Last night, the Senate unanimously passed the PPP Flexibility Bill which is now awaiting a signature from the President. These changes include:

1. Extension of the covered period to incur costs from 8 weeks to 24 weeks
2. Reduction in the portion of the loan used for payroll costs from 75% to 60%
3. Extension for the period of loan maturity from 2 years to a minimum of 5 years
4. More time until payments must be made if all or part of the loan is ineligible for forgiveness, and
5. Allows all borrowers to defer payroll taxes for wages paid between March 27, 2020 and December 31, 2020

Covered Period extended

The covered period is the period during which a borrower incurs costs that would allow loan forgiveness. Originally this was 8 weeks from the origination of the loan and due to end June 30, 2020, but the PPP Flexibility Bill allows the borrower to choose to extend the period to 24 weeks or until December 31, 2020. Furthermore, this extended period allows borrowers the opportunity to rehire or restore employee wages to qualify for loan forgiveness.

60% of Payroll Costs Requirement

Under the CARES Act, forgiveness required a 75% test. A borrower could achieve either total or partial loan forgiveness. Either payroll expenditures could be 75% of the total loan amount and the entire loan would be eligible for forgiveness, or payroll expenditures could be 75% of allowable costs with repayment of the ineligible portion if any. In other words, if you borrowed $50,000 you could spend $37,500 on payroll during the period and the entire loan would be forgiven. Alternatively, you could spend $27,000 on payroll and $23,000 on other allowed costs and the total amount that could be forgiven is $36,000. The remaining $14,000 would need to be paid back.

Now, the PPP Flexibility Bill has reduced the payroll expenditure test from 75% to 60% of the total loan amount. However, the major difference is that 60% of the total loan must be used for payroll. Using the example above, that would mean $30,000 would need to be spent on payroll during the period. Spending $27,000 on payroll would mean that the loan could not be forgiven.

What does this mean for borrowers?

There are two circumstances where all or part of the loan would need to be repaid. One is if the 60% test on payroll expenditures is not met for borrowers, then the loan must be repaid in entirety. The second is for whatever portion of the 40% of the loan that is not used on allowed expenditures. Originally, the loan was given a 2-year maturity date for amounts that were ineligible for forgiveness. Now that period has been extended to a minimum of 5 years. Furthermore, the loan interest and principal payments were allowed to be deferred for six months. Now the deferral for these payments is until the borrower has received some forgiveness compensation. If borrowers do not apply for forgiveness, they have 10 months from the end of the program to repay the loan. Finally, all borrowers are allowed to defer payroll taxes for wages between March 27, 2020 and December 31, 2020. These payroll taxes are allowed to be split and due December 31, 2021 and December 31, 2020.

Bill Text: https://www.congress.gov/bill/116th-congress/house-bill/7010

Stay tuned as the Paycheck Protection Program remains a fluid situation. These updates just reflect how it is today. Expect changes down the road, either from clarification from the Treasury, guidance from the SBA, or information from the IRS.