New PPP Law Extends 8-Week Period and Reduces Percent Payroll Cost Rule
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Congress just passed the Paycheck Protection Flexibility Act of 2020 and improved the Paycheck Protection Program (PPP) for small-business loans. The bill enhances the PPP by increasing the time small businesses can use funds and receive forgiveness from eight weeks to twenty-four weeks and by reducing the payroll cost rule from 75 percent to 60 percent. The President is expected to sign the bill immediately, and the SBA and Treasury will be tasked to update their regulations, guidance and forgiveness application.
8-Week Forgiveness Period Extended to 24 Weeks
Under the original law, small businesses who received a PPP loan had eight weeks to use the funds, and so long as they used the loan proceeds for qualifying purposes, the entire loan could be forgiven. This eight-week timeframe is known as the “covered period” and is the timeframe in which qualified spending of the funds is eligible for forgiveness.
Under the new law, the eight-week period was extended to 24 weeks or December 31, 2020, whichever is first. Any funds not used for qualifying purposes within the “covered period” is not eligible for forgiveness and must be paid back by the small business. Many small businesses had their PPP loans funded in April and May were unable to open back up for business because of legal or health reasons, and others just had a fraction of business demand that they had pre-pandemic. They were seeing their eight weeks pass by while being unable to open back up. These small businesses were being hurt the most by the pandemic, and by extending the covered period to 24 weeks, Congress has greatly improved their ability to use their PPP funds to bring back workers to payroll.
Steven Nicokiris, CPA, Managing Director and Shareholder with the New York office of CBIZ MHM, LLC, calls the new law a game changer for small businesses in areas affected most by COVD-19. “We have several retail and restaurant clients that received PPP loans in early/mid April, and the eight-week covered period will be ending in mid-June," he explains. "Many of these businesses will not even be able to re-open on a limited basis until late June or July or later. Realistically, many NYC businesses will need months to bring back employees in an intelligent manner as their businesses come back to life.”
The 75 Percent Payroll Cost Requirement Is Reduced to 60 Percent
The second-most significant change to PPP is a reduction to the payroll cost rule from 75 percent to 60 percent. This rule required forgiveness requests for a PPP loan to be comprised of at least 75 percent payroll costs, while the other 25 percent can be spent and used on other qualifying forgiveness purposes such as mortgage interest, rent and utilities. By reducing the payroll cost requirement to 60 percent, small business owners will be eligible to have more of their PPP funds forgiven. Many small businesses that had higher rent or mortgage payments were finding it difficult to use 75 percent of their PPP funds within the covered period of eight weeks.
Unfortunately, the language in the bill that changed the payroll costs rule to 60 percent specifically stated that this is 60 percent of the loan amount. It reads: “An eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs."
This language of “covered loan amount” is a departure from prior SBA guidance which said that 75 percent of “the forgiveness request” must be for payroll costs. The language from the new bill implies that a small business is only entitled to forgiveness if they use 60 percent of the loan amount on payroll costs. The prior SBA guidance, on the other hand, did not consider the loan amount and instead only looked at the amount a small business requested to be forgiven. There’s a big difference between the two, as you can always reduce the forgiveness request based on what you use to meet the 75 percent requirement, but once you get the loan you can’t reduce the loan amount and are stuck at spending 60 percent of that number to get forgiveness at all.
For example, under the prior rule, if you received a PPP loan amount of $100,000 and used $50,000 on payroll costs, then under the old 75 percent payroll cost rule you would be able to request forgiveness of the $50,000, as you would just reduce your forgiveness request to match what you spent. Under the new law, the language seems to state that forgiveness would only be available if the small business used at least 60 percent — $60,000 in this example — on payroll costs and if the small business only spent $50,000 on payroll costs over their 24-week period, then they will be entirely ineligible for loan forgiveness, as they would not have spent 60 percent of the loan amount on payroll costs.
The change in the payroll cost rule from “75 percent forgiveness request” to “60 percent loan amount” will trip up some small businesses who received a large loan amount based on 2.5 months of payroll under a vibrant economy in 2019 and are unable to bring back workers or ramp up business quickly enough to spend 60 percent of the loan amount on payroll costs. House and Senate leaders have already been working with Treasury and SBA to see if they can provide favorable guidance on the rule and have also discussed a follow-up bill to fix it.
Bringing Back Workers
The original PPP law reduced the amount eligible for forgiveness if the small business did not bring back the same number of employees that they had pre-pandemic. The new law made changes to the requirements on bringing back workers and gives small businesses until December 31, 2020 to restore their workforce to pre-pandemic levels. The bill also created new exceptions to the new law that excuse a business from brining back workers if they can document that they were unable to re-hire a worker (e.g. the worker rejected an offer to return) or a similarly qualified worker. They can also be excused from bringing back their workforce to pre-pandemic levels if they can document a health or safety requirement related to COVID-19 that restricted their business.
Plan Moving Forward
Small businesses who received PPP funds and who were already planning to submit a forgiveness application with their bank will need to wait, as the SBA and Treasury will be updating guidance and the PPP forgiveness application. The good news for many small businesses is that the additional 16 weeks will provide more payroll cycles and will result in more PPP funds being forgiven. The changes to PPP in this new bill are significant and will allow more small businesses to benefit from this popular small-business relief effort.