What The Paycheck Protection Program Flexibility Act of 2020 Means for Your Business

By Peter Bosman, Bart Norman and Charles Kabugo-Musoke

On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the Act) was signed into law. The Act amends the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in several important ways. 

Perhaps most importantly, the Act extends the period in which borrowers must use PPP loan proceeds in order to maintain eligibility for forgiveness from eight weeks to the earlier of 24 weeks after they receive their loan or December 31, 2020. Borrowers that received PPP loan proceeds before June 5 may elect to keep the initial eight week period. It is unclear at this time whether borrowers will be permitted to apply for loan forgiveness based on an intermediate period, if PPP loan proceeds are used in full before the end of their 24-week covered period. 

The Act also reduces the minimum amount of loan proceeds that must be utilized for payroll costs from 75% to 60%, meaning that up to 40% of loan proceeds may be used for eligible non-payroll costs including office and equipment leases, utilities and mortgage interest. The text of the Act suggested that borrowers who use less than 60% of their loan proceeds for payroll costs would be ineligible for any loan forgiveness. On June 8, 2020, however, the Small Business Administration (SBA) and the U.S. Department of the Treasury (Treasury) issued a Joint Statement clarifying that borrowers will be eligible for partial loan forgiveness if they use less than 60% of their loan proceeds for payroll costs, so long as at least 60% of the forgiven amount is used for payroll costs. 

The SBA and Treasury previously required all PPP loans to mature in two years. The Act requires PPP loans made after June 5, 2020 to mature in between five and ten years. The change does not apply to PPP loans made before June 5, but the Act permits borrowers and lenders to extend the maturity date of earlier loans to between five and ten years. 

The Act makes changes to how loan forgiveness amounts will be reduced based on decreases in headcount or salaries.  Previously, borrowers who reduced wages or decreased their number of full-time equivalent (FTE) employees between February 15, 2020 and April 26, 2020 could avoid reductions in their forgivable loan amounts if they eliminated those wage reductions or decreases in FTE numbers by June 30, 2020. The Act extends the safe harbor deadline to December 31, 2020. In addition, borrowers will not lose eligibility for loan forgiveness based on decreases in their number of FTE employees if they are unable to rehire employees or to hire similarly qualified employees on or before December 31, 2020. In a change that should be particularly helpful to restaurants, hotels and other businesses in the hospitality industry, borrowers will not lose eligibility for loan forgiveness based on decreases in their number of FTE employees if they can document an inability to return to the same level of business activity at which they were operating before February 15, 2020, due to sanitation, social distancing or other safety requirements related to COVID-19 that are implemented by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention or the Occupational Safety and Health Administration. Note that one consequence of the changes made by the Act appears to be that borrowers will be required to maintain an average number of FTE employees without reducing their wages by more than 25% for a longer period – 24 weeks instead of eight weeks – in order to avoid potential reductions to their forgiveness amount, although PPP loans will still only include 2.5 months of payroll costs. 

The Act also amends the deferral period for PPP loans. Previously, borrowers were not required to begin making payments of principal, interest or fees until six months after they received their loan proceeds. The Act defers those payments until the SBA determines the amount of forgiveness. In addition, deferment will end for any borrowers who do not apply for forgiveness within ten months after the end of their covered period.

The Act also eliminates a provision in the CARES Act making certain payroll tax deferrals unavailable for recipients of PPP loans who have their loans forgiven.

The SBA and Treasury indicated in the Joint Statement that they will promptly issue additional guidance, a modified PPP loan application and a modified PPP forgiveness application reflecting changes made by the Act. We will update this alert as additional guidance becomes available.

If you have any questions related to this alert, please do not hesitate to contact your regular Smith Anderson lawyer or any other member of our firm. Additionally, please visit and bookmark our firm’s Coronavirus (COVID-19) Business Resource Center, which is continuously updated with useful materials, and resources related to COVID-19. This tool has been made available to ensure that our clients and the broader business community stay informed on key issues that may impact their operations and to navigate the related business and legal issues during these challenging times.