Update: More Flexibility for PPP Loans

Posted By Mike Meyer, Monday, June 22, 2020

sba loan form

By Patrick O'Brien, JD, legal coordinator, American Med Spa Association

Earlier this month, Congress passed a new law, called the Paycheck Protection Program Flexibility Act, that is aimed at making it easier for borrowers to have their Paycheck Protection Program (PPP) loans forgiven. This past week, the U.S. Small Business Administration (SBA) and Department of the Treasury released amended rules and updated forms that reflect those changes. As we have covered in the past (see here), this program has already gone through constant refinement. The best place to keep up with the developments and see the latest documents on the PPP is at the Treasury's Coronavirus Aid, Relief and Economic Security (CARES) Act webpage (see here).

We have covered details of the original PPP loans in webinars and articles, available here. This new law leaves the basic structure of the program but makes some critical changes that make these loans much easier to use. Originally, the PPP loans were issued in an amount equal to 2.5 months of a business's average payroll expenses with a two-year term at 1% interest. Under the new law for all loans issued after June 5 (the effective date), the maturity is now five years; borrowers who have obtained loans before the June 5 can have their loans extended to five years by mutual agreement.

The primary attraction of the PPP loans is that money spent on payroll and other approved expenses during the first eight weeks is eligible to be forgiven. This window was found to be much too restrictive for many businesses who are still either wholly or partially shut down. The new law extends this forgiveness window to 24 weeks or December 31, whichever is earlier; borrowers for loans issued before June 5 can still choose to stay with the eight-week period. This extension has the side effect of also increasing the total amounts that can be paid to employees over the period; this was previously limited to $100,000 protracted for eight weeks. Of note, however, the limits on ownership compensation were only raised to 2.5 months total. Previously, in order to qualify for forgiveness, the rules required that 75% of loan funds go to payroll expenses. The Flexibility Act lowers this to 60%, allowing far more of the loan funds to go towards eligible interest, rent and utilities. Altogether, this should make it easier for business owners to spend these funds on expenses that allow maximum forgiveness.

The PPP does reduce the eligible forgiveness amount if employee wages are reduced below 25% or the number of full-time employees (FTEs) is reduced compared to a pre-pandemic measurement period. These two reductions remain, but the FTE reduction amount now has two safe harbors—one modified from the original law and one new one. The original safe harbor would allow businesses to ignore the staffing level reductions between February and April of this year if they hired back the employees by June 30; the new law extends that date to December 31, giving borrowers the rest of the year to get back to full strength. The new safe harbor allows the FTE reductions to be ignored if the business was not able to operate at full capacity due to guidance or requirements from the Centers for Disease Control and Prevention, Occupational Safety and Health Administration, or Department of Health and Human Services related to COVID-19. This safe harbor will likely apply to many businesses, so it will provide significant flexibility for applying for loan forgiveness.

And finally, the forgiveness applications have been overhauled. The original version was updated to reflect changes in the Flexibility Act, but a new "EZ" version also was released. The EZ version is 2.5 pages total, versus the original's seven pages. Like most tax forms, it also comes with multi-page instruction sheets to aid in filling it out. The EZ form is available for self-employed borrowers or those who did not decrease employee wage levels or FTE levels (or qualify for the safe harbor exception). As we'e discussed in the past, this forgiveness application also requires the borrower to supply supporting documentation. So, it is imperative that borrowers keep good records on how they use these loan funds.

Please join us on Monday, June 22, at 2 pm Central for a webinar where we will be discussing many of these changes and how they will affect you. AmSpa will endeavor to keep you updated on developments for this and other programs.

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