The Latest Guidance on PPP Loan Forgiveness

A little more than three weeks ago, President Trump signed into law the PPP Flexibility Act of 2020 (Flexibility Act) which made some significant changes to the Paycheck Protection Program (PPP), a loan program introduced in the CARES Act of 2020 in March.  These changes are intended to allow PPP loan recipients greater flexibility in how and over what period they spend their loan proceeds.  Due to the significance of the changes, it took the SBA some time to adapt the previously published rules and procedures that govern how you apply for a loan and how you qualify and apply for forgiveness.  Now that the SBA has released these guidelines, the following are some of the important points to note:

Extension of the Forgiveness Period – Prior to the Flexibility Act, borrowers had 8 weeks over which they could spend the money for forgivable purposes.  The Flexibility Act extends this forgiveness period to 24 weeks, giving borrowers more time to spend the money and qualify for forgiveness.  This is especially helpful for businesses that experienced a delay in reopening and were slower to bring employees back to work.  Borrowers who obtained a loan prior to June 5, 2020 are not obligated to take advantage of the extended forgiveness period and have the option to stick with an 8-week forgiveness period if they choose.  Guidance released by the SBA last week indicates that borrowers who elect the extended forgiveness period but expend the money before the end of the 24-week period may apply for forgiveness early.  However, if a borrower has reduced wages for any of its employees by more than the 25% allowed for full forgiveness, the borrower must account for the excess unallowed salary reduction for the full 24-week period.

Payroll vs Non-Payroll Costs – Prior to the Flexibility Act, borrowers were required to spend 75% of their loan proceeds on payroll costs (as defined in the CARES Act) to ensure full forgiveness for qualifying expenditures.  To the extent that this threshold was not met, forgiveness amounts would be prorated according to a prescribed formula.  Under the Flexibility Act, this threshold has been lowered to 60%, giving borrowers with lower payroll costs and higher fixed costs a better chance to utilize the PPP funds for forgivable purposes.

Extended Payment Terms – Prior to the Flexibility Act, PPP Loans had a 2-year maturity, while loans obtained after the passage of the Flexibility Act have a maturity of 5 years.  Borrowers with loans obtained prior to the Flexibility Act can extend their loan term to 5 years if their lender agrees to the modification.

Forgiveness Application and Payment Deferral Windows – Prior to the passage of the Flexibility Act, loan payments were deferred for 6 months from the loan origination date, and borrowers had 60 days after the end of the forgiveness period to apply for forgiveness.  Under the Flexibility Act, borrowers now have 10 months from the last day of the forgiveness period to apply for forgiveness. Principal and interest payments are deferred until the earlier of the end of this 10 month period or the date on which the SBA determines a borrower’s eligibility for forgiveness.

The landscape surrounding PPP loans seems to be ever-changing.  Maximizing the benefit of your PPP loan requires careful planning and a strong understanding of program provisions.  If you need help to ensure maximum benefit from your PPP loan, our team of advisors stands ready to help.