PPP Flexibility Act Has Traps for the Uninformed

Many Businesses will be better off electing to use the old rules. Here’s why…

For businesses that cannot spend all of their PPP loan proceeds on eligible expenses by their 8 week deadline, the new PPP Flexibility Act provides a lifeline in the form of additional flexibility and extensions of deadlines for use of the funds.

However, there are some large pit-falls in the details. Some PPP recipients should consider applying for the PPP loan forgiveness under the old rules. Here’s why:

Extension of Covered Period

The Covered Period was extended from eight weeks to 24 weeks or December 31, 2020, whichever comes first. Similarly, the safe harbor deadline for restoring average full-time equivalent employee (FTEE) and salary/hourly wages was extended to December 31, 2020.

This gives borrowers that continue to experience reduced operations more time to spend their loan proceeds as they return to pre-COVID levels of activity.

However, it also means borrowers will have to maintain average FTEE headcount and salary/hourly wages over a longer period, which may result in lower loan forgiveness amounts. For example, borrowers who spend their loan proceeds by week 16 of the 24-week Covered Period will have to maintain FTEE and salary/hourly wages for an additional eight weeks. If they are unable to avoid layoffs or furloughs during their Covered Period, their loan forgiveness amount could be reduced.

Borrowers with loan origination dates prior to the date of enactment of the new PPP legislation (June 5th) can elect to keep their Covered Period at eight weeks.

Borrowers who have already spent at least 60 percent of their PPP proceeds on payroll costs by the end of eight weeks should consider applying for their PPP loan forgiveness now. Be cautious about extending your Covered Period if you are uncertain about your ability to maintain FTEE and salary/hourly wages over the next 16 weeks.

Rehire Exemption

The new legislation includes an exemption that allows the loan forgiveness to be determined without regard to a proportional reduction in the number of FTEEs. However it will be difficult to qualify for this exemption due to the substantial documentation needed to prove former employee rejections of offers to rehire or documentation of the inability to hire replacements.

Employment Level Exemption

The Flexibility Act prohibits consideration of employment level in determining loan forgiveness amount only if the employer can document that Covid health regulations caused an inability to return to the same level of business activity due to compliance with requirements or guidance related to “maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”

Business activity that was negatively impacted by economic slow-down or supply-chain disruption would not qualify for this exemption.

Loan maturity dates

Even though the PPP Flexibility Act allows lenders to extend the term up to five years, they are not required to do so. For the 4.5 million PPP loans approved as of June 6, 2020, an extension of the maturity date may be unlikely.

Please don’t hesitate to contact us with any questions you may have.