Congress extends loan forgiveness for small business PPP

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 06/10/20


In response to the high demand for the Paycheck Protection Program (PPP), launched to help small businesses meet expenses during the COVID-19 pandemic, Congress last week passed legislation to extend the timeline and requirements for loan forgiveness.

The PPP was authorized by the CARES Act. The most attractive feature of the program is that the loan can turn into a tax-free grant due to the forgiveness provision, if certain requirements are met. Since its inception, more than $600 billion has been appropriated for this program.

Borrowers recognized some challenges when the PPP was introduced. A key criticism for many businesses was the requirements for loan forgiveness. The forgiveness portion of the loan is based on eligible expenses, of which at least 75% must be payroll-related, over an eight-week period, beginning when the loan proceeds are disbursed by the lender.

Many business owners secured these loans but were unable to resume normal operations resulting in lower expenses especially payroll, during the eight-week covered period.

The Paycheck Protection Program Flexibility Act

To address the concerns about the requirements, Congress passed the Paycheck Protection Program Flexibility Act.

  • The new law extends the covered period for forgiveness from eight weeks following receipt of the loan to 24 weeks, allowing more time for businesses that are facing delays in resuming operations.
  • In addition, responding to criticism that the SBA requirement that expenses eligible for forgiveness must include at least 75% associated with payroll, the new law reduces the requirement to 60%. This allows business owners with higher, non-payroll costs (utilities, rent, mortgage interest) to benefit from higher forgiveness.
Additional changes
  • Loan amounts not forgiven are subject to a minimum repayment term of five years, increased from the initial two-year term.
  • To avoid a penalty in forgiveness due to staffing or compensation reductions, businesses have until the end of the year to restore headcount and salary (previous deadline was June 30).
  • There are two new exceptions to avoid a penalty on forgiveness due to a reduced staffing level after PPP loan proceeds are received:
    • Lack of qualified applicants. “An inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.”*
    • Business still operating below normal levels. “Inability to return to the same level of business activity conducted prior to February 15, 2020, due to compliance with requirements established, or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration. These new requirements, introduced for the period beginning on March 1, 2020, and ending December 31, 2020, must include the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”*
  • Lastly, businesses securing PPP loans are now able to defer the employer’s share of Social Security payroll taxes if desired. Under the new law, 50% must be paid in 2021 and 50% in 2022.
  • Note that the deadline for businesses to apply for a PPP loan remains June 30, 2020. Additionally, there is no guarantee that funds targeted for PPP loans will remain until that deadline, so business owners should consult with tax and lending professionals now if they are interested in pursuing the program.
For more information, read our investor education piece, "Understanding the CARES Act and its implications for individuals and businesses."

*The Paycheck Protection Program Flexibility Act, 2020.

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