This article was updated on June 3, 2020. Updates to this article will be made as new information becomes available.
Schneider Downs continues to track the evolving landscape of Federal financial programs offered due to the disruption caused by the coronavirus crisis (COVID-19). On June 3, 2020, the Senate passed a bill that makes many borrower-friendly changes to the popular Paycheck Protection Program (PPP). The bill will need to be signed by President Trump before taking effect.
Under the Paycheck Protection Program Flexibility Act, H.R. 7010, (Flexibility Act) the covered period of the borrower’s loan will be extended to the end of the earlier 24 weeks from the date of the loan origination or December 31, 2020. This is a welcome change for many borrowers whose organizations have been shut down due to state and local orders. Many others are just starting to open their doors, but will not be back up to pre-pandemic levels for some time.
The Flexibility Act does give borrowers that have received a PPP loan prior to the enactment of the Flexibility Act the option to elect an 8-week covered period, which is likely also beneficial to those businesses that are able to utilize all the loan proceeds within the covered period.
The Flexibility Act also provides relaxed rehire exemptions related to loan reductions if a borrower is unable to rehire individuals who were employed as of February 15, 2020, or unable to return to the same level of business activity due to compliance with requirements established by various governmental entities. Documentation of a borrower’s inability will be required.
The minimum maturity of the remaining loan portion has been extended to five (5) years from the earlier established term of two (2) years. The maximum term of ten (10) years under the CARES Act remains unchanged. Additionally, the deferral period of loan payments has been revised to be the earlier of the date on which the amount of loan forgiveness is determined and remitted to the lender [from the SBA] or ten (10) months following the end of the covered period.
Another borrower-friendly provision of the Flexibility Act, that isn’t directly related to the PPP loan, is that the Flexibility Act repeals the portion of the CARES Act that disallowed a borrower receiving forgiveness of a PPP loan the ability to defer certain federal payroll tax. This will allow for a payroll tax deferral for all businesses even if the PPP loan is forgiven.
One area potentially not friendly to borrowers is the wording of the relaxing of the payroll and non-payroll limitation. The Flexibly Act revises that limitation; however, the wording states that to be eligible for forgiveness, the borrower shall incur at least 60% of the covered loan amount for payroll costs. This wording may result in a reduction of loan forgiveness if the SBA were to literally interpret the law as only allowing for forgiveness if the borrower meets the 60%/40% requirement. We will continue to monitor this provision and interpretations.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.