This document was updated on June 9, 2020 to provide updated information based on the June 8, 2020 release of the Joint Statement by Treasury Secretary Steven T. Munchin and SBA Administrator Jovita Carranza Regarding the Enactment of the Paycheck Protection Program Flexibility Act.1
The information in this publication is provided only for educational purposes and to inform the reader of relevant topics. This is not to be perceived or utilized as formal tax or legal advice. It is up to the reader to seek the necessary and appropriate tax and legal professionals that specialize in these areas for specific guidance.
Paycheck Protection Program Flexibility Act of 2020
The President signed H.R. 7010 – Paycheck Protection Program Flexibility Act of 2020 on June 5. The Senate had passed H.R. 7010 – Paycheck Protection Program Flexibility Act of 2020 on June 4, 2020, and the House passed the bill on May 28, 2020. This bill makes a number of changes to the Paycheck Protection Program (PPP) by amending the Small Business Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act.2
An important note about this legislation is that it did not change the date a PPP loan can be approved. The deadline remains June 30, 2020.
Term of Loan Maturity. The term of the PPP loan will be a “minimum” of five years. This change amends the Small Business Act, 15 U.S.C. 636(a)(36).3 The PPP loan originally provided a two-year term, so this change provides an additional three years for loans that received a loan number on or after June 5, 2020. The term on PPP loans that received a loan number prior to June 5, 2020, will remain a 2-year term.
Coverage Period Extension. This act extends the coverage period from eight weeks to twenty-four weeks or December 31, 2020 (whichever occurs first).
Reduction of Forgiveness Based on Reduced Full-Time Equivalent Employees (FTE). The bill creates an exemption from a reduction in the forgiveness amount based on the reduction of FTEs of an employer as long as the employer can prove and document that (point 1 and 2 below have to both be met or only point 3 must be met):
- There was an inability to rehire individuals that were employees of the employer on February 15, 2020, AND
- The employer was unable to hire employees that were similarly qualified for those unfilled positions on or before December 31, 2020, OR
- The employer is able to document that the business was unable to return to the “same level of business activity” as it was operating prior to February 15, 2020, specifically due to compliance requirements as established or under the guidance of the Secretary of Health and Human Services (HHS), the Director of Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA) during the period from March 1, 2020 through December 31, 2020. These recommendations are specific to standards set for social distancing measures, sanitation, and for the safety of workers and customers. Business owners will need to watch for future guidance on the documentation that may be required to prove the business was unable to return to the same level of business activity that occurred prior to February 15, 2020.
Payroll versus Other Approved Expenses. The bill makes changes to the originally mandated PPP loan requirement that 75% of the PPP loan be used for payroll, and no more than 25% be used for other approved expenses. The Act changes the 75%/25% rule so that 60% of the PPP loan must be used for payroll to be eligible for full forgiveness while up to 40% can be used for other eligible expenses, including interest on mortgages, rent, and covered utility payments.
Those who have already received a PPP loan prior to this act may elect to utilize the original coverage period of eight weeks instead of the twenty-four weeks or December 31, 2020 rule. The act also made a change to the deferral period of six months. The act now allows for a deferral period of not more than one year for making payments of principal, interest, and fees from the date forgiveness is determined. PPP loan holders must work with their lenders to determine the deferment period as well as any possible changes that may affect the borrower.
Forgiveness Limitation of PPP Loan. A minimum of 60% of the PPP loan funds must be used for payroll purposes to receive full forgiveness of the PPP loan. Borrowers that use less than 60% of the loan for payroll purposes may be eligible for partial forgiveness of the loan.
Failure to Apply for Forgiveness
If a borrower of a PPP loan does not apply for forgiveness within ten months after the last day of the coverage period, the borrower will be required to begin making payments on principal, interest, and any fees. The act specifically states that the payments will begin “on the day that is not earlier than the date that is ten months after the last date of such covered period.”
With the passing of this act, a number of unknowns remain. Borrowers, lenders, and others will need to remain vigilant as guidance may be released from the Small Business Administration (SBA) and the US Department of the Treasury through FAQs and Interim Final Rules. Some of the pressing questions include but are not limited to
- Will the calculation to determine loan value change to use the twenty-four-weeks rule or remain with the eight-week rule?
- Does the compensation limitation per employee remain as it was originally developed for an eight-week coverage period and not the twenty-four-week period?
- Does the same limitation apply for the self-employed income compensation? (Originally, an eight-week time period was used to develop the maximum value, not the twenty-four-week time period.)
- Further details are needed for the safe harbor rule to minimize the reduction of loan forgiveness due to a reduced FTE employee count.
Additional resources and information on assistance programs related to COVID-19 can be found on the Clemson Cooperative Extension Agribusiness Program Team Resources for COVID-19 website.
The Clemson Agribusiness Center
Sandhill Research and Education Center
900 Clemson Road, Columbia, South Carolina 29229
- Joint Statement by Treasury Secretary Steven T. Munchin and SBA Administrator Jovita Carranza Regarding the Enactment of the Paycheck Protection Program Flexibility Act. https://home.treasury.gov/news/press-releases/sm1026.
- Paycheck Protection Program Flexibility Act of 2020, H.R. 7010, 116th Cong. (2020). https://www.congress.gov/bill/116th-congress/house-bill/7010/text.
- Small Business Act, Pub. L. No. 112-239, (2013). https://www.sba.gov/sites/default/files/Small%20Business%20Act_0.pdf.