More Changes to The Paycheck Protection Program: The Paycheck Protection Program Flexibility Act of 2020

By Brian Bernhardt

On March 27, 2020, the CARES Act became law.  As part of the CARES Act, Congress created the Paycheck Protection Program (the “PPP”) to provide, after an amendment increasing the amount of funding, $659 billion in loan assistance to small businesses and nonprofits.  

The PPP is designed to, in general, provide small businesses with a short term loan (a “PPP Loan”) equal to two and a half months of payroll. For general rules governing the PPP and PPP Loans, please see Forrest Firm blog articles here, here, and here, accurate as of the time of their publication.  The CARES Act also provides for the forgiveness of PPP Loans in certain circumstances by converting the PPP Loans into grants.  For a detailed summary and analysis of PPP Loan Forgiveness, please see the Forrest Firm blog article here, accurate as of the time of its publication.

On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “PPPFA”) became law and made a number of changes to the PPP.  Some of these amendments addresses specific statutory provisions of the PPP.  Other amendments addresses one of more of the regulatory interpretations issued by the Small Business Administration (the “SBA”) in its seventeen (17) Interim Final Rules.  The PPPFA made the following changes to the PPP:

    1. Increase in Term of PPP Loans

Borrowers who receive a PPP Loan after June 5, 2020 will have five (5) Borrowers who receive a PPP Loan after June 5, 2020 will have five (5) years to repay the PPP Loan.  Borrowers who received a PPP Loan on June 5, 2020 or earlier will retain the original two (2) year term – however, the PPPFA allows borrowers and lenders to mutually agree to extend the two (2) year term to five (5) years.

    2. Extension of Forgiveness Period 

Under the original PPP, borrowers had an eight (8) week ‘covered period’ from the date they received a PPP Loan to use the PPP Loan proceeds.  That covered period caused problems to some businesses and industries which had laid off employees and were unable to rehire them, had shut down operations and were unable to reopen, and which were, as a result, spending more than 25% of their PPP Loan proceeds on mortgage interest, rent, and/or utilities, as opposed to payroll costs.

The PPPFA extends the covered period to the earlier of (1) twenty-four (24) weeks after a business received a PPP Loan or (2) December 31, 2020.  Notably, the PPPFA does not increase the alternative payroll covered period created by the SBA in its Interim Final Rule addressing loan forgiveness, but the SBA will likely address that issue in further guidance.  This increase in the covered period will make it easier for borrowers to have enough time to spend their PPP Loans and qualify for loan forgiveness.  

This provision of the PPPFA applies to all PPP Loans, even those obtained before to June 5, 2020.  However, if a business obtained its PPP Loan prior to June 5, 2020 and wants to retain its eight (8) week covered period, it may do so.

    3. Changes to SBA 75%/25% Payroll Costs Rule

In a Final Interim Rule issued on April 3, 202, the SBA determined that borrowers were required to spend 75% of their PPP Loan proceeds of payroll costs, and no more than 25% of their PPP Loan proceeds on certain mortgage interest, rent, and utilities.  A business’s failure to meet this rule resulted in a decrease in the amount of the PPP Loan it could have forgiven  This rule, not included in the original PPP statute, caused problems to some businesses and industries which had reduced payroll costs through lay-offs and furloughs as a result of decreased revenue, while their fixed mortgage, rent, and/or utility costs did not change.

 The PPPFA provides that borrowers need only spend 60% of their PPP Loan proceeds on payroll costs, and 40% of their PPP Loan proceeds on non-payroll costs.  On first glance,  this rule appears to create a “cliff” whereby businesses which spend 60% of their PPP Loan proceeds on payroll costs are entitled to PPP Loan forgiveness but if they spend only 59% of their PPP Loan proceeds on payroll costs they are not entitled to any PPP Loan forgiveness.  On Monday, June 8, 2020, however, the Department of Treasury announced, in a press release, that it would not interpret the PPPFA as creating this type of “cliff.”  Instead, if borrowers did not spend 60% of their PPP Loan proceeds on payroll costs they would simply be entitled to a decreased amount of loan forgiveness.

    4. Full-Time Equivalent Employee Safe Harbor

The PPPFA extends the safe harbor period by which borrowers may restore their FTE headcount to avoid a reduction in PPP Loan forgiveness from June 30, 2020, to December 31, 2020.  However, in order for a business to take advantage of this safe harbor, it must be one of two tests, “in good faith.”

First, the business must be able to document that it is unable to rehire the same individuals who were employees of the business on February 15, 2020 and that it is unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020.  The PPPFA does not define the term “similarly qualified employees,” explain what “unable to hire” means, or provide any context for the term “unfilled positions.”

Second, the business must be able to document that it is unable to return to the same level of business activity as it was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the DHHS, the CDCC, or OSHA from March 21, 2020 through December 31, 2020 related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to the coronavirus.  Again the PPPFA provides no definitions or explanations for terms such as “same level of business activity” or “any other worker or customer safety requirement.”

    5. Extension of Deferral on Repayment of PPP Loan

In the original PPP, borrowers were provided a six (6) month deferral on PPP Loan repayment.  The PPPFA makes changes to this deferral period.  Now, businesses may defer payments on any portion of their PPP Loans which must be repaid until the date on which the SBA pays the business’s lender the amount of the PPP Loan which is forgiven.  There is a caveat, however – if a business does not apply for loan forgiveness within ten (10) months of the end of its covered period, then the payment deferral ends the next day.

    6. Delay of Payment of Employer Payroll Taxes

The CARES Act provides, in general, that businesses may defer payment of employment taxes.  For employment taxes due between March 27, 2020 and December 31, 2020, half are due by December 31, 2021 and the other half are due by December 31, 20220.  However, the CARES Act prohibited businesses which had PPP Loans forgiven from taking advantage of this employment tax deferral – the PPPFA, though, eliminates this prohibition.


The PPPFA made a number of revisions to the PPP which borrowers, whether current or future (the deadline for applying for a PPP Loan remains June 30, 2020), need to know.  It also left a number of issues outstanding, some of which it created and others (such as whether costs paid out of PPP Loans will become deductible, for instance) created otherwise.  There will be more guidance, by the SBA and the IRS, and potentially more legislation.  So, stay tuned…

If you have any questions about the Paycheck Protection Program, other aspects of the CARES Act, or other tax, risk management, or business needs, please feel free to reach out to me.