shorter eight-week covered period.
Other favorable changes for PPP recipients to look towards:
The two-year term has been amended to allow for a five-year loan term. This is much more favorable, as some business owners were hesitant to risk having such a short-term repayment that could potentially tie up a substantial amount of cash for repayment period of eight months. Stretching out the loan terms will allow for better cash flow management. Note that this change is applied on a go-forward basis only, for new PPP loans. Existing PPP loan recipients are still under the original two-year term, unless modified by mutual agreement with the existing lender.
The six-month deferral on repayment has been updated to instead defer repayment until the date on which the amount of forgiveness under the act has been determined and remitted to the lender. This change allows the loan recipient and bank to work through the forgiveness calculation, receive payment, and then amortize the remaining amount that will be repaid. One caveat is that repayment will begin ten months after the end of the covered period if the recipient fails to apply for forgiveness. This will ensure the process moves timely and banks can reasonably rely on a repayment period.
Calculations for the forgiveness based on headcount reductions have been amended, with additional exemptions for documented inability to rehire employees or the inability to return to the same level of business activity that existed before February 15, 2020, due to compliance with federal guidelines related to COVID, such as sanitation and social distancing mandates.
The Treasury is expected to update its existing guidance for the changes. The forgiveness application is likely to change, as are some of the previous calculations and limitations imposed under the various Interim Final Rules.
Some questions that still exist at this time:
- Will the interest rate on repayment, which is currently 1 percent, be updated now that new loans are no longer short-term?
- Will the limitations and caps on wages, including self-employed and owner-employees, be updated to capture twenty-four weeks of annualized wages?
- How are lenders to address existing promissory notes that lay out commitments that comply under the old rules?
The deadline to apply for a PPP remains June 30, 2020, which is fast approaching. If you have not applied and have been on the fence, now is the time.
The changes from the Flexibility Act are a win for most small businesses. Whether you already have a PPP or will be planning to apply for one now, the best course of action is to meet with your trusted advisor. A Certified Public Account is an excellent place to start. The rules for the PPP loan change weekly, almost daily sometimes, and often mid-stream. Your CPA or other trusted advisor can assist in keeping your small business updated with current guidance and navigating through the planning and forgiveness process.
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