On June 5, 2020, U.S. President Donald Trump signed into law the Paycheck Protection Program (PPP) Flexibility Act (the Act). The Act gives borrowers more time to spend PPP loan proceeds and makes it easier for borrowers to qualify for forgiveness by (i) lowering the amount of the loan that must be spent on payroll expenses, (ii) extending the deadline for borrowers to rehire furloughed or laid-off employees, (iii) adding exceptions to avoid loan forgiveness reductions due to layoffs and (iv) extending the payment deferral period to give borrowers more time to apply for forgiveness without having to start paying interest or principal on the underlying loan.
The Department of the Treasury (the Treasury) or the U.S. Small Business Administration (the SBA) may publish further guidance with respect to the Act — likely in the form of an interim final rule and frequently asked questions. Until such guidance is issued, below are key takeaways that supplement our prior articles related to PPP, the links to which can be found here and here.
- Covered Period Extension: The Act extends the “covered period” during which a borrower must spend PPP loan proceeds from eight weeks following loan disbursement to the earlier of (i) 24 weeks after loan disbursement or (ii) December 31, 2020. For loans issued prior to the effective date of the Act, borrowers have the option to use either the 24-week “covered period” or the initial eight-week “covered period.”
- Reduced Threshold Requirement: The Act reduces the amount of loan proceeds that must be spent on payroll costs in order to qualify for forgiveness from 75 percent to 60 percent. In other words, as much as 40 percent of the loan proceeds can be spent on permissible nonpayroll expenses, such as mortgage interest, rent and utilities. While the lower threshold will allow many more borrowers to qualify for loan forgiveness, borrowers who spend less than 60 percent of loan proceeds on payroll costs will not be entitled to any loan forgiveness (as opposed to a proportionate reduction in forgiveness). Sen, Marco Rubio, R-Fla., Chairman of the Senate Committee on Small Business and Entrepreneurship, and other senators have raised concerns about this forgiveness cliff and have stated that they will address it with additional legislation if the Trump administration is unable to fix the “unintended consequences” of the Act. For borrowers unable to meet the 60 percent threshold, we recommend waiting to apply for loan forgiveness until either the SBA clarifies this issue by regulation or Congress addresses it with additional legislation.
- Maturity Term Extension: The Act extends the loan repayment period for any unforgiven portion of a PPP loan made after the effective date of the Act from two years to five years. For loans issued prior to the effective date of the Act, lenders and borrowers may mutually agree to modify the maturity terms.
- June 30 Full-Time Equivalent Safe Harbor Extension: The Act extends the deadline for borrowers to restore headcount reductions (and avoid a reduction in their loan forgiveness amounts) from June 30 to December 31, 2020. Thus, if a borrower reduced its headcount between February 15 and April 26, 2020, but restores its headcount by December 31, 2020, the borrower’s forgiveness amount will not be affected by its initial headcount reduction.
- New Exemption Based on Employee Availability: The Act provides a new exemption from a loan forgiveness reduction associated with a headcount reduction. The exemption provides that a borrower’s forgiveness amount will not be affected by a headcount reduction if the borrower can document in good faith that
- the borrower is unable to rehire employees who worked for the borrower as of February 15, 2020, and the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or
- the borrower is unable to return to the same level of business activity as existed on February 15, 2020, as a result of requirements and guidance issued 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 during the period from March 1 through December 31, 2020, for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19.
- Deferral Period Extension: The Act extends the deferral payment period from six months after the loan disbursement date until the date on which the SBA remits the forgiveness amount to the lender. However, if a borrower does not apply for loan forgiveness within 10 months after the last day of the “covered period,” the deferral period ends after such 10-month period.
- Payroll Tax Deferral: The Act allows borrowers to defer payment of the employer share of the Social Security tax under Section 2302 of the Coronavirus Aid, Relief and Economic Security Act through December 31, 2020. Previously, PPP borrowers were prohibited from taking advantage of the payroll tax deferral allowed under Section 2302.
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