Signed into law on March 27, 2020, the CARES Act permits eligible small businesses to obtain loans through the Paycheck Protection Program (PPP) and have their loans forgiven if certain criteria are met. The purpose of the loans is to help small businesses — typically those with 500 or fewer employees — meet their payroll expenses during COVID-19 pandemic.
However, the PPP has been criticized for being too stringent and not sufficiently addressing the longer-term effects of the COVID-19 crisis. As a result, the PPP has been modified to give small businesses more flexibility when utilizing PPP loans and to make it easier for them to obtain loan forgiveness. These changes are reflected in the Paycheck Protection Program Flexibility Act (PPPFA), which was signed into law on June 5, 2020.
Here’s a non-exhaustive look at what the PPPFA means for small employers.
More Time to Use PPP Funds
Previously, borrowers had to use their PPP funds within 8 weeks of their loan origination date in order to have their loan forgiven.
The PPPFA gives borrowers 24 weeks to spend their PPP funds, starting from their loan origination date or until Dec. 31, 2020 — whichever comes first.
This expansion applies to all PPP loans, though borrowers who took loans before June 5, 2020, can choose to keep their eight-week period.
More Money for Non-Payroll Expenses
Previously, borrowers had to spend 75% of their PPP money on qualified payroll expenses in order to have their loan forgiven. Qualified payroll expenses include:
- Salaries, wages, commissions, and tips
- Health insurance premiums
- Retirement benefits
- State and local payroll taxes
- Paid leave
- Severance pay
The PPPFA reduces the payroll expense requirement to 60%. This means PPP borrowers can spend 40% (instead of 25%) on non-payroll expenses — such as mortgage interest, rent, and utilities — and still have their loan forgiven.
More Time to Repay Unforgiven PPP Loans
Previously, PPP borrowers had two years in which to repay any portion of their loan that’s not forgiven.
The PPPFA extends the repayment duration to five years. This change automatically applies to PPP loans approved on or after June 5, 2020. Borrowers with PPP loans taken prior to that date might be able to extend their repayment timeframe by contacting the lender directly.
More Time to Rehire Laid-Off Employees
Previously, to have their PPP loan fully forgiven, borrowers had until June 30, 2020 to rehire employees who were laid off between Feb. 15, 2020, and April 26, 2020.
The PPPFA extends the rehire deadline to Dec. 31, 2020, meaning employers have until the end of 2020 to restore laid-off employees to their pre-COVID-19 employment status.
In addition, the Small Business Administration has issued rehiring exceptions, including when an employer is not able to rehire a laid-off employee. For example, if the laid-off employee rejects the employer’s return-to-work offer, the employer can still receive loan forgiveness so long as they “made a good faith, written offer of rehire” and documented the employee’s rejection of the offer.
More Leeway to Defer Social Security Tax
Under the CARES Act, employers can generally defer their portion of Social Security tax (6.2% of taxable wages) that would normally be due between March 27, 2020, and Dec. 31, 2020. In this case, half of the tax can be deferred until Dec. 31, 2021 and the remaining half until Dec. 31, 2022. However, employers with forgiven PPP loans were excluded from deferring their share of Social Security tax.
The PPPFA enables all employers — including those with forgiven PPP loans — to defer their share of applicable Social Security tax for 2020.
Because the deferral does not extend to Medicare tax, employers must still submit their portion of Medicare tax (1.45% of taxable wages) on time.
There’s also more time to apply for a PPP loan.
Small employers that missed the June 30, 2020, deadline to apply for a PPP loan have another chance, as the cutoff has been extended to Aug. 8, 2020.
