On Friday, June 5th, President Trump signed the Paycheck Protection Program Flexibility Act into law, bringing much needed relief to borrowers that have struggled with the popular small business loans meant to keep employees on payroll and off unemployment.

Key Provisions

  • Extension of the covered loan period from 8 weeks to 24 weeks
  • Loan term extended from 2 years to 5 years
  • Requirement to use 75% of funds on payroll costs reduced to 60%
  • FTE requirement “safe harbor” date of June 30th extended to December 31st
  • Ability for PPP borrowers to defer federal employer payroll taxes (6.2% SS tax)

Big winners include the hospitality and service industries. Additionally, recent PPP applicants now have plenty of time to spend the funds and a far better idea on how to comply with the program’s rules than April Borrowers.

The bill almost didn’t make it to the President’s desk – a few Senators felt that the bill language created even more questions. A few of the notable ones:

  1. Compensation per employee is currently capped at “8/52” of $100,000 or “8/52” of 2019 self-employment income. With a covered period of 24 weeks, will these limits increase to “24/52”?
MKS: This would elevate the cap from $15,385 per employee to $46,154 per employee. We would be surprised to see this increase in the compensation limit allowed.
  1. Can a Borrower apply for forgiveness before the 24 weeks is up (i.e. once the funds are exhausted after 12 weeks)?
MKS: Given that we don’t believe the new Act allows for an increase in the compensation cap, it would make sense that a Borrower would exhaust eligible funds before 24 weeks are up. We believe a Borrower should be able to apply for forgiveness any time after 8 weeks.
  1. Borrowers must satisfy the “FTE” requirement during the covered period. If the decision is made to adopt the 24-week period, will the average FTE obligation apply for the entire period?
MKS: It would be prudent for Borrowers to consider the ramifications of choosing the 24-week covered period. Several safe harbor provisions are available, but the safest path to forgiveness is an average workforce during the 8-week covered period that compares favorably to base period equivalents.
  1. Is the payroll cost threshold change from 75% to 60% a cliff?
MKS: Some professionals are interpreting the language of the Act to state a borrower must spend 60% of the entire loan on payroll costs to receive any forgiveness. We believe the new 60% threshold may represent an unintentional bright line that should be rectified.
  1. Will the expenses associated with PPP loan forgiveness be deductible?
MKS: It was expected that Congress would override the IRS and allow PPP expenses to be deductible, but there was no mention of this in the Act. We still anticipate this to be addressed in future legislation.

Final Thoughts

We believe the PPP Flexibility Act was long overdue, but additional guidance from the Treasury and SBA will be necessary to understand how the changes interact with current rules. Due to the convoluted program criteria and pattern of delays related to guidance, we advise those with PPP loans to hold off on applying for forgiveness and await further interpretation. In addition, support for a forgiveness “rubber stamp” on smaller loans is being heavily lobbied for by professional organizations that represent banks and accountants.