Paycheck Protection Program Flexibility Act: Forgiveness Relief

Last week Congress passed H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020 (PFA), significantly amending certain provisions in the Paycheck Protection Program (PPP) relating to a borrower’s loan forgiveness relief requirements. The President subsequently signed the PFA legislation into law which provides PPP borrowers with the following favorable modifications that should enable more, if not all, of their PPP debt to be fully forgiven:

  • Extension of Availability of PPP Funding: The PFA amended the CARES Act to extend the “covered period” for availability of PPP loans until December 31, 2020. With billions of dollars still available, eligible employers that have not already received PPP proceeds are encouraged to seize this opportunity to contact their bank and begin the application process.
  • Extension of Period to Spend PPP Proceeds: The original CARES Act provisions allowed employers up to 8 weeks from the date they received the PPP proceeds to incur costs that are eligible for forgiveness. The PFA now extends that period to 24 weeks (from the date PPP proceeds received) or December 31, 2020, whichever is earlier.
    • This is a significant change and should provide employers with a greater opportunity to receive full forgiveness of their PPP loan since the period for incurring eligible costs has now tripled.
    • For employers that may have already reached the end of their original 8-week covered period and spent all of their PPP funds, they are given the option to elect an 8-week period and apply for forgiveness now instead of waiting 24 weeks before they can apply.
  • Timeline for Forgiveness Application: The PFA also specifies that PPP recipients have up to 10 months from the last day of their covered period (8 or 24 weeks) to apply for forgiveness. In the absence of such timely application, the PPP loan will begin to amortize and become payable.
  • Increase in Percentage of Non-Payroll Costs: The SBA originally issued guidelines limiting non-payroll costs (i.e. mortgage interest, utilities, rents) to a maximum of 25% of the total PPP funding.  The PFA has now increased the maximum threshold to 40%. While this change is a welcome relief for many employers whose payroll costs did not reach a 75% threshold, thereby resulting in some portion of their PPP loan not being forgiven, the language of the PFA legislation has produced a potential issue for employers that do not spend at least 60% on payroll costs.
    • The PFA states that to receive loan forgiveness under the program, the eligible recipient shall use at least 60% of the covered loan for payroll costs. Such language suggests that if an employer doesn’t spend at least 60% of the PPP loan on payroll related costs, NONE of the loan will be eligible for forgiveness. This is a change from the earlier approach which would have permitted a proportionate forgiveness amount based on the ratio of payroll costs incurred, and some members of Congress have already indicated that this was not the intent (all or nothing) and have asked the SBA to correct it thru additional guidance.
  • Extension of Cure Period for Reductions in FTE’s or Wages: As originally enacted, the PPP rules called for a clawback/reduction in the amount of forgiveness a borrower could receive where they had either reduced their FTE’s during the 8-week covered period from one of several threshold levels or where the they reduced wages of certain employees by more than 25% during the 8-week covered period compared to wages in the 1st quarter of 2020. Borrowers were able to cure either or both of these forgiveness reductions if they restored FTE or salary levels by June 30, 2020. Under the PFA, borrowers will now have until December 31, 2020 to restore FTE’s or reduced wages. 
  • Additional Exemptions from Forgiveness Reduction: The requirement to reduce the forgiveness amounts relating to the level of FTE’s at certain threshold dates, as discussed above, is now subject to two additional exemptions as follows:
    • The borrower is able to document, in good faith, their inability to rehire the same or similarly qualified employees that were in place as of February 15th, 2020,  for unfilled positions, on or before December 31, 2020; OR
    • The borrower is able to document an inability to return to the same level of business activity that existed before February 15, 2020, due to compliance with requirements established by various governmental agencies (i.e. HHS, CDC). This means that for any businesses that are unable to fully open due to government restrictions as of December 31, 2020, any reductions in the number of FTE’s caused by such limitations.
  • Deferral of Employer’s Portion of FICA: The original CARES Act provided employers with another employee related incentive to defer the employer portion (6.2%) of FICA taxes until 2021 and 2022 (50/50%) but only where the borrower had not received loan forgiveness under the PPP program. The PFA amended this limitation and now permits employers that receive forgiveness to still be able to defer their employer portion of FICA taxes until 2021 and 2022.
  • Extension of PPP Loan Period: The PFA extends the PPP loan term for all new loans granted after the PFA is enacted from 2 years to 5 years. Although this extension is not mandated for PPP loans already in existence, it does permit the parties to mutually agree to extend the loan to 5 years.

Unfortunately, the new legislation did not address the nondeductibility of expenses funded with forgiven loan proceeds as set forth in IRS Notice 2020-32.  This Notice states that no deduction will be allowed for an expense that would otherwise be deductible by a small business if the payment of such expense results in forgiveness under the provisions of the Paycheck Protection Program (PPP) of the CARES Act, and the income associated with the forgiveness is excluded from gross income (See previous Alert on Nondeductibility of Expenses Funded with PPP Loan Proceeds).

As was the case in previous CARES Act and PPP legislation and guidance, several questions remain regarding the changes put forth under the PFA and the impact they will have on a borrower’s PPP forgiveness computations. More guidance from the SBA is expected. 

Members of the DUGGAN BERTSCH team are available to assist small business employers in determining the impact of these changes in computing the employer’s total loan forgiveness. Please contact your DUGGAN BERTSCH representative for more information or assistance.

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