PPP Flexibility Act – Congress Passes Changes to PPP Loan Forgiveness

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The PPP Flexibility Act passed both the House and the Senate Wednesday and is expected to be signed by the President Thursday.  The Act provides additional relief to business that may not have qualified for full forgiveness under the current law.  Here is a summary of the changes to PPP loan forgiveness.

Extension of 2-year repayment period to 5 years.  PPP loans made on or after the date of enactment of the PPP Flexibility Act will have a minimum repayment period of 5 years, as opposed to the 2 years currently established by the SBA.  The law also gives borrowers and lenders the ability to extend the minimum repayment period on existing PPP loans from 2 years to 5 years, only if mutually agreed upon by both parties.

Extension of covered period.  The covered period for PPP loans has been modified.  The covered period was an 8-week period beginning on the date of the origination of the loan (the day you received the loan proceeds).  The covered period for PPP loans now begins on the date you receive the loan proceeds and ends the earlier of 24 weeks later, or December 31, 2020. This means that loan recipients now have up to 24 weeks to maximize their payroll costs and other forgivable costs and meet the full-time equivalent requirement in order to maximize loan forgiveness.  The extension of the covered period is effective for all current and new PPP loans.  Loan recipients that received PPP money prior to the enactment of the Flexibility Act can elect to use the 8-week period instead of the 24-week period.

Change for exemption for re-hires.  Employers are subject to a reduction in loan forgiveness when their average full-time equivalents during the covered period is less than their average full-time equivalents during one of two base periods.  An exemption from this reduction is available if employers can demonstrate the following:

  1. They could not re-hire individuals who were employees on February 15, 2020 and they could not hire similarly qualified employees on or before December 31, 2020. (Think employers in the health industry)
  2. They could not restore business to the same level of business activity as they were operating on or before February 15, 2020, due to social distancing or other federal health guidance established by the CDC, OSHA, etc. (Think dance studios, camps, daycare, restaurants, etc.)

Limitation on forgiveness.  The CARES Act did not specify the amount that must be spent on payroll costs versus other forgivable costs.  The current 75% payroll cost calculation was established by the SBA.  The PPP Flexibility Act expressly states that an eligible recipient of a PPP loan shall use at least 60% of the covered loan amount for payroll costs and up to 40% of other forgivable costs (rent, utilities, interest on secured debt) to qualify for loan forgiveness. The use of the word “shall” is troubling and could indicate that a loan recipient MUST spend at least 60% of loan proceeds on payroll costs, or else have no forgiveness.   This doesn’t appear to be the intention of Congress and is widely interpreted that the 60% is not all or nothing, however, more guidance is needed.  The change to the limitation on forgiveness is effective for all current and new PPP loans.

Extension of the deferral period.  The SBA provided for a deferral period of 6 months for amounts not forgiven under the loan and which must be repaid.  The PPP Flexibility Act extends that time period to 1 year.

In addition, the PPP Flexibility Act provides that if a loan recipient fails to apply for loan forgiveness within 10 months after the last day of their covered period, their repayment period begins on the 10-month mark.  This is effective for all current and new PPP loans.

Payroll tax deferral.  The CARES Act provided for the deferral of the payment of the employer portion of social security tax on employee wages paid from the date of enactment through December 31, 2020. The deferred taxes are due 50% by December 31, 2021 and 50% by December 31, 2022.  Under the CARES Act, the option to defer payment of the employer portion of social security tax was not available to taxpayers who receive loan forgiveness under the PPP program.  The PPP Flexibility Act amends the CARES Act to remove this exception, allowing employers who receive loan forgiveness to defer payment of the employer’s portion of social security tax.  This deferral could add up to a larger amount than anticipated and taxpayers may have a problem paying the deferred taxes when due.  This is a decision that should be discussed with your tax advisor.

Is this the final guidance we will see on the Paycheck Protection Program? We doubt it! More guidance will certainly be needed.  If you have questions about PPP loan forgiveness, please call us at 215-497-8888 (leave a message), or email office@diamondcpas.com. Someone will get back to you as quickly as possible. We are here for you!

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