Paycheck Protection Program

As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.

On June 30, the deadline to apply for loans under the Paycheck Protection Program (PPP), part of the CARES Act designed to help small businesses weather the COVID-19 pandemic, came and went. (The Senate and House have passed a bill that would extend that deadline to Aug. 8. But at the time of this writing, it remains to be seen whether President Trump will sign it into law.)

However, with the passing of the Paycheck Protection Program Flexibility Act (PPPFA), lots of small business owners are still wondering how they might be able to meet the payroll expenses and full-time employee requirements that are mandated by the Small Business Administration (SBA) and U.S. Treasury Department in order to have their loans forgiven.

By meeting the government’s specific set of guidelines, participating small business owners participating in the coronavirus aid loan program—who have received an average of $114,000 in funding—won’t be required to repay their loan’s principal or accrued interest.

What is the Paycheck Protection Program Flexibility Act of 2020?

The PPPFA gives the more than 4.8 million small business owners who secured upwards of $521 billion in relief funds through the PPP more time to spend proceeds from their loans, more flexibility with how those funds can be used, and more time to qualify for loan forgiveness.

A longer “covered period”

With the passage of the PPP, borrowers initially had eight weeks to spend the money they received under the program. This time span is called the “covered period.”

The PPPFA extends the covered period timeline to 24 weeks, with Dec. 31, 2020 serving as the cutoff date. Once the covered period passes, businesses will either have their loans forgiven if they’ve met the government’s requirements, or they’ll have to start repaying the loan, with a 1 percent interest rate.

More flexibility with payroll costs

While the PPP called for 75 percent of loan proceeds to be spent on payroll costs, the PPPFA reduces that obligation to 60 percent. This revision came in response to business owners’ complaints that their payroll costs had decreased in the coronavirus era while fixed costs—like utility payments, rent, mortgage interest, and supplies—stayed the same.

There is one caveat here, though, and it’s a big one: Under the PPP, businesses that didn’t meet the 75 percent payroll costs milestone would see their loan forgiveness reduced in proportion to how far off they were from that figure.

The PPPFA eliminates that provision altogether. Businesses that fail to meet the 60 percent threshold won’t be eligible for loan forgiveness, period.

How do small businesses qualify for loan forgiveness under the PPPFA?

Under the PPPFA, borrowers can begin applying for loan forgiveness after eight or 24 weeks from the start of their covered period, depending on when they got their loan amount. Borrowers must initiate the process by submitting a forgiveness application; otherwise, the loan becomes a liability that can’t be discharged. After receiving a loan forgiveness application from a borrower, lenders need to submit a decision to the SBA within 60 days.

To qualify for forgiveness, small business owners need to prove that 60 percent of the funds are spent on payroll, which includes salary, wages, commissions, bonuses, and hazard pay, and retirement, healthcare, and other benefits. The expenses must be paid or incurred during the covered period, which either starts on the first day the funds are received or the beginning of the first payroll cycle after the funds are received, depending on what the business owner chooses.

As for the other 40 percent of the loan? Those funds can be spent on certain non-payroll costs, like business mortgage interest, recurring operating expenses (e.g., rent and utility payments), and personal protective equipment (PPE).

If the business in question received an Economic Injury Disaster Loan (EIDL) advance, those funds can be deducted from the calculus, too.

How can businesses get partial loan forgiveness?

Failure to spend at least 60 percent of loan funds on payroll costs will automatically disqualify businesses from loan forgiveness. But businesses may qualify for partial loan forgiveness should they find themselves in either of the following circumstances.

1. Reductions in full-time equivalent employees

Some businesses have no choice but to reduce the number of full-time equivalent (FTE) employees during the covered period compared to the pre-COVID reference period (e.g., January 2020).

For example, some restaurants have been able to successfully pivot to curbside dining, delivery, and take out in certain parts of the country. Still, restaurants are seeing fewer customers than they were pre-COVID, which means that they might not need as many employees as they did when people were eating out more frequently.

In fact, FTE reduction might be the only way they can stay afloat. If a restaurant that received PPP funding had 20 employees before the coronavirus shut everything down and are now operating with a staff of 15, loan forgiveness might drop 25 percent.

There are some exemptions here, which we will touch upon in a little bit.

