Payroll Protection Program (PPP) Update

It is expected today that the President will sign bipartisan legislation to update the U.S. Small Business Administration (SBA) Payroll Protection Program (PPP) to make several changes to the rules governing the forgivable loan program designed to help small businesses keep employees on payroll. This is great news for businesses that received the PPP loan and were left with many unanswered questions.

The initial PPP provided small businesses (fewer than 500 employees) an opportunity to take a loan for 2.5 times their monthly payroll which could be used to maintain staff and cover some additional business expenses. The loan would be forgiven if all outlined conditions were met. At least 75 percent of the proceeds had to be used to cover payroll costs and up to 25 percent could be used for rent, utilities or interest on mortgages. Forgiveness was based on the employer maintaining the same employee and salary levels as pre-COVID-19 times. The borrower then had 8 weeks from the date the loan was received to meet the above terms or the borrower had to repay the unused portion over 2 years at 1%. All funds had to be used by June 30, 2020.

Due to the extended lockdown and the slow pace that small businesses have returned to “business as usual” (especially in New Jersey), the revisions to the Paycheck Protection Program Flexibility Act (Flexibility Act) serve to alleviate several areas of worry. The most noticeable changes are:

1. Extension of Covered Period – borrowers now have the earlier of (a) 24 weeks or (b) December 31, 2020 to use the loan proceeds and achieve full forgiveness. As NJ businesses start to reopen in June/July, this is the biggest indication that most borrowers will qualify for full forgiveness. In particular, restaurants and seasonal businesses will benefit most. The recent decrease in unemployment numbers may be a direct result of the extension as employers have clearer expectations now.
2. Minimum Amount for Payroll – The new minimum is 60% of PPP loans need to be used for payroll costs to obtain full forgiveness. However, up to 100% of proceeds can be used for payroll.
3. Calculation of Full-Time Employees – since PPP borrowers have to maintain pre-COVID-19 staff levels, it was imperative that a large number of employees return to work. The extension of the hiring deadline from June 30 to December 31 provides great relief to businesses slow to return to fully operational status.
4. Payroll Tax Deferral – the CARES Act allowed employers to delay paying the employer portion of social security tax (6.2% tax on wages) with one-half payable by December 31, 2021 and the remaining half by December 31, 2022. However, any business receiving loan forgiveness under PPP was not eligible for the deferral. The Flexibility Act allows all borrowers to defer 2020 social security payroll tax obligations.

Overall, we are delighted with the recent changes to the PPP and the clarification of the programs rules. This is great news for small business owners and the economy.