Another week, another round of updates to the Paycheck Protection Program. This week’s revision comes in the form of an entirely new (albeit brief) piece of legislation called the Paycheck Protection Program Flexibility Act of 2020.
The Act is mostly good news for business owners. This post covers what you need to know about the changes, and what the current opportunities are.
The Paycheck Protection Program Flexibility Act of 2020
The Act itself isn’t a big piece of legislation. It’s only 3-4 pages long, compared to the 833 page CARES Act passed back in April. That being said, it does include some very helpful provisions for business owners.
The biggest revision has to do with the window in which you must spend PPP funds in order to receive forgiveness. That is a mouthful, so I’ll break down the forgiveness provisions step by step.
Eight Week Forgiveness Window
As you may remember, once you receive PPP funds the clock starts ticking. And from that date, anything you spend on payroll, rent, utilities, and a few other expenses in the 8 weeks after the funds hit your account could be eligible for forgiveness.
This presents a challenge to many businesses, particularly sole proprietors and 1099 independent contractors given the amount of the PPP loan itself. Since loans are based on 2.5 times your average monthly payroll (or self employment comp) from last year, many businesses would have struggled to use all the funds in only 8 weeks.
The PPP Flex Act extends this period from 8 to 24 weeks. So rather than being pushed to use the funds haphazardly, you can now take your time and be more responsible. And for many, it could mean reducing employee pay by 25% in order to stretch the funds further.
Covered Period Extension
Aside from the 8 week to 24 week forgiveness extension, the covered period formerly ending on 6/30/20 has been extended to 12/31/20. This is the drop dead date that all forgivable funds must be used by.
Effectively, this means that all businesses receiving PPP funds by 10/1/20 will have 24 full weeks to use them and their loans forgiven. This is another relief, as many businesses would have been hamstrung by the 6/30/20 deadline.
75% Payroll Requirement
Another provision of the PPP that’s relaxed from the bill is the payroll expense requirement. Formerly businesses had to use at least 75% of the funds toward payroll and related expenses, like retirement plan contributions and healthcare. The PPP Flex Act reduces this requirement to 60%, meaning that you may now use up to 40% toward non-payroll expenses like rent and utilities. Again, it gives businesses some helpful flexibility.
Payroll Tax Deferral
The paycheck protection program wasn’t the only provision in the CARES Act, of course. Businesses also had the opportunity to defer payroll taxes, with 50% not due until 12/31/21, and the other 50% due on 12/31/22.
The drawback was that the CARES Act prevented businesses from deferring payroll taxes AND obtaining PPP funds. It was one or the other. And after running through the exercise several times, it was almost always more beneficial for businesses to take the PPP funds. The PPP Flex Act relaxes this restriction. Businesses may now obtain PPP funds AND take advantage of the payroll tax deferral.
This will be very helpful to many cash strapped businesses. Remember that payroll taxes account for:
- 6.2% of w-2 compensation for Social Security, up to the wage base of $137,700 in 2020
- 1.45% of all w-2 compensation for Medicare
That’s 7.65% of your compensation paid up to $137,700 per person, and 1.45% beyond that. All of it may now be deferred for at least 18 months.
Logistically, it’s very likely your payroll provider already has a mechanism to help you defer the taxes. If cash is tight right now, I’d recommend exploring the idea.
Maturity Date Adjustment
Finally, the PPP Flex Act again adjusts the amortization period on loans that are not forgiven. Recall that the CARES Act initially set a maximum term of 10 years on all PPP loans, but didn’t give guidance on how it’d be rolled out in the banking system. Soon after, Treasury Secretary Mnuchin announced that all loans would have an amortization period of one year. (If the loan wasn’t forgiven that is, beginning six months after the loans were obtained). He then backtracked a few days later, announcing that all loans would be termed at two years instead of one.
The PPP Flex Act extends the amortization period on all loans, and defaults those that are not forgiven to five years. It affords flexibility as well, and states that terms may be negotiated beyond five years, to as much as ten.
For all intents and purposes, this is beneficial to businesses. It seems that more and more businesses are deciding not target forgiveness, as they plan to stretch the loan funds out for far longer than the first 8 weeks (now 24) after disbursement. Many will likely change course, though, given the 24 weeks window.
Regardless, the longer amortization period can really only be helpful to borrowers. Secretary Mnuchin can always come out and specify another maturity date. The difference is that this time it can’t be shorter than 5 years.
What This Means For You
As I’ve written and spoken about over the last few months, this is a pretty fluid situation. It’s challenging to plan too far ahead given the economic turmoil and the fact that the PPP is changing basically every week.
There are still funds available though. If you’re unsure whether you qualify, unsure whether you want to apply, or unsure what you need to do to have your PPP loan forgiven, now is the time to figure that out.
Here are a few helpful resources I’ve come across on the program:
- SBA Breakdown
- U.S. Treasury Overview (Including Updated Guidance)
- FAQs from Senate Committee on Small Biz & Entrepreneurship