Requirements for PPP Loan Forgiveness Eased in Recent Legislation

Companies and sole proprietors with PPP loans have been scrambling to maximize their 8-week loan forgiveness. The Paycheck Protection Program Flexibility Act, which eases the forgiveness rules, will likely come as welcome relief for many employers. The PPPFA passed the Senate on June 3, 2020, and the President is expected to sign the act in to law very quickly.

The PPPFA does not change the deadline for applying for a PPP loan—that deadline remains June 30. However, many of the other requirements have been relaxed. Key changes to the PPP program include the following:

Extended Forgiveness Period: The 8-week forgiveness window is extended to 24 weeks (but ending no later than December 31, 2020). This is optional for existing PPP borrowers and automatic for new borrowers. Keep in mind that the period for measuring wage and headcount reductions for forgiveness are tied to the forgiveness period, and so those will be similarly extended. While most borrowers may benefit from the extension, it is particularly welcomed relief for companies that could not restore operations immediately or struggled to rehire employees who may have been better off receiving unemployment. In addition, repayment of the PPP loan will not begin until after a decision is made on the forgiveness application.
Time to Restore Wages or Headcount: The deadline to restore wages and/or headcount to achieve full forgiveness is now December 31, 2020, rather than June 30, 2020.
Flexibility for Headcount Reductions: The restrictions on forgiveness for employers who reduced headcount have been relaxed. The PPPFA adds exceptions to limited forgiveness for borrowers who are unable to fully restore their workforce to pre-pandemic levels if (a) employees refuse good faith offers of rehiring and the company is unable to find qualified employees by December 31, 2020, or (b) is unable to restore business operations to February 15, 2020 levels because of certain COVID-19 related operating restrictions.
Required Use for Payroll Costs: The amount of the PPP loan required to be used for payroll costs has been reduced from 75% to 60%. However, the forgiveness is now an all-or-nothing cliff. Borrowers must spend at least 60% of the PPP loan on payroll costs to be eligible for any forgiveness. Previously, if an employer did not use 75% of the loan on payroll costs, the amount eligible for forgiveness was reduced but not taken off the table entirely.
Repayment Period: The repayment term was extended from two years to five years. The five-year repayment period is automatic for new PPP borrowers. Existing PPP borrowers may extend their repayment plan from two years to five years upon agreement with their lender.
Payroll Tax Deferral: Borrowers who obtain forgiveness may now also take full advantage of the CARES Act payroll tax deferral. The CARES Act permits employers to defer certain 2020 payroll taxes, paying 50% of the deferred amounts by December 31, 2021 and the remaining 50% by December 31, 2022. Previously, PPP borrowers could not defer these taxes once they obtained forgiveness on the PPP loan.