What Is the PPP Flexibility Act of 2020?
The Paycheck Protection Program Flexibility Act of 2020 (PPPFA), signed into law by former President Donald Trump on June 5, 2020, amends the Paycheck Protection Program (PPP) to give borrowers more freedom in how and when loan funds are spent while retaining the possibility of full forgiveness.
- The PPP Flexibility Act amends the Paycheck Protection Program to give borrowers more time to spend loan funds and still obtain forgiveness.
- Borrowers now have 24 weeks to spend loan proceeds, up from 8 weeks.
- The Act also reduces mandatory payroll spending from 75% to 60%.
- Two new exceptions let borrowers obtain full forgiveness even without fully restoring their workforce.
- Changes made by the PPPFA have been incorporated in new forgiveness applications released by the SBA.
- The time to pay off the loan has been extended to five years from the original two.
- The Act now lets businesses delay paying payroll taxes even if they took a PPP loan.
- In January 2021, the program was opened again for first-time loans and second-time loans.
Understanding the PPP Flexibility Act of 2020
Under previous PPP loan guidance, borrowers had eight weeks from the time they received the first loan installment to spend the funds. The PPP Flexibility Act of 2020 lets them extend that period to 24 weeks. They also have the option to keep the original eight-week spending period if they already had their loan before the enactment of the Act. Under the new timeline, full forgiveness is still possible.
The original PPP loan guidelines mandated that 75% of any forgiven amount had to be spent on payroll costs. The Flexibility Act reduces required payroll expenditures to 60% of the loan amount with up to 40% of the loan amount used for mortgage interest, rent, or utility payments to obtain full loan forgiveness of that amount. Or, part of the loan can be forgiven provided the borrower maintains the same 60/40 ratio for the amount forgiven. This change reflects complaints from many businesses that their payroll costs went down as employees were laid off but fixed costs like rent did not.
Borrowers were able to use the new 24-week period to restore their workforce to pre-COVID-19 levels in order to obtain full forgiveness. The deadline under the Flexibility Act to achieve this was Dec. 31, 2020, vs. the previous deadline of June 30, 2020.
In January 2021, the PPPFA was opened again, allowing businesses to take loans for the first time as well as a second draw for businesses that had previously taken a loan.
New Legislation Extends Previous Application Deadline
New legislation signed by Trump on July 4, 2020, extended the deadline to apply for a Paycheck Protection Program Loan through Aug. 8, 2020. The original application deadline was June 30, 2020. Under the reopening of the act in 2021, first- and second-time borrowers are allowed to apply for a loan until March 31, 2021, or until funds run out.
In January 2021, when Congress revived PPP funds as part of a $2.3 trillion Coronavirus relief package signed in December 2020, an additional $285 billion is now available for PPP loans, of which approximately $25 billion is being allocated to second-draw loans. When the first program expired in August 2020, Congress had approximately $130 billion left in unused funds.
Exceptions to Full Forgiveness Guidelines Contained in PPPFA
Two new exceptions let borrowers achieve full forgiveness even if they don't fully restore their workforce. These are in addition to previous guidance that let companies exclude workers who turned down good-faith offers of re-employment. Borrowers can now also reduce workforce requirements based on the inability to find qualified employees or if they were unable to restore operations to Feb. 15, 2020, levels due to COVID-19 restrictions.
Changes made by the PPPFA have been fully incorporated in new loan forgiveness applications posted on the SBA website.
Additional Provisions of PPPFA
The PPP loan repayment period has been extended to five years from the original two while retaining the original 1% interest rate. This gives borrowers more time to pay off the unforgiven portion of their loan.
The payment deferment period (principal, interest, fees) is now extended from six months after the end of the covered period to the date the SBA sends the borrower's loan forgiveness amount to the lender. If the borrower does not apply for forgiveness, the deferral period lasts until 10 months after the end of the covered period, according to guidance issued by the SBA on June 8, 2020.
Finally, the PPP Flexibility Act of 2020 lets businesses that took a PPP loan also delay paying their payroll taxes. This was not allowed under the original Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The second-draw loans for companies that have already taken the first-time loan must meet certain criteria. They must show that they employ less than 300 individuals, if they have used or will use the total amount of their first loan, and have lost 25% or more of their revenue for any quarter in 2020. Second-draw loans are also capped at $2 million, which is lower than the $10 million cap for first-time loans.
Further PPPFA Guidance
The SBA, in consultation with the Treasury Department, issued additional PPPFA guidance on Aug. 4, 2020, which sets the maximum amount of compensation that can be counted toward forgiveness for anyone with an ownership interest in an S corporation, C corporation, partnership, or sole proprietorship (Schedule C business) at the lesser of $20,833 or 2.5 months' worth of their 2019 compensation. This cap applies cumulatively to all companies that pay the owner/employee. The $20,833 cap applies to a "covered period" of 10.6 weeks or more. If the company elects an 8-week covered period, the cap will be the lesser of $15,385 or eight weeks' worth of 2019 compensation.
Additional highlights from the Aug. 4 guidance include the following:
- Health insurance and retirement plan costs are not included in the compensation calculation above.
- With regard to the loss of forgiveness for reducing an employee's wages by more than 25% a reduction in benefits would not be considered a reduction in wages. (This has now been altered with the new rounds in January 2021, which allow benefits to be included.)
- The cap on the forgivable owner/employee compensation does not include compensation paid to other family members, such as a spouse.
Reaction to the PPP Flexibility Act of 2020
The new PPP Flexibility Act has received a largely positive response from experts, mostly for the extended spending deadline and retooled payroll costs guidance, although the shift from "75% of the forgiven amount" to "60% of the total loan amount" has some worried that the new requirement will cause many businesses to obtain no forgiveness now where they would have obtained at least some in the past.
Amanda Ballantyne, executive director of The Main Street Alliance, called for additional support above and beyond what she refers to as a "first step in addressing the design flaws of the PPP." Noting that "Most small businesses have already spent their eight weeks of PPP funding," Ballantyne and the Alliance urge a "comprehensive longer-term solution that recognizes the financial crisis COVID-19 has created for small business and our entire economy."