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How the PPP Flexibility Act helps businesses with loan forgiveness
The swift and massive federal response to the economic downturn has settled into a more cautious phase. Policymakers are looking for signs of what impact their billions of dollars of relief to businesses and consumers already may have had.
“Following the CARES Act, Congress has had a much more difficult time agreeing on what additional stimulus might be necessary to reinvigorate the economy,” says Lance Schoening, government relations director for Principal®.
However, Congress did reach consensus on a key point: Requirements placed on businesses to receive loan forgiveness under the Paycheck Protection Program (PPP) were too stringent.
The challenge: Businesses need more choices when spending their PPP loans to stay afloat.
That led to the signing in early June of the PPP Flexibility Act—a new law providing more options to borrowers. The act mostly lives up to its name by giving businesses more time and better options for spending their PPP loans to maximize forgiveness.
It features four major changes:
1. The spending window is three times as long at 24 weeks.
- Some businesses that have stayed on the sidelines because of uncertainty over PPP requirements—more than $100 billion in funds was still available when the act was signed into law—may have been encouraged to apply by the August 8, 2020 deadline (extended from June 30th).
- Those that already accepted a PPP loan but were shut down because of local regulations or a business model hurt by COVID-19 could see a huge benefit with 24 weeks (compared to the original eight) to spend the loan and maximize forgiveness.
2. Now the payroll threshold is 60%, down from 75%.
- The other 40% can continue to be used for rent, mortgage interest payments, and utilities. Businesses that need non-PPP funds for inventory, personal protection equipment, or remote work expenses need as much flexibility here as possible. A restaurant, for instance, may have a harder time meeting the 60% threshold than an independent contractor whose business is mostly payroll.
- The 60% threshold isn’t a “cliff.” In other words, a business that spends less on payroll should receive partial forgiveness (as the federal government continues to issue more detailed guidance).
- For any loan amount not forgiven, you now have five years to repay the 1% loan, not two—at least that’s automatically the case if your loan is dated June 5 or later. For prior loans, the payback remains two years but can be modified by mutual agreement of the lender and borrower.
3. Businesses can wait longer to restore staffing.
- This recognizes the inconsistent reopening across the U.S. as some businesses still face restricted operating hours or capacity. All rehiring must be done by end of year.
- If a business can’t find qualified employees and can document it, lower staffing is allowed.
- A business also can document the ongoing impact of COVID-19 safety requirements to avoid a reduction in loan forgiveness.
4. Businesses with PPP loans can delay their payroll tax.
- Previously, the payroll tax delay was unavailable to a business granted forgiveness on a PPP loan. But the PPP Flexibility Act removes that restriction. This may be a good option for businesses struggling to preserve cash flow.
- But remember it’s only a delay. Full payment of the taxes still will be due in two installments: half by the end of 2021 and the other half by end of 2022.
3 more relief factors to watch in 2020
The PPP Flexibility Act may not be the final federal response to the pandemic-triggered recession, depending on how the rest of the year develops.
“For anything in 2020, if there’s anything that has been certain, it’s the uncertainty,” says Mark West, national vice president of business solutions for Principal.
Three factors to watch:
- The additional $600 per week of unemployment benefits runs out in July. A proposed reemployment bonus for workers could be an effective employee-focused complement to business-focused PPP efforts.
- As the Federal Reserve’s $600 billion Main Street Lending Program gets underway, builds momentum, and effectively helps middle-market companies (both for profit and nonprofit), it could contribute significantly to recovery.
- Less volatility the rest of 2020 will help, but both companies and Congress will need to stay vigilant about how they can respond to keep business models and the broader economy healthy.
- Reach out to your trusted financial professional or seek one through Principal.
- Contact your local SBA district office or visit the SBA's page dedicated to PPP details.
- Check out our resources to help businesses through this challenging year, like our CARES Act Paycheck Protection Program calculator to help estimate your loan forgiveness.
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