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Paycheck Protection Program Flexibility Act of 2020

Posted by : on : June 5, 2020 | 8:00 am

On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “PPPFA”) which modifies significant elements of the Paycheck Protection Program (the “PPP”) as established under Section 7(a)(36) of the Small Business Act by the CARES Act (forgiveness governed by Section 1106 of the CARES Act). The U.S. House of Representatives passed the PPPFA by a near unanimous vote of 417-1 on May 29, 2020. The U.S. Senate then unanimously passed the PPPFA on June 3, 2020 despite concerns raised by some U.S. Senators regarding the changes. This FGMK Alert provides an overview of the changes made by the PPPFA, as well as thoughts moving forward.


PPPFA Modifications


The key modifications that the PPPFA makes to the small business loan program include the following:


  • Amends Section 7(a)(36)(K)(ii) of the Small Business Act by inserting language that would make the minimum maturity five years for any loan issued following the passage of the PPPFA (all loans made prior would be subject to the two-year maturity date; however, the PPPFA allows for lenders and borrowers to mutually agree to modify such term for a pre-existing loan);
  • Strikes the original Section 1106(a)(3) in the CARES Act and replaces it with a new provision that increases the length of the “covered period” for purpose of loan forgiveness from eight weeks to the earlier of 24-weeks after date of loan origination or December 31, 2020 (PPFA also adds Section 1106(l) to the CARES Act which allows borrowers who received a covered loan prior to the enactment of the PPPFA to elect for the end of the covered period to remain the date that is eight weeks after the date of loan origination);
  • Modifies Section 1106(d)(5)(B) of the CARES Act to change the exemption date (date by which need to restore headcount or employee salaries or wages to avoid the reduction of loan forgiveness) from June 30, 2020 to December 31, 2020;
  • Adds Section 1106(d)(7) to the CARES Act which provides an exemption from loan forgiveness reduction based on a reduction of full-time equivalents, i.e., the headcount reduction, if a borrower can either:
    • Document an inability to rehire individuals who were employees as of February 15, 2020, and an inability to hire similarly qualified employees for the unfilled positions by December 31, 2020; OR
    • Document an inability to return to the same level of business activity as the business operated at or before February 15, 2020, due to compliance with government health guidance regarding maintenance sanitation standards, social distancing, or other worker or customer safety requirements related to COVID-19 during the period beginning on March 1, 2020 through December 31, 2020;
  • Adds Section 1106(d)(8) to the CARES Act, which decreases the requirement for use of a covered loan for payroll costs from 75 percent to 60 percent; thereby allowing borrowers to use up to 40 percent of loan proceeds for non-payroll costs, which include mortgage interest obligations, rent or lease obligations, or any covered utility payment, during the covered period (Note: The 75 percent payroll cost requirement was not in the CARES Act, but rather constituted an SBA-created rule pursuant to Interim Final Rule 1);
  • Modifies Section 7(a)(36)(M)(ii)(II) of the Small Business Act by striking the language governing the deferral period (“period of not less than 6 months, including payment of principal, interest, and fees, and not more than 1 year”) and inserting language that identifies the end of the deferral period for such payments until the SBA remits the guaranty to the lender (also modifying Section 7(a)(36)(M)(iii) to allow SBA to purchase loans on secondary market to ensure borrower receives such deferment); and
  • Adds Section 7(a)(36)(M)(v) to the Small Business Act which provides that if a borrower fails to apply for loan forgiveness within 10 months of the end of the covered period, such borrower shall begin to make payments of principal, interest, and fees beginning after the date on which the 10-month period ends.


Importantly, the PPPFA also strikes Section 2302(a)(3) of the CARES Act. As a result, borrowers who obtain PPP loans may defer the employer share of Social Security tax (6.2 percent share) for the period of March 27, 2020 through December 31, 2020. Previously, the government had clarified the borrowers could exercise the deferral election until the date on which they received loan forgiveness decision. This modification now treats such borrowers like all other taxpayers by eliminating any restrictions on the election of the deferral opportunity.


Moving Forward


Prior to the Senate vote, Senator Marco Rubio and others had expressed the concern that the language of PPPFA created a “cliff effect” for those borrowers that fail to meet the 60 percent payroll cost test. The government had interpreted the SBA-created 75 percent rule in a manner that would merely reduce loan forgiveness on a proportionate basis if a borrower failed to meet the 75 percent threshold. Based on the language of the PPPFA, it appears that the failure to meet the 60 percent threshold could result in zero loan forgiveness. While the SBA and Treasury may provide future clarification, borrowers should be aware of this issue and aim to meet the 60 percent threshold to avoid any concern regarding the complete denial of loan forgiveness.


Congressional leaders have also indicated that technical corrections to the program may be made in the next phase of COVID-19 response legislation. A critical issue that such future legislation may address, as the PPPFA did not, is the deductibility of expenses that result in loan forgiveness. Barring a decision by the IRS to retract Notice 2020-32, Congress will have to act legislatively to provide borrowers with the ability to deduct such expenses for federal income tax purposes. If Congress does take the expected action, borrowers will still need to monitor states’ responses to the deductibility issue for state income tax purposes.


FGMK will continue to monitor the government loan program, future guidance, and updates to the SBA loan forgiveness application in order to keep our clients informed.


The summary information in this document is being provided for education purposes only. Recipients may not rely  on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.


About FGMK


FGMK is a leading professional services firm providing assurance, tax and advisory services to privately held businesses, global public companies, entrepreneurs, high-net-worth individuals and not-for-profit organizations. FGMK is among the largest accounting firms in Chicago and one of the top ranked accounting firms in the United States. For over 50 years, FGMK has recommended strategies that give our clients a competitive edge. Our value proposition is to offer clients a hands-on operating model, with our most senior professionals actively involved in client service delivery.