US Paycheck Protection Program (“PPP”)

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This page was last updated on June 25, 2020.

New Paycheck Protection Program Flexibility Act – June 5, 2020

On June 5, 2020, the United States Congress enacted the Paycheck Protection Program Flexibility Act (the Flexibility Act). This new act modified the terms and conditions of the Paycheck Protection Program (PPP), which is detailed at the bottom of this page. Following are the additions to the original PPP, which was created under the March 27, 2020 Coronavirus Aid, Relief and Economic Security Act (the CARES Act).

Highlights

  • Under the new rules, at least 60% of PPP loan proceeds must be spent on payroll costs to be eligible for forgiveness (the minimum percentage was formerly 75%).
  • To be eligible for forgiveness, PPP loan proceeds can now be spent by the earlier of 24 weeks after origination and December 31, 2020 (the deadline was formerly 8 weeks after origination).
  • The loan forgiveness amount will not be reduced on the basis of the borrower having made layoffs if the borrower either attempts to rehire employees or if the borrower’s business does not return to its pre-February 15 activity levels due to compliance with federal COVID-19-related health guidance.
  • Balances of PPP loans that are not forgiven will now have a minimum maturity date of 5 years (no minimum was originally proposed by the CARES Act).  Loan payments will be deferred until the date on which the applicable forgiveness amount is remitted to the lender or, if the borrower does not apply for forgiveness, 10 months after the earlier of 24 weeks after origination and December 31, 2020.

Proceeds Use Requirements

For PPP loan forgiveness to occur, the SBA guidance initially provided that at least 75% of PPP loan proceeds must be used for payroll costs of U.S. situs employees.  The Flexibility Act lowers this minimum threshold to 60% and further provides that up to 40% of proceeds may be put toward covered mortgage interest, rent and utility payments.

Loan Forgiveness Requirements

Under the Flexibility Act, the “covered period” during which PPP loan proceeds must be spent has been extended from the 8 weeks following loan origination to 24 weeks following origination and December 31, 2020.  As under the initial PPP, forgivable amount of a PPP loan will be reduced proportionately to any reduction in employee headcount during the covered period compared to specified periods in 2019 and early 2020 and dollar for dollar for any decrease in salary or wages of an employee during the covered period exceeding 25% of their total salary in the most recent full quarter prior to the covered period.

The CARES Act originally provided that prior to June 30, employers could re-hire employees laid off between February 15 and April 27 or reverse reductions in salaries or wages made between February 15 and April 27 and still be eligible for full loan forgiveness. The Flexibility Act extends the rehiring/wage cut reversal period to December 31, 2020. Employers will also be exempted from the proportional forgiveness reduction for layoffs if they can show that they were unable to rehire the laid-off or similarly qualified employees prior to December 31, 2020 or that their business was unable to return to its pre-February 15 activity levels prior to December 31, 2020 due to compliance with federal COVID-19-related health guidance.

Maturity Period

The Flexibility Act provides that any principal balance of a PPP loan that is not forgiven will have a minimum maturity of 5 years from the date on which the borrower applies for forgiveness; the CARES Act had previously only provided for a maximum maturity of 10 years and no minimum maturity.

Deferral period

Whereas the CARES Act originally provided that PPP loan payments would be deferred for a period of not less than 6 months and not more than one year, the Flexibility Act provides that loan payments will be deferred until the date on which the amount of forgiveness determined under the CARES Act is remitted to the lender.  If a PPP borrower does not apply for forgiveness within 10 months after the last day of the “covered period”, the borrower’s PPP loan payments will not be due until at least the date that is 10 months after the last day of the covered period.

Original Paycheck Protection Program (“PPP”) - Created under the March 27, 2020 Coronavirus Aid, Relief and Economic Security Act (the CARES Act)

The New Paycheck Protection Program (“PPP”) authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. All loan terms will be the same for everyone. The loan is to be used to cover payroll and certain other expenses.

The critical thing is that the loan amounts will be forgiven (essentially converting it to a grant) as long as:

  • The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8-week period after the loan is made; and
  • Employee and compensation levels are maintained.

Loan amount is $10 million or 2.5 times of the business’s average monthly net payroll (gross payroll minus payroll taxes) computed based on the last 12 months. Payroll costs are capped at $100,000 on an annualized basis for each employee. Any qualifying expenses the business incurs in the 8 weeks period starting from the date of the loan (ending no later June 30, 2020) may be eligible for a future loan forgiveness. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. The remaining balance will be deferred for 6 months and repayment is to be done over a 2-year period. Interest on any outstanding balance is computed at a fixed rate of 1%.

Application acceptance begins today for small businesses and sole proprietorships, April 3, 2020. The loan can be applied through the businesses’ existing US Small Business Administration loan lenders (typically a regular bank approved by the SBA, see www.sba.gov for a list). Due to the likelihood of over-subscription, it is anticipated that less than 25% of the forgiven amount may be used for non-payroll expenses. A small business is defined to be one with 500 or fewer employees; certain industries may have more than 500 employees. There are few restrictions to business types so most businesses will qualify including nonprofits. In fact, certain chain or franchise type of business-like hotels and restaurants may be exempt from the affiliation standards thereby allowing the chain to have more than 500 employees. Independent contractors and self-employed individuals can apply for the same on April 10, 2020.

Please note that this is not a tax-based program, so your financial institutions are generally taking the lead on this. KRP can assist with the calculations, so please give us a call if you need assistance. Some of you may note that the original application found on the US Small Business Administration website did state that if the business has any 20% owner who is NOT a US citizen or permanent resident (i.e. greencard holder); the loan will not be approved. However, the Department of Treasury has released a new version of the form, found here; and the US ownership requirement has been removed. With the new update, this may prove to be a fantastically lucrative program for Canadian owned enterprises as well.

In a nutshell, a fantastically lucrative program, but of limited benefit to most Canadians.

For more information, please contact:

Terence Wong
Director International Taxation
780.420.4761