Finances and Taxes

What You Need to Know About the Paycheck Protection Flexibility Act

Gusto Editors  
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Responding to the needs of small businesses, the president signed legislation titled The Paycheck Protection Program Flexibility Act (PPPFA), also known as H.R.7010, on June 5, 2020. 

The Paycheck Protection Program Flexibility Act revises the Paycheck Protection Program (PPP) in response to critiques, making it more flexible and offering small business owners increased access to loans. 

Since the PPP launched on April 3, over 4.4 million loans have been distributed to small businesses, totaling over $500 billion in value. However, small business owners have overwhelmingly found the PPP too restrictive and clarified an urgent need for more elasticity in the program—specifically, SBOs sought more forgivable non-payroll expenses and a longer window in which to spend the funds. The Paycheck Protection Program Flexibility Act provides this. 

If you haven’t yet applied for the PPP, there’s still time: $150 billion remains in the fund and the deadline for application is June 30, 2020; follow this simple guide on how to apply.

So, how exactly has the PPP changed with the implementation of H.R.7010? Here’s a breakdown of what you need to know, and more details are below the table:

Paycheck Protection Program (PPP) rules

These are no longer valid
What’s changed under the Paycheck Protection Flexibility Act (PPPFA)
The time allotted to the borrower to pay back the loan is two years.The time allotted to the borrower to pay back the loan is five years.
Loan proceeds must be used within eight weeks. Loan proceeds must be used within 24 weeks.  
In order to qualify for PPP loan forgiveness, proceeds must be used by whichever one of these occurs first: (a) within eight weeks from the date when the loan was funded, or (b) by June 30, 2020.In order for PPP loan forgiveness, proceeds must be used by whichever one of these occurs first: (a) within 24 weeks from the date when the loan was funded, or (b) by December 31, 2020.
To be eligible for full PPP loan forgiveness, 75% of the loan must be spent on payroll costs.To be eligible for full loan forgiveness, 60% of a PPP loan should be spent on payroll.

*However, if less than 60% is allocated to payroll, businesses remain eligible for partial forgiveness, but the forgiven amount will be reduced.
In order to avoid reductions in PPP loan forgiveness, businesses have until June 30, 2020 to rehire employees who have been let go due to the COVID-19 crisis and restore wage rates. In order to avoid reductions in PPP loan forgiveness, businesses have until December 31, 2020 to rehire employees who have been let go due to the COVID-19 crisis. 
The loan amount eligible for forgiveness will decrease if headcount or wages are reduced after February 15, 2020—unless those reductions were reversed by June 30, 2020. The loan amount eligible for forgiveness will not decrease if the business can, in good faith, document an inability to rehire the individuals who were employed by the business on or before February 15, 2020 and an inability to hire similarly qualified employees by December 31, 2020.
Businesses unable to return to the same level of business activity that existed on or before February 15, 2020 may not be eligible for loan forgiveness. Businesses unable to return to the same level of business activity that existed on or before February 15, 2020 will remain eligible for full loan forgiveness. 
Employers who have had PPP loans forgiven cannot take advantage of the 6.2% social security tax deferral detailed under the CARES Act.Employers who have had PPP loans forgiven can take advantage of the 6.2% social security tax deferral detailed under the CARES Act.
Lenders are required to provide all PPP loan borrowers a deferment of at least six months and up to one year.Lenders are required to provide all PPP loan borrowers a deferment through the date on which the amount of loan forgiveness is determined. 

PPP Loan Maturity

The maturity of the loans (simply put: the time allotted to the borrower to pay back the loan) has been extended from two years to five years.

The Covered Period

Loan proceeds must be used within 24 weeks of the date they have been disbursed (but not later than December 31, 2020). This will allow employers to cover more payroll cycles and spread the funds out over a longer period as economic hardships continue into the second half of the year.

PPP Loan Forgiveness

Eligible Time Frame

In order for a PPP loan to be forgiven, the proceeds must be spent within a specific time frame. Loan proceeds originally had to be used within eight weeks from the loan disbursement date. Now, they must be used by whichever one of these occurs first:

  • within 24 weeks from the date when the loan was funded, or 
  • by December 31, 2020

Eligible Expenses

To be eligible for full loan forgiveness, 60% of the loan proceeds must be used for payroll costs. This overturns the initial 75% standard, which means that more of the PPP loan proceeds can now be spent on non-payroll expenses.  Under the PPPFA, if less than 60% of the loan is allocated to payroll, a business may still remain eligible for partial forgiveness, but the forgiven loan amount will be reduced.

