loan forgiveness

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.

The United States House of Representatives and Senate recently passed, and President Trump signed into law, the Paycheck Protection Program Flexibility Act (PPP Flexibility Act). It makes significant changes to the loan forgiveness requirements of the PPP.

Most people are aware that the PPP is a major economic stimulus program. It was passed as part of the CARES Act in response to the novel coronavirus pandemic and the slowdown in business activity that were a result of stay at home orders, lockdowns and other federal government restrictions on doing business.

The PPP provides small business owners with loans to help keep them afloat during the crisis, until reopening and a return to normal is possible. A significant portion — or all — of the loan money could be forgiven if it was spent on approved payroll and non-payroll expenses as outlined by the PPP legislation and specified by the Small Business Administration (SBA), the administrator of the program.

While most business owners found the loans attractive, they felt many of the forgiveness related limits placed on how the loan money could be spent — and the timeframe in which it was required to be used — too onerous.

Of course, mistakes were made in the original PPP COVID-19 recovery legislation. It was a short term solution to an immediate crisis. Federal government officials and public health experts were only learning about a new coronavirus outbreak that arrived in the United States from China, South Korea and Europe. New York and other coronavirus hot spots were being impacted in a big way. Business leaders and people in the federal government couldn’t know the near-term and ultimate business impact this public health threat could have on the United States.

The PPP Flexibility Act resolves many of the issues uncovered over the last few months with the PPP. It will help make it easier for PPP borrowers to get loans forgiven, and make it more attractive for owners to apply for loans, which they can do through the end of June 2020.

One key aspect of the PPP Flexibility Act many business owners are interested in is an exemption for businesses that can’t rehire employees or restore payroll because they’re unable to do the same level of business they did before COVID-19 crisis impacted their operations. The exemption is granted to companies that are unable to rehire full time employees or restore payroll because they can’t return business activity, including the level of foot traffic, sales or revenue, to where it was prior to February 15, 2020 because of COVID19-related operating restrictions.

Before we explain this exemption in greater detail, along with how to start planning now to take advantage of it, let’s look at what the Flexibility Act changes when it comes to PPP loan forgiveness.

Paycheck Protection Program Flexibility Act overview

Key changes to the PPP made by the Flexibility Act include:

  • Covered period. PPP loan borrowers can now choose to extend the original eight week loan forgiveness period to 24 weeks or maintain the original eight week forgiveness period. The loan forgiveness period is the amount of time business owners have to spend loan money as required by the PPP and amended by the Flexibility Act and SBA guidance. The longer time period should make it easier for borrowers to get more, or all, of their loan dollars forgiven.
  • Payroll expenditure percentage. The Flexibility Act drops the payroll expense requirement from 75 percent of loan expenses stipulated by the PPP to 60 percent. In other words, if borrowers don’t use at least 60 percent of the loan money on payroll related costs like wages, health care insurance premiums or retirement plan contributions, part or all of the loan may not be forgiven. (Look to the Small Business Administration for additional guidance on this.) This change gives borrowers additional money to spend on non-payroll expenses including things like mortgage interest, rent and utility costs. This will help them deal with critical cash flow and supply chain issues.
  • Employee rehiring date. Borrowers can strategically use the new 24 week loan forgiveness period to restore their full time workforce headcount and wages to the pre-COVID levels required for full forgiveness. It must be done by December 31, 2020, a significant extension from the previous June 30 deadline. This came in response to business owners not being able to restore their business operations by the original deadline to pre-COVID levels because of pandemic-related restrictions.
  • Loan maturity. Borrowers now have five years to repay unforgiven loan money instead of two. The interest rate remains at one percent and there is no penalty for prepayment.
  • Extended deferral period. Prior to the new act, payments of principal, interest and fees on PPP loans were deferred for six months from the date of the loan. The Flexibility Act extends the six month deferral period to the date on which the lender receives payment of the forgiven portion of the borrower’s loan from the SBA. At that time, the borrower is required to begin repaying any loan amount not forgiven. In addition, borrowers who do not apply for loan forgiveness within ten months of the last day of their covered period are required to begin making payments of principal, interest and fees on their PPP loan beginning ten months after their covered period ends. Borrowers should contact their lenders to find out how this change will impact them.
  • Payroll tax deferral. The PPP Flexibility Act allows businesses that take out a PPP loan to delay payment of their payroll taxes, which was not allowed under the CARES Act.
  • Exception based on employee availability. The new legislation allows borrowers to achieve full PPP loan forgiveness even if they do not fully restore their full time workforce or pay levels by December 31, 2020 (as amended by the PPP Flexibility Act) because they can’t find qualified employees or people willing to work in a place where they could be exposed to COVID-19 when doing their jobs.
  • Exception based on business operation limits. Finally, the PPP Flexibility Act lets borrowers claim full loan forgiveness even if they don‘t completely restore their total full time employee workforce or employee pay because they are unable to restore business operations to February 15, 2020 levels due to COVID-19 related operating restrictions.

