Congress Changes the Rules on PPP Loan Forgiveness, but Questions Remain

Newly passed changes to the Paycheck Protection Program are designed to make it easier for small businesses to have their loans forgiven.

The Paycheck Protection Program has been around since the end of March and provides funds for small businesses to retain employees and keep operating during the global coronavirus pandemic. If used properly, the business should have all or a portion of the loan forgiven. The new law eases some of the restrictions on how that money can be spent.

Congress passed The Paycheck Protection Program Flexibility Act last week and it became law on June 5. As its name would imply, the Act gives PPP recipients more flexibility to use the funds as they see fit without having to pay it all back.

The biggest change is to the amount of the loan that must be used for payroll. When the PPP was first created, SBA required that recipients use at least 75% of the proceeds on payroll in order to qualify for loan forgiveness. That amount is now reduced to 60%.

To put that in round figures, let’s say a concern received a $2 million loan. Under the original requirements, it would have had to use $1.5 million on payroll. Now, it need only spend $1.2 million on payroll. That’s a $300,000 difference.

The remaining 40% cannot be spent on just anything, however. According to the text of the law, it can be used for interest on a mortgage, rent, or utilities.

Another big change to the program is that the period of loan forgiveness has been extended from eight weeks to 24. Obviously, that gives recipients the flexibility to stretch out the use of those funds over half a year rather than two months.

But here’s what’s hard to understand. Each loan was designed to help a business get through eight weeks, right? Shouldn’t a loan designed to get a business through 24 weeks be three times larger? Or is the business supposed to adjust its spending to make the funds last? Should it now use the funds to pay one-third of each employee’s salary? Or does this change simply give a business more time to correctly document its spending and seek forgiveness?

The U.S. Small Business Administration could provide some guidance. Since the PPP has been in existence, the SBA has periodically updated its list of Frequently Asked Questions to help borrowers and lenders to navigate the turbulent waters. It’s currently up to 48 questions and answers. With this dramatic change, it’s likely to keep going.

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