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Paycheck Protection Program Flexibility Act Makes Significant Changes to the Forgiveness Provisions of PPP Loans


The Paycheck Protection Program (PPP), enacted as part of the CARES Act, is a lending program designed to provide funds for small businesses to hold on to current employees and bring back workers who have been laid off or furloughed. One aspect of the loan that is especially appealing is the loan forgiveness. Businesses can qualify for loan forgiveness for amounts used for payroll costs, mortgage interest, and rent and utility payments during the covered period, if certain criteria are satisfied.

The federal government responded again to further help America’s small businesses weather the financial challenges by passing the Paycheck Protection Program Flexibility Act (PPPFA).  The PPPFA changes several provisions related to the forgiveness of loans under the PPP, making loan forgiveness much more achievable.

The key highlights of the new regulations:

    • Extends the current 8-week covered period during which businesses must use funds to have loans forgiven to 24 weeks or December 31, 2020, whichever comes sooner. However, businesses that received a PPP loan before June 5, 2020 could keep the current 8-week covered period.
    • Extend to December 31, 2020 from June 30, 2020, a period in which loans can be forgiven if businesses restore staffing or salary levels that were previously reduced. The provision would apply to employee (FTEs) and wage reductions made from February 15, 2020 through April 26, 2020, that were restored by December 31, 2020.
    • PPP loan forgiveness amounts would be determined without regard to employment reductions for companies that document their inability to rehire employees employed as of February 15, 2020, and their inability to find similarly qualified employees by December 31, 2020. Under the bill, such companies would need to show that they could not resume business levels from before February 15, 2020, because they were complying with Federal COVID-19 safety, sanitization, or social distancing guidelines.
    • The deadline to apply for a PPP loan is still June 30, 2020.
    • Lowers the minimum percentage of loan proceeds required to be used for covered payroll costs to qualify for loan forgiveness from 75% to 60%. However, the payroll costs percentage threshold may not be as much of an issue anymore due to the extended 24-week covered period where more payroll costs can now be included in the loan forgiveness calculation.
    • Repeals a provision from the CARES Act {Section 2302(a)(3)} that barred companies with forgiven PPP loans from deferring their payroll tax payments.
    • Allows borrowers to defer principal and interest payments on PPP loans until the SBA compensates lenders for any forgiven amounts (or notifies the lender that no loan forgiveness is allowed), instead of the previous six-month deferral period. Borrowers that do not apply for forgiveness within 10 months after the end of loan forgiveness covered period must start making payments right after the end of that period.
    • Establishes a minimum loan maturity period of five years following an application for loan forgiveness, instead of the current two-year maturity set by the SBA. That provision would apply to PPP loans issued on or after June 5, 2020 though borrowers and lenders could agree to extend pre-June 5, 2020 loans to five years.
    • Unfortunately, the PPPFA does not address the tax deductibility of expenses paid with a forgiven loan. Although the CARES Act provided that the loan forgiveness amount is nontaxable, the IRS essentially took this benefit away when it issued Notice 2020-32 which disallowed any expenses paid with the forgiven portion of the PPP loan.

The PPP Flexibility Act is a win for small businesses.  The changes to the PPP loan forgiveness rules and guidance will ease many of the burdens placed on businesses that received the loans and offer a greater opportunity for PPP loan forgiveness.

However, even given the enhanced flexibility on the PPP loan forgiveness, we still have more questions and will be seeking further guidance on the following questions:

    1. Can a borrower whose loan was received before June 5, 2020 use the June 30, 2020 FTE reduction and salary reduction safe harbors instead of December 31, 2020?
    2. What happens if you restore FTEs and salaries using the safe harbors before December 31, 2020 but do not maintain the safe harbor levels through December 31, 2020?  Do you lose the loan forgiveness reduction restoration benefit?
    3. Can you apply for loan forgiveness before the end of the 24-week covered period if all the PPP loan funds are spent, FTE reductions and salary reductions are restored and you calculated 100% loan forgiveness at that time, or do you have to wait until the end of the 24-week covered period?
    4. Does the loan forgiveness limit on cash compensation change to $100,000 x 24/52 ($46,154) from $100,000 x 8/52 ($15,385)?
    5. With the new 24-week covered period, borrowers will most likely spend well beyond their PPP loan amount. How do borrowers document what costs were paid from PPP loan funds vs. other funds? This could be a problem for borrowers that spent most of their PPP loan funds, where more than 40% of which, were for non-payroll costs. Can you now go back and reallocate and state that these non-payroll costs came from other funds and that the PPP loan funds that were restored will be used for future payroll costs?
    6. Also, will the FTE reduction quotient now apply to the smaller PPP loan amount vs. the amount spent?


Businesses have a great deal to consider when applying for a PPP loan and forgiveness and should consult with their accounting professional and legal advisor to determine the best course of action.

Contributing author: Michael J. Reilly, CPA/ABV, CVA, CFF, CDA, is the managing partner at Dannible & McKee, LLP. Mike has experience in all areas of income and estate taxation, with a strong emphasis in individual and corporate tax planning, business valuations, ownership transition and employee benefits. If you have questions about the Paycheck Protection Program Flexibility Act or Paycheck Protection Program Forgiveness, contact Mike Reilly at mreilly@dmcpas.com or 315-472-9127 ext. 148.