What Is t🐭he Paycheck Prot𓄧ection Program Flexibility Act of 2020?

President Donald Trump signed the Paycheck Protection Program Flexibility Act (PPPFA) into law on June 5, 2020 during his first term. It amended the Paycheck Protection Program (PPP) to give borrowers more freedom as to how and when loan funds are spent while retaining the possibility of full forgiveness.

Understanding the Paycheck Protec𝔍tioඣn Program Flexibility Act of 2020

Borrowers had eight weeks from the time they received the first loan installment to spend the funds under previous PPP loan guidance. The PPP Flexibility Act of 2020 extends that period to 24 weeks. Borrowers also have the option to keep the original eight-week spending period if they already had their loan before the enactment of the act. Full forgiveness is still possible under this timeline.

The original PPP loan guidelines mandated that 75% of any forgiven amount had to be spent on payroll costs. The Flexibility Act reduces required payroll expenditures to 60% of the loan amount with up to 40% of the loan amount used for mortgage interest, rent, or utility payments to obtain full loan forgiveness of that amount or part of the loan can be forgiven provided the borrower maintains the same 60/40 ratio for the amount forgiven.

Borrowers were able to use the 24-week period to restore their workforce to pre-COVID-19 levels to obtain full forgiveness. The deadline under the Flexibility Act to achieve this was Dec. 31, 2020. The previous deadline was June 30, 2020.

The PPPFA opened again in January 2021, allowing businesses to take loans for the first time as well as a second draw for businesses that had previously taken a loan.

L😼egisl♕ation Extended Previous Application Deadline

President Biden extended the deadline to apply for a Paycheck Protection Program Loan by signing the aptly named Paycheck Protection Program Extension Act on March 30, 2021. This legislation extended the deadline to May 31, 2021 and gave the Small Business Administration an additional 30 days to process applications.

An additional $285 billion became available for PPP loans in January 2021 when Congress revived PPP funds as part of a $2.3 trillion coronavirus relief package signed in December 2020 Approximately $25 billion of this money was allocated to second-draw loans. Congress had approximately $130 billion left in unused funds when the first program expired in August 2020.

Exceptions to Full Forgiveness

Two exceptions let borrowers achieve full forgiveness even if they don't fully restore their workforce. These are in addition to previous guidance that lets companies exclude workers who turned down good faith offers of reemployment. Borrowers can also reduce workforce requirements based on an inability to find qualified employees or if they were unable to restore operations to Feb. 15, 2020 levels due to COVID-19 restrictions.

Additional Provisions꧒ of the PPP Flexibility Act

The PPP loan repayment period was extended to five years from the original two while retaining the original 1% interest rate. This gives borrowers more time to pay off the unforgiven portion of th♋eir loan.

The payment deferment period for principal, interest, and fees is extended from six months after the end of the covered period to the date when the SBA sends the borrower's loan forgiveness amount to the lender. The deferral period lasts until 10 months after the end of the covered period if the borrower doesn't apply for forgiveness, according to guidance issued by the SBA on June 8, 2020.

The PPP Flexibility Act of 2020 also lets businesses that took a PPP loan to delay paying their payroll taxes. This wasn't allowed under the original Coronav🐼irus Aid, Relief, and Ec﷽onomic Security (CARES) Act.

Second-Draw Loans

The second-draw loans for companies that have already taken the first-time loan must meet certain criteria. They must show that they employ less than 300 individuals, if they have used or will use the total amount of their first loan, and have lost 25% or more of their revenue for any quarter in 2020. Second-draw loans are also capped at $2 million which is lower than the $10 million cap for first-time loans.

Further PPP Flexibility Act Guidance

In consultation with the Treasury Department, the SBA issued additional PPPFA guidance on Aug. 4, 2020. It set the maximum amount of compensation that can count toward forgiveness for anyone with an ownership interest in an S corporation, C corporation, partnership, or sole proprietorship (Schedule C business) at the lesser of $20,833 or 2.5 months' worth of their 2019 compensation.

This cap applied cumulatively to all companies that pay the owner/employee. The $20,833 cap applies to a "covered period" of 10.6 weeks or more. The cap is the lesser of $15,385 or eight weeks' worth of 2019 compensation if the company elects an eight-week covered period.

ꦇ Additional highl🅘ights from the Aug. 4 guidance included:

• Health insurance and retirement plan costs are not included in the compensation calculation.
• A reduction in benefits would not be considered a reduction in wages regarding the loss of forgiveness for reducing an employee's wages by more than 25%. This was later altered with the rounds in January 2021, however, which allowed benefits to be included.
• The cap on the forgivable owner/employee compensation doesn't include compensation paid to other family members such as a spouse.

The Bottom Line

The PPP Flexibility Act received a largely positive response from experts, mostly for the extended spending deadline and retooled payroll costs guidance. The shift from "75% of the forgiven amount" to "60% of the total loan amount" had some worried, however, that this requirement would cause many businesses to obtain no forgiveness where they would have obtained at least some in the past.