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Flexibility Act Loosens Restrictions in PPP Loan Program

On Friday morning the President signed into law the Flexibility Act (the “Act”) making significant changes to the forgiveness portion of the Paycheck Protection Program (PPP). These changes will triple the time allotted for small businesses and other PPP loan recipients to spend the funds and still qualify for forgiveness of the loans.

Flexibility Act

Key changes to the PPP program brought by the Flexibility Act include:

  • Covered Period: PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
  • Payroll Cost Percentage: The payroll expenditure requirement drops to 60% from 75% but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven (although there is talk of a possible technical correction to this).
  • Employee Rehiring Date: Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30. 
  • Exemptions Based on Employee Availability: The Act includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they do not fully restore their workforce. The Flexibility Act allows borrowers to adjust their calculations because (1) they could not find qualified employees or (2) were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
  • Loan Maturity Period: Borrowers now have five years to repay the loan instead of two. The interest rate remains at 1%.
  • Extended Deferral Period: Payment of principal, interest and fees are deferred until forgiveness is remitted to the lender, only if the borrower applies for forgiveness within 10 months after the last day of the covered period.
  • Payroll Tax Deferral: The Act allows businesses that took a PPP loan to also delay payment of their payroll taxes, which was prohibited under the CARES Act.

Loan Forgiveness Guidance

Earlier, the SBA released new guidance addressing loan forgiveness under the PPP, as well as the SBA’s loan review procedures. Some of this earlier issued guidance has now been overtaken by the passage of the Act.

Noteworthy aspects of the loan forgiveness guidance that remain intact include the following:

Payroll Costs

  • Reaffirms that, in general, payroll costs paid or incurred during the 8 weeks following disbursement of the loan (i.e., the “covered period”) are eligible for forgiveness, but that borrowers may also use an “alternative payroll covered period” as set forth in the instructions to the Loan Forgiveness Application, in which the borrower may opt to use a covered period beginning on the first day of the borrower’s first payroll cycle;
  • Confirms that payroll costs are generally incurred on the day the employee’s pay is earned (i.e., the day the employee worked) and clarifies that where employees are not performing work and are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day the employee would have performed work);
  • Confirms that employee bonuses and hazard pay are eligible for payroll costs, as long as the employee’s total compensation does not exceed the $100,000 annualized cap;
  • Wages paid to furloughed employees during the covered period are eligible for forgiveness;
  • Clarifies that owner-employees and self-employed individuals are limited to “payroll compensation” no greater than the lesser of 8/52 of 2019 compensation or $15,385 per individual, and owner-employees are further capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf. Schedule C filers are capped by the amount of their owner compensation requirement, calculated based on 2019 net profit. And general partners are capped by the amount of their 2019 net earnings from self-employment, subject to certain reductions.

Nonpayroll Costs

  • Reaffirms that nonpayroll costs must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period, but clarifies that if a borrower’s nonpayroll expenses straddle the covered and noncovered period and are paid after the covered period (e.g., a borrower’s “covered period” ends on July 26 and its electricity expenses for July are not paid until August 10), the borrower may seek partial forgiveness of the expenses incurred during the covered period but paid on the next regular billing date (e.g., electricity expenses for July 1-26 are forgivable);
  • Advance payments of interest on mortgage obligations are not eligible for loan forgiveness.

Forgiveness Reductions

  • Confirms that EIDL advances will be deducted from loan forgiveness amounts.

Head Count Reduction – Computations

  • Borrowers will not be penalized for voluntary resignations and schedule reductions or for-cause terminations;
  • Aa “full-time employee” is an employee who works 40 hours or more, on average, each week, and is given a full-time equivalent (FTE) weighted of 1.0;
  • In calculating the FTE of part-time employees, borrowers may either add the hours of all part-time employees and divide by 40, or elect, “for administrative convenience . . . to use a full-time equivalency of 0.5 for each part-time employee,” as long as the borrower applies the chosen method consistently.

Salary/Wage Reductions

  • Confirming that the 25% salary/wage reduction calculation (for employees who were not paid more than the annualized equivalent of $100,000 during any 2019 pay period) is performed on a per-employee basis and not in the aggregate.
  • Clarifying that borrowers will not be doubly penalized for reductions, such that the salary/wage reduction applies only to the decline in employee salary and wages not attributable to the FTE reduction.


  • The SBA guidance also confirms that lenders have 60 days from receipt of a complete forgiveness application to issue a decision to the SBA, and that the lender must request payment from the SBA at the time it issues its decision to the SBA.  Further the SBA is required to remit the appropriate forgiveness amount to the lender, plus any interest that accrued during that period, subject to “any SBA review of the loan or loan application.”

Loan Review Guidance – Rules for Borrowers

The SBA provided guidance clarifying various components of its loan review process including:

  • Clarifying that the SBA may review “any PPP loans,” at any time in its discretion, and that the SBA may consider in that review whether a borrower correctly calculated the loan amount, properly used the loan proceeds, and/or is entitled to the loan forgiveness amount sought (this presumably includes loans smaller than $2 million, notwithstanding the SBA’s previous suggestion in FAQ 46 that audits will be focused on loans of $2 million or more).
  • Requiring Borrowers to retain PPP documentation for at least 6 years after the date the loan is forgiven or paid in full, and the SBA must be granted these files upon request.
  • If the SBA believes a borrower may be ineligible for the loan or for some forgiveness amount, it will require that the lender make a written request for additional information from the borrower, and it may also request information directly from the borrower. All information provided by the borrower in response (either directly to the SBA or through the lender) will be considered in the SBA’s review.
  • Failure to respond to the SBA’s request for information may result in a determination that the borrower is ineligible for forgiveness or for the loan itself.
  • Emphasizing that the shareholders, members, or partners of a borrower that is deemed ineligible to have received a PPP loan will not be protected by “the CARES Act’s nonrecourse provision … which limits SBA’s recourse against individual shareholders, members, or partners of a PPP borrower for nonpayment of a PPP loan only’ if the borrower is an eligible recipient of the loan” (emphasis added).
  • Borrowers have the opportunity to seek reconsideration and appeal of review decisions. Procedural rules covering this process are expected from the SBA.

This alert serves as a general summary, and does not constitute legal guidance. All statements made in this article should be verified by counsel retained specifically for that purpose. Please contact us with any specific questions.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or

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