New Payroll Protection Program Guidance Relaxes Requirements for Loan Forgiveness


On June 5, 2020, President Trump signed a bill that grants Payroll Protection Program (PPP) borrowers more flexibility in spending funds received from the program. The major changes made by the Payroll Protection Program Flexibility Act of 2020 are

1) Changes in the Covered Period;

2) Changes in Restrictions of Eligible Expenses;

3) Changes in Required Employment Levels.

Additional guidance was issued on June 22, 2020 when the Interim Final Rule was issued by the U. S. Small Business Administration in consultation with the Treasury.

Change in the Covered Period

Under the CARES Act, Congress provided borrowers an eight week period, considered the "covered period," to pay expenses with PPP funds in order to be eligible for forgiveness. However, borrowers and industry groups urged Congress and the SBA to focus on the difficulty of obtaining full forgiveness under this restriction, especially for businesses that remained closed due to governmental restrictions and were unable to fully re-open or re-hire to pre-COVID-19 levels.

As a result of the Paycheck Protection Program Flexibility Act, borrowers can elect a longer covered period for which applicable expenses are incurred 24 weeks from the date of the loan origination (but not beyond December 31, 2020).

Thus, payroll costs and eligible non-payroll costs either paid or incurred in the 24 week period can be included in the borrower's loan forgiveness application. These costs are limited to the loan amount and are subject to defined payroll costs limitations.

Borrowers with a loan issued prior to the PPP Flexibility Act may elect to maintain the original eight week period to apply for forgiveness. Review your organization's specific circumstances to confirm full forgiveness during the eight week period before applying.

Changes in Restrictions on Eligible Expenses

Before passage of the PPP Flexibility Act, SBA guidance stated that forgiveness was restricted, and non-payroll costs (eligible interest/rent/utilities) could not be more than 25 percent of the total forgiveness amount. Payroll costs were required to be at least 75 percent of the forgiveness amount. The new Act increases the 25 percent limitation to 40 percent, which allows businesses a greater opportunity for full forgiveness. Now, the payroll cost requirement has been lowered to at least 60 percent of the forgiveness amount. This will be helpful for businesses that could not return to full capacity.

The amount of PPP funds used for payroll costs needed additional clarification. There was a concern on whether forgiveness would be allowed if the borrower spent less than 60 percent of loan funds on payroll. The Treasury and SBA have confirmed that forgiveness is available "subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs."

Change in Required Employment Levels

The PPP Flexibility Act also gives business owners until December 31, 2020, to get Full Time Equivalent

Employees (FTEs) and required wages paid up to the level required for maximum loan forgiveness. Prior forgiveness guidance allowed for exceptions in counting FTEs (declined offers of employment, employees fired for cause, etc.). Excepted reductions in the number of FTEs will not be counted against a borrower if it can be documented in good faith that either:

  • the borrower was unable to rehire individuals who were employed on February 15, 2020, AND is unable to hire qualified employees for unfilled positions before December 31, 2020; or,
  • the borrower can document that they are unable to return to the same level of business activity at the time of the loan forgiveness application, as compared to February 15, 2020 because of governmental or COVID-19 health and safety rules.

Applying for Forgiveness

The Act revised the deferral period for loan repayment. Borrowers will have 10 months after their covered period to apply for forgiveness. Lenders are currently developing processes for loan forgiveness applications for borrowers. Borrowers should stay in contact with their lender for further updates. Borrowers not applying for forgiveness have 10 months from the program's expiration or from the date the SBA makes a partial forgiveness to the lender to begin making payments, whichever is earlier. Application for forgiveness can be made on one of two forms, the regular form and the Form EZ.

Repayment Extension

Borrowers with loans made on or after June 5, 2020 can extend repayment of PPP loans for up to five years. If a loan was made on or before June 5, 2020, the parties may extend the loan repayment to five years if the borrower and lender both agree to do so.

PPP Borrowers May Defer Payroll Taxes

The CARES Act allowed employers to defer payment of the 6.2 percent employer share of Social Security taxes through December 2020 but disallowed this benefit for PPP recipients that have a loan forgiven. This Act removes the restriction. The payroll tax is not eliminated--only deferred allowing for a short-term cash flow boost.

Early Loan Forgiveness Applications

The Interim Final Rule states that if a borrower applies for loan forgiveness before the end of the

Covered Period and has reduced wages more than 25 percent, borrowers must account for the excess wage deduction for an eight or 24 week period that applies to the loan. Borrowers applying early for loan forgiveness may forfeit a safe-harbor provision allowing them to restore wages before December 31, 2020. Seek current guidance and rules from the Treasury and the SBA before acting on any loan forgiveness application.

Gerard J. Kassouf, CPA is a director at Kassouf & Co., P. C. an advisory and CPA firm assisting healthcare entities throughout the Southeast.


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