How The Payroll Protection Flexibility Act Affects Entrepreneurs

The Payroll Protection Program (PPP) continues to evolve. The Paycheck Protection Program Flexibility Act (PPPFA) was passed nearly unanimously by both houses of Congress and signed into law on Friday, June 5th. On Monday, June 8th, Treasury Secretary Steven T. Mnuchin and SBA Administrator Jovita Carranza released a joint statement on the implementation of PPPFA and both testified in front of Congress on Wednesday, June 10^th.

This new legislation and statements support entrepreneurs by reducing restrictions on how PPP money can be spent and increasing the timeframe to spend the loan. 

So, what are the relevant details for entrepreneurs?

60/40 Rule

Historically, the 75/25 Rule required entrepreneurs to spend at least 75 percent of the PPP loan on payroll costs in order to receive loan forgiveness. The PPPFA also makes it easier for entrepreneurs to qualify for loan forgiveness by reducing the percentage of the PPP loan proceeds that must be spent on payroll costs from 75 percent to 60 percent. Now, if entrepreneurs spend at least 60 percent of PPP on payroll expenses, they can spend up to 40 percent on authorized non-payroll costs and still receive full forgiveness.

According to Monday’s joint statement, if entrepreneurs use less than 60 percent of the loan amount for payroll costs during the forgiveness-covered period, they will continue to be eligible for partial loan forgiveness.

The PPPFA does not change authorized payroll and non-payroll costs.

Payroll costs include:

• Salary, wages, commissions or[1]  tips (capped at $100,000 on an annualized basis for each employee);
• State and local taxes assessed on compensation;
• Costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums.

Other non-payroll costs include:

• Payments of interest (but not payments of principal) on any mortgage obligation;
• Rent (including rent under a lease agreement);
• Utilities; or
• Interest (but not principle) on any other debt incurred before February 15, 2020.

Extension of “Covered Period” from 8 to 24 Weeks

The original PPP loan program and loan forgiveness rules required the entrepreneur to spend PPP funds during an eight-week “covered period” beginning on the date of loan disbursement. The PPPFA extends the covered period for loan forgiveness from eight weeks to 24 weeks, providing substantially greater flexibility for borrowers to qualify for loan forgiveness. This is particularly helpful for entrepreneurs in hospitality and retail as many of their business are still shuttered due to the COVID-19 lockdown.

One thing to keep in mind is that entrepreneurs who elect the new longer 24-week covered period may be required to maintain employment levels and salary and wage levels through this longer covered period. Entrepreneurs who have already received PPP loans may opt to use the original eight-week covered period.

Extension of Rehiring Window

A key objective of the PPP was to keep as many employees on payroll as possible. To that end, the PPP required that if an entrepreneur received PPP funding and reduced the number of employees during the covered period, then the amount that would be eligible for forgiveness would be reduced proportionally. However, the PPP allowed full forgiveness if entrepreneurs re-hired those employees by June 30, 2020. The PPPFA extends the deadline for rehiring and restoring wages and salaries from June 30, 2020 to December 31, 2020.

In addition, the PPFA adds two new exemptions. PPPFA allows borrowers to treat unfilled positions as if they were filled by the new December 31, 2020 deadline. The entrepreneur should in good faith establish and document:

1. An inability to rehire the same or similar employees that were in place as of February 15, 2020.
2. An inability to return to the same level of business activity before February 15, 2020, due to COVID-related social distancing, sanitation, and other safety requirements or guidance from the Centers for Disease Control, Health and Human Services, or Occupational Safety and Health Administration issued between March 1, 2020, and December 31, 2020.

Extension of Forgiveness Application Window

The PPPFA now allows an entrepreneur to apply for forgiveness up to 10 months after the covered period concludes. If the entrepreneur fails to apply for forgiveness before the end of the 10-month loan forgiveness application deadline, the borrower will be required to make payments of principal, interest and fees on the full amount of the PPP loan.

Extension of Loan Repayment Start Date

The PPPFA establishes the start date for payments on any remaining PPP loan amount until after any loan forgiveness is remitted by the SBA to the lender. This allows the entrepreneur to go through the entire forgiveness application process before starting repayment on the PPP loan. However, if an entrepreneur fails to apply for forgiveness within a 10-month window, then the start date for payments will commence on that date.

Extension of Maturity Date

Initially, the term of a PPP loan was two years. The PPPFA extends the minimum maturity date on new PPP loans originated on or after June 5, 2020 to five years. Though the PPPFA does not automatically extend the term of PPP loans originated before enactment of the PPPFA, it explicitly empowers lenders and borrowers to modify the maturity terms of existing PPP loans consistent with the PPPFA. Entrepreneurs with PPP loans funded before enactment of the PPPFA should consider contacting their lenders to discuss a potential extension of the maturity date of their PPP loan if they do not receive full forgiveness.