Photo | Courtesy of blumshapiro
Alan Osmolowski
June 12, 2020
Advice
Flexibility added to Paycheck Protection Program
By Alan Osmolowski
In a rare display of bipartisanship on June 5, President Donald Trump signed into law the Paycheck Protection Program Flexibility Act, which makes some favorable modifications to the PPP loan program. These modifications will allow businesses more flexibility in using the loan funds and qualifying for forgiveness.
Some of the highlights of the bill’s modifications include:
- The repayment terms for amounts not forgiven. There is a minimum maturity of five years for a paycheck protection loan. The PPP Flexibility Act now allows recipients to defer payments until the date on which the amount of the forgiveness is determined and remitted to the lender. Recipients who do not apply for forgiveness shall have 10 months after the last day of the covered period before the first payment is required. Initially, the U.S. Small Business Administration provided for a two-year maturity term for the portion of a PPP loan that was not forgiven. This provision extends that period to five years, and the existing two-year term loans can be modified.
- Extension of covered period. The PPP Flexibility Act extends the covered period to 24 weeks (from eight weeks), during which a loan recipient may use the funds for certain expenses while remaining eligible for forgiveness. The statute also extends the covered period for purposes of attaining a loan until Dec. 31.
- Use of loan proceeds. With the changes, to receive loan forgiveness, an eligible recipient shall use at least 60% of the covered loan amount for payroll costs and may use 40% for the non-payroll portion (covered mortgage interest, covered rent and covered utilities) of a forgivable covered loan. That said, a technical correction or favorable SBA guidance will be needed to clarify that this provision does not create a cliff effect, where if a borrower fails to spend 60% on payroll costs, the entire loan will not be eligible for forgiveness. As currently drafted, the provision does appear to require 60% usage on payroll costs to receive any forgiveness.
- Loan forgiveness reduction relief. The PPP Flexibility Act extends the period to Dec. 31 in which an employer may rehire or eliminate a reduction in employment, salary or wages to otherwise reduce the forgivable amount of a paycheck protection loan. The forgivable amount will be determined without regard to a reduction in the number of employees if the recipient is unable to rehire former employees and is unable to hire similarly qualified employees, or unable to return to the same level of business activity due to compliance with federal requirements or guidance related to COVID-19.
- Payroll tax deferral. The new law amends the CARES Act to allow PPP borrowers (even those receiving forgiveness), to take advantage of the payroll tax deferral provisions. Under the CARES Act, PPP borrowers could only take advantage of the employer payroll tax deferral provision until they received notice of forgiveness. This provision allows PPP borrowers to take advantage of the deferral provision even after receiving forgiveness on their PPP loan.
Many loan forgiveness questions remain unanswered, and the passage of this bill adds to the list! The SBA needs to revise the Paycheck Protection Program Loan Forgiveness Application as well as issue interim final rules and frequently asked questions in response to this new legislation and clarify the myriad of open issues. Be sure to stay tuned for more updates forthcoming.
Alan Osmolowski is a tax partner with blumshapiro (www.blumshapiro.com) at 100 Front St. in Worcester, where he leads the firm’s technology and life sciences practice. He can be reached at aosmolowski@blumshapiro.com.
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