Paycheck Protection Program Flexibility Act (PPPFA) changes the PPP

By June 4, 2020 June 25th, 2020 CARES Act
PPP loan forgiveness changes on the way as Congress passes bill

Published: June 4th, 2020 at 12:45 PM PST | Updated: June 12th, 2020 at 4:06 PM PST

On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act (PPPFA) into law. The move came after the U.S. Senate unanimously voted in favor of changes to the Paycheck Protection Program (PPP), allowing small businesses greater flexibility in using their PPP loan funds. The House previously passed the bill with a 417-1 vote.

The Act provides significant changes to the PPP, including (i) providing borrowers with an additional 16 weeks to use loan proceeds and qualify for forgiveness, (ii) increasing the limit on the amount of loan forgiveness that borrowers can attribute to nonpayroll costs to 40%, and (iii) extending the PPP minimum loan maturity from two years to five years for new PPP loans entered into after the passage of the PPPFA.

Even with the changes, PPP loan applications are still due June 30.

Key takeaways

The key points of the latest PPP legislation include:

  • The option for current PPP borrowers to extend the eight-week period to 24 weeks. New PPP borrowers will have until the earlier of (i) 24 weeks from receipt of the PPP loan proceeds, or (ii) December 31, 2020, to use the proceeds and qualify for forgiveness. This flexibility should make it easier for more borrowers to reach full, or almost full, forgiveness.
    • Borrowers with loans that originated prior to June 5, 2020, still have the option of electing an eight week covered period.
  • Under the language in the House bill, the payroll expenditure requirement drops to 60% (from 75%), meaning that the limit on the amount of loan forgiveness that can be attributable to nonpayroll expenditures (mortgage interest, rent, and utilities) increases to 40% (up from 25%).
    • On June 11, 2020, the SBA issued its first interim rule (INFR) under the PPPFA to conform prior INFRs issued under the CARES Act. It also clarifies a drafting error in the PPPFA which implied that using less than 60% of PPP funds for eligible payroll costs would render the entire loan amount ineligible for forgiveness. The INFR states that the 60% requirement is interpreted as a proportional limit on nonpayroll costs as a share of the loan forgiveness amount.
  • The bill extends the full time equivalent employee (FTEE) and salary/hourly wage safe harbors from June 30, 2020 to December 31, 2020.
  • Workforce reductions no longer necessarily result in a proportional reduction of loan forgiveness. An employer can be exempt from the associated loan forgiveness reduction if they can document in good faith:
    • An inability to a) rehire terminated employees, and b) hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
    • An inability to return to pre-COVID business levels due to compliance with public health and safety standards.
  • The deadline for borrowers to submit their PPP loan forgiveness applications (SBA Form 3508) is ten months after the last day of the Covered Period. If the borrower fails to apply for forgiveness by then, payment obligations for principal, interest, and fees start on that day.
  • New borrowers now have five years to repay the loan instead of two. Existing PPP loans can be extended up to 5 years if the lender and borrower agree. The interest rate remains at 1%.
  • Interest payment deferral on PPP loans is extended from six months to until the date that the lender receives the PPP forgiveness amount from the SBA.
  • Businesses that took a PPP loan can also delay payment of their payroll taxes, which the CARES Act previously prohibited.

→ View Now: Paycheck Protection Program Webinar Recording

The bill comes at a crucial time as the eight-week spending period began expiring last Friday, May 29, for the first loan recipients after the Small Business Administration (SBA) program opened April 3. Businesses, especially in the restaurant and hospitality industry, which are only recently getting the green light to reopen, say they need more time to distribute pay.

Small business advocates have hailed the passage of the bill as providing the needed flexibility to firms still struggling to emerge from coronavirus-related closings. Sean Kennedy, executive vice president of the National Restaurant Association, said in a statement that the passage is “a win for restaurants and small businesses across the country.”

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Important omissions from the bill

It is important to note that the latest legislation does not address the deductibility of expenses funded with forgiven loan proceeds. While the PPP has a debt forgiveness component, IRS Notice 2020-32 stipulates any expenses associated with the use of PPP loan proceeds subsequently forgiven are not deductible for federal income tax purposes. Despite numerous lawmakers’ bipartisan rebuke of this position, the Act does not overturn it and, as such, Notice 2020-32 remains in effect.

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Reminder: Paycheck Protection Program

Congress established the Paycheck Protection Program as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide much needed relief to small businesses impacted by the COVID-19 pandemic. The legislation authorized the Treasury to use the SBA’s 7(a) small business lending program to fund loans of up to $10 million per borrower to help qualifying businesses cover payroll, mortgage interest, rent, and utilities.

PPP funds are available to small businesses that were in operation on February 15, 2020 with 500 or fewer employees, including tax-exempt not-for-profits, veterans’ organizations, Tribal concerns, self-employed individuals, sole proprietorships, and independent contractors. Businesses with more than 500 employees also can apply for loans in certain situations.

The PPP launched on April 3, 2020 with $349 billion in funding, which quickly ran out in less than two weeks. Congress subsequently approved an additional $310 billion in funding on April 21.

As of June 3, the SBA reported that 4.5 million firms had received approvals for loans totaling $510.6 billion. About $130 billion remains from the second round of funding.

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How can Squar Milner help?

Since the announcement of the Paycheck Protection Program, Squar Milner has stepped up to help clients and business contacts obtain PPP loans and apply for loan forgiveness. We work strategically with borrowers to maximize their loan forgiveness amounts, and provide services to lenders as they evaluate loan forgiveness applications. To learn more about our PPP services, visit here or check out our PPP FAQ.

In addition, our PPP experts have held a number of webinars dedicated exclusively to PPP loans and forgiveness. You can access the previous webinars here or check out our other PPP and COVID-relief insights in the Squar Milner COVID-19 Resource Center.

Still have questions about how the Payment Protection Program applies to your specific business?

View Our PPP Services


Caroline Banzali
Partner, Tax Services

Pauline Dumas
Principal, Consulting Services

Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

Paycheck Protection Program Loan Forgiveness Series | Part III

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