During this time of unprecedented economic challenges faced by small businesses during COVID-19, rare glimpses of bipartisanship are encountered to assist small business with economic relief. Due to the economic challenges faced by small businesses the economic relief provided is in a constant state of fluidity. This has been the status quo for the Paycheck Protection Program (PPP). The President signed into law the Paycheck Protection Program Flexibility Act (PPPFA) to address the concerns voiced by the small businesses utilizing the program. The Congressional intent of the new law is to allow greater flexibility for business to use the PPP loans that was not provided by the initial short-term fix of the PPP set up under the CARES Act. This new law provides the following expansions and flexibility to address the issues created by the CARES Act – PPP, that was a band aid and not a comprehensive bandage when it was enacted.
Deadline to Rehire Workers Extended
Under the PPP, small businesses had to rehire workers by June 30, 2020 to be able to count the salaries of the employees towards loan forgiveness. This created concern due to the overwhelming impact on the economy and shutdowns caused by COVID-19 preventing businesses from reopening by the June deadline. The new law expanded that deadline and now businesses have until December 31, 2020 to rehire workers and have the salary count towards loan forgiveness. The way salaries are calculated towards loan forgiveness was not changed.
Rehire Requirements Modified
Under the PPP, the business had to rehire the same number of full-time equivalent employees. However, an exception would be made if an employer could show in writing an attempt to rehire a worker and the offer was rejected by that worker. The new law modifies this requirement. The PPPFA states that the following will apply without considering a proportional rehiring of full-time equivalent employees if the employer can document in “good faith”:
- Inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and
- Inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
- Is able to document an inability to re-turn to the same level of business activity as such business was 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.
The new law is unclear on the documentation standard but employers will need to maintain documentation on the hiring efforts through December 31, 2020.
Amount of Loan to Spend on Payroll
The new law addressed the concern of small business that they had to spend 75% of the loan towards payroll. The law now allows small business owners to spend 40% of the loan on other expenses and 60% of the loan towards payroll. The list of eligible expenses was not changed and still include mortgage payments, rent, interest on loans and utilities.
In a joint statement, Treasury Secretary Steven T. Mnuchin and SBA Administrator Jovita Carranza, expanded on the 60% spending of the loan towards payroll to allow a borrower to apply for partial loan forgiveness if they do not use all of the 60% of the loan allotted for payroll. On June 11, 2020 the SBA released interim final rule #17 adopting the changes made by the PPPFA. Within the interim final rule, the SBA reiterates congressional intent and that loan forgiveness of the 60% requirement will be proportionately adjusted for loan forgiveness. This takes away the all or nothing barrier requirement and provides proportional relief to struggling businesses.
Extension of Time to Use the Funds
The PPPFA extends the amount of time that the business must spend the loan funds. The PPP originally allowed 8 weeks but under the PPPFA the time has been extended to 24 weeks. This allows businesses the flexibility to spend the funds by December 31, 2020 for borrowers that received the loan funds prior to June 5, 2020. This alleviates the pressure to spend the funds when perhaps the business should be conserving funds. Again, the funds will still have to be spent on eligible expenses. This extension of time does not prevent the business for applying for loan forgiveness – the business can apply for loan forgiveness after 8 weeks and does not have to wait 24 weeks. Borrowers that received the loan on or after June 5, 2020 only have the 24-week option.
Repayment Term Extended to Loan On or Before June 5, 2020
The PPPFA extends the repayment term for the loan from two years to five years in the event that positions of the loan are not forgiven for loans made June 5, 2020 and after. Additionally, the first loan payment will be deferred for six months after the SBA decides on the loan forgiveness. Loans made prior to June 5, 2020 will still be restricted to the two-year repayment term. The PPPFA also added the CARES Act provision for the ability to defer payment of employer payroll taxes for Social Security.
On June 11, the SBA issued a new form for the PPP loans incorporating the PPPFA changes and the interim final rule #17. As is evident by this new law there is a constant state of flux to address the ever-changing economic landscape caused by COVID-19. As this new law addresses some concerns of small businesses it does not address all concerns. So, stay tuned.
Consult a tax specialist if you have additional questions or need clarification with the coronavirus incentive packages.