On June 5, President Trump signed the PPP Flexibility Act. Since then, new regulations and application forms have been released to small businesses seeking financial relief in the midst of the coronavirus pandemic. It’s a wild ride for PPP borrowers and banks alike as they strive to keep pace with the many changes being implemented.
These changes may prove especially impactful to small business owners hit the hardest by COVID-19 economic shutdowns. Here’s what small businesses should know about the changes passed on June 5.
What Is the Paycheck Protection Program Flexibility Act of 2020?
The Paycheck Protection Program (PPP) Flexibility Act of 2020 was signed by President Trump to make significant changes to the PPP program. Many of those changes can be applied retroactively to the date of enactment of the CARES Act.
The 60% Rule
Most importantly, the PPP Flexibility Act states that borrowers must use approximately 60%, not the formerly stated 75%, of proceeds of the PPP loan for payroll costs to be eligible for loan forgiveness. The SBA and Treasury Department have clarified that threshold recently by explaining that it’s 60% “as a proportional limit on non-payroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness.”
For example, a borrower receives a $100,000 PPP loan and spends $54,000 on payroll costs. Since the borrower used less than 60% of its loan on payroll, the maximum amount of loan forgiveness that borrower is eligible to receive is $90,000. The $54,000 spent on payroll accounts for 60% of the $90,000 forgiven, with $36,000 in non-payroll costs constituting 40% of the forgiveness amount. The other $10,000 would be paid back to the federal government on specific repayment terms.
Extended Covered Period
Based on the PPP Flexibility Act, the “covered period” for a PPP loan extends from February 15, 2020 to December 31, 2020 instead of June 30, 2020. All PPP loans established on or after the enactment of the Flexibility Act have a minimum maturity of five years. All loans enacted before the Flexibility Act was signed on June 5 have a maturity of two years, though borrowers and lenders can mutually agree to extend to five years.
Longer Deferment Period
The original PPP program allowed an eight-week deferral period before borrowers needed to begin paying principal and interest on their loans. Now, the PPP Flexibility Act provides an extended 24-week period. Borrowers who begin their loans on or after June 5 automatically receive this 24-week deferment. Borrowers who began their loans before June 5 can elect to extend their deferments to 24 weeks.
Since the deferment period also defines the expenditure period that borrowers have to demonstrate their use of the loan, this change comes with pros and cons. The 24-week period benefits borrowers who are unable to satisfy the 60% rule within an 8-week period. On the other hand, the 8-week period is ideal for borrowers who can hit the 60% milestone within a short period of time, then apply for forgiveness and move forward conventionally.
Overall, the PPP Program is still a work in progress. While the most recent changes are designed to help small business owners succeed, the guidelines are often complex and require the support of a CPA or other trained financial expert.