More on the exception based on business operation limits

The original CARES Act required that borrowers restore full time employee headcount and payroll levels to where they were on February 15, 2020 by June 30, 2020. Otherwise, the loan money would not be forgiven, or forgiveness levels would be limited. The forgiveness relief limitation is based on a somewhat complex formula that compares the reduction in the average number of full-time equivalent employees during the covered loan forgiveness period to a previous reference period.

Congress took this step under guidance from the Treasury Department to ensure that employers maintain their total workforce in order to qualify for loan forgiveness. Preventing job losses was a critical reason for the original CARES Act Paycheck Protection Program.

However, this requirement is proving to be particularly onerous for certain employers, especially those in industries that are experiencing significant COVID-19 restrictions to their business operations, including:

  • Restaurants and bars that are unable to re-open, or open at full capacity for several months or more.
  • Concert venues and theaters that have no idea when they’ll be able to reopen or when attendees will feel comfortable enough to return.
  • Businesses in the hotel industry that are victims of tourism economics and travel related concerns.

The same could be true of businesses in the sports and transportation industries that have business models highly dependent on consumer sentiment related to the COVID-19 outbreak.

In short, any business that has limits placed on their ability to operate because of the coronavirus pandemic may be able to claim the exemption.

Specifically, the Flexibility Act provides a safe harbor from PPP loan forgiveness reductions. It’s available to business owners who can’t restore full time equivalent employees or total salary levels because they can’t do the same amount of business they were doing prior to February 15, 2020 due to forced compliance with requirements or guidance issued between March 1, 2020, and December 31, 2020. The requirements or guidance must be related to worker or customer safety requirements associated with COVID-19. The restrictions must be issued by:

  • The Secretary of Health and Human Services
  • The Director of the Centers for Disease Control and Prevention (CDC)
  • Officials at the Occupational Safety and Health Administration (OSHA).

So far, the Small Business Administration has issued no guidance on this exception.

It’s also likely that guidance related to this issue could change over time, depending on the progression of the pandemic, whether contact tracing ever becomes a reality, new coronavirus restrictions and the types of businesses impacted by the restrictions. For example, a forced limitation on operations would impact a transportation company in a far different way than a small retailer or child care center or a restaurant.

This also doesn’t take into account how alternate business opportunities resulting from the pandemic, for instance, additional lower-revenue takeout activity at restaurants, will impact this exception when balanced against losses related to more traditional ways of conducting business. This will be a particularly big issue for companies that have shifted more of their operations from bricks and mortar to e-commerce to help them get through the pandemic,

Next steps

With little or no guidance available, it’s critical that PPP loan borrowers keep and maintain careful records of their business activity prior to February 15, 2020 and throughout their chosen loan forgiveness period. The records could be their ultimate playbook to help them make it to a better post-COVID-19 future.

They’ll need to be able to prove that they did not hire back their full time equivalent employees or restore payroll to previous levels because they were unable to operate at pre-pandemic levels because of official, pandemic related restrictions made by the officials listed in the previous section. They’ll also likely be required, as part of their loan forgiveness application, to demonstrate that sales and other critical markers of business activity were reduced because of the coronavirus business restrictions.

Some ways that business owners can improve their record keeping related to this include documenting:

  • When and why employees are eliminated (and what steps were taken to keep the from needing unemployment benefits).
  • Changes in business operations and the reasons for the changes.
  • Sales data and all the factors contributing to sales.
  • Business traffic and reasons for changes.
  • How loan money is used and why.

By keeping very careful records, you will be able to make the case for this exemption if you think you qualify for it. Your loan provider will be able to work with you when you apply for loan forgiveness to help you figure out for sure.

In the meantime, it’s a smart move for business owners to pay attention to guidance related to the COVID-19 pandemic along with PPP loan forgiveness guidance from the Small Business Administration. You can find this information, along with frequently asked questions (FAQs), on the SBA website. Check back often to ensure you stay up to date on everything that’s happening.

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