COVID-19 Update #11 - The PPP Loan Game Changer

The past two months have seen a flurry of activity as professionals and regulatory agencies interpreted all the aspects of the legislation passed to address various issues associated with the corona virus.  The blog has not attempted to address all the changes as we have waited to find some final settling of the ever-moving target of final implementation of the new rules.  One of the difficult areas has been the administration of the loans issued through the Paycheck Protection Program.  Much has been written and many webinars have been conducted to take apart and put back together all the nuances with this program.  This program has been the most public of the assistance programs.  From obtaining the loans, to keeping the loans (or maybe returning them), and now to the forgiveness aspects of the loan, administering these loans has been challenging.  With confusion shrouding the program, Congress enacted changes to assist in making the program more beneficial to recipients.  The Paycheck Protection Program Flexibility Act of 2020 was signed by President Trump on June 5th bringing some much-needed flexibility to the PPP.

Background

The PPP was originally authorized by the CARES, Act.  With initial funding quickly disbursed, additional funding was provided by Congress.  (Funding is still available, if your organization needs assistance.)  Most organizations have moved past obtaining the loans, and justifying the loans, and are now addressing the next step; applying for the loan forgiveness.  While there are various requirements, for most recipients, the funds available for forgiveness were originally required to be spent in the eight weeks following the funding of the loan.  Consternation set in as recipients realized they could not spend the funds in the requisite eight weeks due to a multitude of factors.  Significantly, the ongoing restrictions on business’s operations revealed problems with the PPP as originally implemented. 

Paycheck Protection Program Flexibility Act of 2020

Enacted to address several growing concerns with implementing the original legislation, the extension act provides for greater flexibility in gaining forgiveness of the loan funds.  The PPP Flexibility Act makes these changes:

•          Extension of time to use the funds – Originally, set at eight weeks, the time to use the funds has now been extended by changing the definition of the term “covered period” to the earlier of twenty-four weeks from the loan funding or December 31, 2020.  This provision triples the period to assist organizations that may have been closed or restricted in operations during the first weeks after receiving the funds.  Recipients may still elect the eight-week period, if this time-period better suits operations.
•          Establishes a set allocation usage of funds – Forgiveness may occur when the funds are used in the “covered period” for payroll costs and certain overhead costs.  While original legislation did not determine a percentage between the two areas, the SBA had announced that at least 75% of the funds had to be used on payroll costs.  The legislation establishes an allowable 60/40 split on the fund’s usage.  This provision accomplishes the goal of clearly stating that no more than 40% of the funds can be used on the overhead items, i.e., rent, utilities, transportation, mortgage interest.  (The legislation also indicates that 60% of the funds must be spent on payroll costs or none of the funds are forgiven.  However, some commentators believe this is a drafting error and will be corrected to allow for partial forgiveness.)
•          Workforce reestablishment – The original program required a return to “normal” of the number of full-time equivalent employees employed at February 15^th by June 30th.  With extended closures and other operational limitations, the June 30^th deadline has now been moved to December 31, 2020.   And some considerations are provided for this requirement if reemployment is restricted or limited due to ongoing government guidance and restrictions. 
•          Extension of repayment period – While the loans were originally granted with a two-year repayment arrangement, the period has been legislatively established at five years for any portion of the loan that cannot be forgiven.
•          Delay in employer tax deposits – A provision of the CARES, Act allows employers to delay depositing or paying the employer portion of the Social Security and Medicare taxes.  Originally prohibited from taking advantage of this relief provision, PPP recipients may now delay depositing the employer-portion of these taxes.  See this blog’s post for COVID-19 Update #9 published in April.  

Time to Apply

As many approached the conclusion of the initial eight-week "covered period", plans commenced to complete the application requesting loan forgiveness.  The SBA's original loan forgiveness application was not for the faint of heart.  With the legislative changes, the SBA should issue a new loan forgiveness application.  Professional assistance may be required to complete the application.  Forgiveness must be requested within ten months of the end of the recipient's "covered period".  For most recipients, this will be ten month following the twenty-four-week period after the loan's funding.  However, some organization may elect the eight-week covered period after reviewing various business considerations. 

Summary

Navigating the PPP process has been challenging since its inception, but the funds have provided significant financial resources to many nonprofit organizations and churches. To successfully navigate this final phase of the program, recipients will want to monitor upcoming guidance from the SBA and may need to consult with their outside professionals to gain maximum benefit from the program.  For those organization determining they could not spend all of the money prior to the end of eight weeks, the new legislation provides a sigh of relief during these turbulent times.