2. Wage reductions

Similarly, a number of businesses needed to cut wages in order to get through this turbulent period. When revenue isn’t coming in steadily, many companies might not have enough cash reserves to maintain the status quo until business returns to normal.

If you have secured PPP funding and reduce the pay of workers who make less than $100,000 more than 25 percent, your loan forgiveness amount will be reduced in proportion to the pay cut.

For example, if an employee was making $100,000 pre-COVID and is now making $70,000, the loan forgiveness amount drops $5,000 (the difference between the 25 percent reduction that’s allowed and the 30 percent reduction that happened in this hypothetical scenario).

Just like the previous circumstance, there are some exemptions here, too. For example, businesses that are able to restore full wages by Dec. 31, 2020 will still be eligible for full loan forgiveness.

What are the three exemptions in the PPPFA?

There are a few scenarios where businesses may still be eligible for loan forgiveness even in the event that the above requirements aren’t met.

Exemption 1: Employee declines offer of being rehired or chooses to work fewer hours

Not every employee is going to be eager to return to work, and that’s perfectly understandable.

Under the PPPFA, employers who made good faith attempts to rehire workers or restore their hours that were rejected are still able to achieve loan forgiveness; they just need to have documented those offers. The math still stays the same. It’s just that the workers who turned down the offer are excluded from the calculation.

Exemption 2: Unable to hire a suitable replacement for the employee

Imagine a talented carpenter’s hours were cut down significantly or paused altogether during COVID-19, and that individual was offered a job elsewhere they accepted during that period. The previous employer is trying to find someone to replace this individual, but the skilled labor shortage is making that difficult.

In such a scenario, the business wouldn’t be on the hook for needing to hire an FTE replacement. In other words, if you need a master craftsman for the job and can’t find one, you don’t need to just hire a warm body to meet the loan forgiveness requirements.

Exemption 3: The business is not meeting the business activity of a pre-COVID reference period

This exemption is new with the PPPFA. Essentially, if businesses are unable to return to operation levels of Feb. 15, 2020, they will be exempt from having to comply with the loan forgiveness requirements.

There are still some gray areas when it comes to this exemption. For example, imagine a retailer has been able to open their store but customers are wary of shopping there due to concerns over the virus. Would this business owner be exempted from the loan forgiveness guidelines or would they be on the hook because they’re open for business? What happens if the business is a seasonal one—like an ice cream shop in a beach town?

It remains to be seen how business activity will be measured and by whom, but time will tell.

What happens when PPP loan forgiveness doesn’t apply?

Businesses that borrow funds under the PPPFA and either qualify for partial loan forgiveness or don’t qualify for loan forgiveness at all will end up with a five-year amortizing term loan with a 1 percent interest rate and a payment deferral period of six months. In the event a forgiveness application was submitted, the deferral period lasts until the SBA makes a decision on that application.

On the other hand, those who secured funding under the PPP but didn’t qualify for complete loan forgiveness end up with a two-year amortizing term loan. Interest rates and payment deferral stipulations remain the same. While PPP borrowers can request that their notes be converted into five-year loans, it is ultimately up to the lender to decide.

How can businesses pay back PPP loans?

Once the deferral period ends, businesses can repay their loans at any time. There aren’t any prepayment penalties, and interest only accrues up until the loan is fully paid off.

While it might be challenging for many businesses to pay off these loans quickly, the deferment of payroll taxes under the CARES Act might give some businesses access to the cash they need to remove PPP liabilities from their balance sheets.

What if a business can’t repay the full loan amount? The SBA has guaranteed lenders that the principal amount will be covered, while the lender may lose out on the 1 percent interest.

Using PPP and PPPFA funding to grow your business

While the original deadline for applying for coronavirus aid passed on June 30, it seems almost certain that President Trump will sign the bill passed by both chambers of Congress to reopen that deadline to Aug. 8.

If you’re a business owner who’s been affected by the COVID-19 pandemic, PPPFA funds can serve as a bridge that helps your company stay afloat until the coronavirus has finally come and gone. In many cases, you should be able to receive complete loan forgiveness, turning these funds from a liability to a grant. And even if you are not able to get your entire loan forgiven, you’re still able to borrow funds at a cool 1 percent.

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