The recent Paycheck Protection Program Flexibility Act (PPPFA) brings good news to small businesses who borrowed funds under the PPP. In response to concerns from business owners, the new law corrects or simplifies some of the original CARES Act’s provisions, which impact a PPP loan’s forgiveness. Forgiveness means the loan proceeds don’t need to be repaid by the employer; they are essentially a grant. This article contains an excellent summary of the major points of the PPFA.
60% of the funds must be used for payroll
To achieve forgiveness of the loan, the original law required 75% of the proceeds be used for payroll while the remaining 25% could be used to pay expenses such as rent, health insurance and utilities. An earlier revision to the law allowed for prorated forgiveness if an employer spent less than the 75/25 ratio on allowed expenses. It’s important to keep in mind that the list of expenses eligible for forgiveness has not changed and any loan funds not used for approved expenses must be repaid.
24 weeks to use the funds
A PPPFA provision extends the period for employers to use the funds to 24 weeks, from the original time frame of eight weeks. Many businesses had been in a bind because once they received the proceeds, the clock started ticking toward the original eight-week period to use them. Since some businesses may not have been to fully open when they received the loan, the prospects for loan forgiveness were dim.
Can rehire workers by 12/31/20
In order for the salaries of furloughed or laid off workers to count toward forgiveness, the original law required businesses to rehire these employees by June 30th. This deadline was extended until the end of the year, which increases the likelihood that more of the proceeds will be used for payroll expenses over the longer period and thus, more of the loan will be eligible for forgiveness.
Extended repayment term
Any portion of the loan requires repayment at a one-percent interest rate. The original repayment period was two years but the PPPFA extended it to five years. The other good news is that repayment doesn’t begin until the bank and SBA assess the loan for forgiveness and make a determination. So conceivably, a business might not start repaying PPP loan proceeds until Fall 2021.
You can read another of our blogs on PPP Forgiveness here.