Rehiring Employees

  • In order to qualify for loan forgiveness, businesses have until December 31, 2020 (extended from June 30, 2020) to rehire employees who have been let go due to the COVID-19 crisis. 
  • The initial PPP mandated that the loan amount eligible for forgiveness would decrease if headcount or wages had been reduced after February 15, 2020—unless those reductions were reversed by June 30, 2020. H.R.7010 changes this. Now, the loan amount eligible for forgiveness will not decrease if the business can, in good faith, document an inability to rehire the individuals that were employed by the business on or before February 15, 2020 and an inability to hire similarly qualified employees by December 31, 2020. 

Operating Capacity

Due to COVID-19 safety measures established by the Centers for Disease Control and Prevention (CDC), Occupational Safety and Health Administration (OSHA), or the Department of Health and Human Services (HHS), like social distancing or new sanitation standards, many businesses may be unable to return to the same level of business activity that existed on or before February 15, 2020. These businesses also may be forced to reduce the number of employees. Businesses that document these cases, in good faith, will remain eligible for loan forgiveness. 

Tax Implications

The PPPFA states clearly that employers—even those who have PPP loans forgiven—may take advantage of the 6.2% social security tax deferral outlined in the CARES Act. This is a departure from the PPP that did not allow SBOs to benefit from this tax deferral. 

Deferring Loan Payments

The original PPP mandated that lenders were required to provide a loan deferment of at least six months and up to one year. However, under the PPPFA, this has been eliminated; now, payments are deferred until the date on which the amount of loan forgiveness is determined.

However, if a borrower fails to apply for forgiveness within 10 months after the last day of the PPP loan forgiveness covered period (again, that’s whichever one of these comes first: 24 weeks from the day the loan was funded or December 31, 2020), then the borrower must begin loan payments. 

When you’re ready to apply for forgiveness, be sure to follow our step-by-step instructions to the PPP loan forgiveness application

We will continue to update this post as things change; check back to stay in the know.

Updated: June 15, 2020

Comments

  • Glenn

    I do not see any thing about the FTE employee calculations. Is that still a part of the forgiveness formula and how dies that apply?

    Reply
  • Laura Jacobsen

    I think there is a typo regarding the 24 weeks under “The Covered Period”. Eligible Time Period says 24 weeks or Dec 31. 2020 and The Covered Period says 24 weeks or June 30, 2020.

    Reply
    • Gusto Editors

      Thank you, Laura! We’ve updated the article and corrected the end of the eligible time period to December 31, 2020.

      Reply
  • Mack

    Must a company wait until the full 24 week period is complete, before applying for forgiveness? In other words, if we were on track for applying for forgiveness after 8 weeks, can we still do that?

    Reply
    • Gusto Editors

      Hi Mack! Be sure to check with your lender to confirm whether you should wait 8 weeks or 24 weeks to apply for forgiveness, which may also depend on your Covered Period. If you received your loan after June 5, 2020, your Covered Period will be 24 weeks. If your loan was disbursed before June 5, you can elect either 24 weeks or the original eight-week Covered Period.

      Reply
  • Stephen Martineau

    If i already received a PPP loan based on eight weeks of payroll expenses. Can I apply for a new loan for the additional 16 weeks of payroll?

    Reply
    • Gusto Editors

      Hi Stephen — currently, the SBA has not indicated that this is a possibility. We will let you know if this changes!

      Reply
  • Rob

    Don’t PPP borrowers have the option to keep the original 8-week covered period OR choose the extended 24 week period?

    Reply
    • Gusto Editors

      Hi Rob — thanks for calling this out! We’ve updated the article to make it clearer that the loans must be used within 24 weeks, rather than over 24 weeks.

      Reply
  • Michelle

    Hello, Is there a required re-hire deadline after the PPP Funds have been given? In other words, can someone wait several weeks before rehiring as long as the 60%-40% is still achievable within the 24 week time period? Is the answer different for a sole proprietor, or owner/employee of an S-corp? Thank you for your great help!

    Reply
    • Gusto Editors

      Hi Michelle — we mention this in our article! “In order to avoid reductions in PPP loan forgiveness, businesses have until December 31, 2020 to rehire employees who have been let go due to the COVID-19 crisis.” There are currently no stipulations that it will work differently for sole props or S-corp owners.

      Reply
  • Ida

    Hello! If I received funds on June 15th, can I use them for payroll run on July 10th, that was related to work completed between June 1-June 30, or do I need to wait until the payroll I run on August 10, so that I’m not using it for payroll related to work completed before I received the loan? Thanks!

    Reply
    • Gusto Editors

      Hi Ida — payroll costs are eligible as long as they were either paid or incurred during the forgiveness window. As a result, the payroll you ran on July 10 is eligible because your workers were paid during the eligibility window – even if some of the work occurred before you received the funds.

      Reply

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