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Paycheck Protection Program Flexibility Act Modifies Forgiveness Provisions of PPP Loans

The Paycheck Protection Program Flexibility Act modifies and amends several provisions of the PPP loan, most notable those related to forgiveness.
A borrower checks on how PPP Flexibility Act impacts his loan forgiveness.

Update (1/19/21): Please note that we are actively monitoring evolving legislation and will continue to provide information as it becomes available. While we are moving swiftly to analyze and share these updates with our customers and the general public in real-time, some aspects of this article may be dated as updates continue to be announced. For more information on the stimulus plan signed into law on December 27, 2020, click here. To learn more about financial relief opportunities under the new law, click here.

Update (8/9/20): On Aug. 8, 2020, the original PPP loan application period closed. 

With the economic shutdown in the United States moving into its third month, the federal government responded to further help America’s small businesses weather the financial challenges. On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act that amends some provisions of the PPP program that already has provided more than $514 billion in funding to nearly 4.6 million small businesses since the first week of April.

The PPP Flexibility Act modifies certain provisions related to the forgiveness of loans under the PPP, allowing recipients of loan forgiveness under the PPP to defer payroll taxes.

What is a PPP loan?

A PPP loan was intended to provide small businesses with funds to hold on to current employees and bring back workers who have been laid off or furloughed, even if their business isn’t fully re-opened during the COVID-19 pandemic. Employers with 500 employees or fewer can access the loans through the Small Business Administration (SBA) to use on payroll and operating costs. The loan application process closed Aug. 8, 2020, but you can learn how to maximize PPP loan forgiveness.

The funds can be used to pay any eligible expenses incurred during the period beginning on the date the lender makes the first disbursement of the PPP loan to the borrower. Eligible expenses include payroll costs and non-payroll costs (mortgage interest, rent, insurance premiums, and utilities).

Businesses were eligible for a loan in an amount of up to $10 million, but data show that nearly two-thirds of all PPP loans have been for $50,000 or less. The loan is eligible for forgiveness if the employer meets certain conditions.

What changes were made under the PPP Flexibility Act

For new loans, the maturity period is now a minimum of five years, compared to the original two-year term established by the SBA. This applies to loans obtained after the passage of the PPP Flexibility Act (June 5, 2020), but borrowers and lenders could agree to extend the terms of any loan made before June 5, 2020.

Amendments to PPP loan forgiveness

Many of the changes to the loan forgiveness provisions of the PPP loan involved extended deadlines, as well as to the covered period for loan forgiveness. Additional changes were made on the percentages applied to eligible costs that could be forgiven and exemptions on full-time equivalent (FTE) employees that are included in calculating forgiveness.

  • Extends the covered period. The covered period begins on the date you receive your loan and ends 24 weeks (168 days) later, or Dec. 31, 2020, whichever is earlier. Borrowers who received a PPP loan before June 5, 2020 (the effective date of the PPP Flexibility Act) may elect to use their original covered period (eight weeks after their loan was received). For details on the covered period or alternative covered period, check out our FAQs on loan forgiveness.
  • Loan forgiveness. Amends SBA rule requiring that not more than 40% of the borrower’s loan forgiveness amount could be attributed to non-payroll costs. If a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60% of the loan forgiveness amount having been used for payroll costs.
  • FTE Salary/Hourly Wage Re-Hire safe harbors. Extends the time a borrower can qualify for the FTE and Salary/Hourly Wage reduction safe harbors from June 30, 2020 to Dec. 31, 2020 if they fully restore FTEs and/or salary/hourly wages. The Act also created a new FTE Reduction Exemption that provides loan forgiveness will not be impacted if the FTE reduction was due to being unable to re-hire employees (or hire similarly qualified employees) or return to pre-COVID-19 business activity.

The Loan Forgiveness Application sets forth a three-step calculation to determine the salary/hourly wage reduction and whether you are eligible for the safe harbor. For each employee that worked during your covered period complete each step using salary for salaried employees and hourly wage for hourly employees.

You will need the salary and hourly wage information for the time periods and dates below. 

  • Look-back period. Jan. 1 – March 31, 2020 
  • Reduction period. Feb. 15 – April 26, 2020
  • February 15, 2020
  • Your Covered period
  • Dec. 31, 2020

Calculate Salary/Hourly Wage Reduction

Step 1. Determine if wages were reduced more than 25%.

  • Divide the average annual salary or hourly wage during Your Covered Period by the average annual salary or hourly wages of the Look-Back Period.
  • If the result is 0.75 or more you do not have a salary or hourly wage reduction for that employee. If 0.75 or more, proceed to Step 2.

Step 2. Determine if you qualify for the Salary/Hourly Wage Reduction Safe Harbor for each employee.

  • Compare the annual salary or hourly wages in the Reduction Period to the annual salary or hourly wages on Feb. 15,2020.  If the annual salary or hourly wages in the Reduction Period is equal to or greater than the annual salary or hourly wages on Feb. 15, 2020 you do not qualify for the salary/hourly wage safe harbor. Complete Step 3.
  • Compare the salary and hourly wages on Feb. 15, 2020 and Dec. 31, 2020. If the average annual salary or hourly wage as of Dec. 31, 2020 is equal to or greater than the average annual salary or hourly wage on February 15, 2020 you qualify for the safe harbor and will not be required to take a salary or hourly wage reduction. Otherwise complete Step 3.

Step 3. Determine the Salary/Hourly Wage Reduction.

  • Multiply the Look-back Period amount by 0.75 the “(3a Amount”).
  • Subtract 3a Amount from Your Covered Period amount (the “3b amount”).
  • If the employee is an hourly worker, compute the total dollar amount of the reduction that exceeds 25% as follows:

Multiply the 3b amount by average number of hours worked per week during the Look-back Period and then multiply this amount by Your Covered Period (either 24 or 8 weeks).  The result is the salary reduction for the hourly employee.

  • If the employee is a salaried worker, compute the total dollar amount of the reduction that exceeds 25% as follows:

Multiply the 3b Amount by Your Covered Period (either 24 or 8 weeks) and divide by 52. The result is the salary reduction for the salaried employee.        

  • Extended Deferral of Loan Repayment. Extends deferment of payments of loan principle, interest and fees, from the current six months, to the date when the SBA pays the forgiveness amount to your lender. If a borrower has not applied for forgiveness of a covered loan within 10 months after the last day of the covered period payments on principal, interest and fees will begin.

Employer payroll taxes

Employers would be able to defer payment of their share of Social Security taxes, even after a PPP loan is forgiven. This replaces the original provision of the CARES Act.

Moving forward

The SBA released additional FAQs on Aug. 4, 2020. Paychex will continue to monitor for additional guidance.

Businesses have a great deal to consider when applying for PPP loan forgiveness and should consult with their accounting professional and legal advisor to determine the best course of action. There are additional aspects involved in re-opening a business, and Paychex offers the following resources to help support your efforts.

Note: This article was originally published on June 8, 2020.

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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