Congress has enacted legislation that modifies a number of provisions in the Paycheck Protection Program that was implemented as part of the CARES Act and its response to COVID-19. The new legislation gives business owners more time and more flexibility in using loan proceeds received through the PPP, and modifies provisions related to loan forgiveness. The bill now goes to the President for his signature.
Under the earlier version of the PPP, as administered by the Small Business Administration, business owners seeking loan forgiveness were required to use 75% of such loan proceeds for payroll costs, with payment of other costs limited to the remaining 25% of the proceeds. The new legislation revises the ratio of costs, and provides that the payroll portion must be at least 60% and the non-payroll portion no more than 40%.
The new legislation also gives small businesses more time to use emergency loans under the program. Prior rules provided that funds must be used within eight weeks for the recipient to qualify for loan forgiveness. That timeframe has now been extended to 24 weeks from the date of the loan’s origination, or December 31, 2020, whichever is earlier.
The bill also revises the timeframe for repayment of any loan proceeds that are not forgiven. After passage of the CARES Act, the SBA assigned a two-year maturity date for such loan proceeds. The bill extends this period to five years. Although this provision applies only to PPP loans that are made after the enactment of the bill, lenders and borrowers are free to negotiate the terms of any pre-existing PPP loan in order to match the newly permitted five-year period.
Additionally, the bill revises the deferral period for payment on paycheck protection loans that are not forgiven. Under the CARES Act and the Small Business Act, lenders were required to defer the payment of principal and interest for six months. The new act allows recipients to defer payments until the date that the lender receives the forgiveness amount from the SBA. Recipients who do not apply for forgiveness shall have 10 months from the program’s expiration to begin making payments.
The bill also eliminates a provision that makes a paycheck protection loan recipient who has such indebtedness forgiven ineligible to defer payroll tax payments. The bill provides that deferral of payroll tax payments is available even if the loan is forgiven.
It is anticipated that the Small Business Administration will release guidance concerning the terms of the new law and its impact on those who participate in the Payroll Protection Program. We will keep you apprised of any further developments.