PAYCHECK PROTECTION PROGRAM FLEXIBILITY ACT AMENDS PPP LOAN TERMS
On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act of 2020, H.R. 7010 (the “PPPFA”) into law, thereby amending the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which was enacted on March 27, 2020. In particular, the PPPFA changes key aspects of the terms applicable to the small business loans that fall under the purview of the CARES ACT, including an extension of the maturity date and the period in which the loan can be utilized, a lowering of the portion of the loan that must be utilized for payroll costs, and deferral of payroll taxes for its recipients, among other modifications affecting both lenders and borrowers.
Given that many small business recipients of the PPP loans have expressed concern about their inability to utilize the proceeds of the loans during the originally mandated periods especially considering state- and local government-enacted closures of businesses, the PPPFA provides small business much needed flexibility to properly utilize the PPP loan proceeds and qualify for full loan forgiveness. The below is a summary of the key changes in the PPPFA affecting PPP loans.
Extension of Covered Period for Loan Forgiveness
- The period in which PPP borrowers may seek loan forgiveness (the “Covered Period”) has been extended from 8 weeks to the earlier of 24 weeks after the date of the loan proceeds are disbursed and December 31, 2020. For loans made prior to the enactment of the PPPFA (i.e., before June 5, 2020), borrowers may choose to retain the 8-week covered period.
- This means that small business borrowers have a longer period of time to spend the loan proceeds. For small businesses that have been closed during most or all of the 8-week period from their loan origination date, this is particularly helpful. Allowing small businesses to elect to retain the 8-week covered period, however, helps businesses that (x) have already spent the proceeds and are confident the expenditures are appropriate or (y) do not want to maintain the full time equivalent (FTE) employees threshold for a longer period of time, apply for forgiveness at an earlier time.
- Further guidance would be helpful to determine whether or not the extension of loan forgiveness eligibility affects that the pro-rated cap of $100,000 per employee, which would have resulted in a payment of up to approximately $15,385 for the 8-week period, as opposed to the approximately $46,154 which would apply using the 24-week period.
Eligible Expenses for Loan Forgiveness
- PPP loan recipients were originally tasked to spend 75% of their loans on payroll expenses in order to qualify for loan forgiveness. The PPPFA lowers this percentage to 60%, thereby requiring small business employers to utilize only 60% of loan proceeds on payroll and allowing the remaining 40% to be utilized on other permitted business expenses (mortgage interest, rent and utilities) while remaining eligible for complete forgiveness of the PPP loan.
- The language of the PPPFA would benefit from further guidance as it appears that the PPPFA suggests that borrowers must spend the full 60% prior to requesting forgiveness or no amount of the loan will be eligible for forgiveness, which differs from the prior iteration and Small Business Administration (SBA) guidance that indicated the amount eligible for forgiveness would simply be reduced, and not entirely eliminated, if a borrower did not use the full 75% for payroll costs.
Extension of Loan Maturity for Unforgiven Amounts
- Originally, PPP loans had a minimum maturity of 2-years and a maximum maturity of 10 years. The PPPFA extends the minimum maturity to 5 years for loans made prior to June 5, 2020. In other words, borrowers with loans that have balances remaining after applying for loan forgiveness will have a longer period to repay such debt. Although this section of the PPPFA does not apply retroactively, it specifically states that borrowers and lenders of loans made prior to June 5, 2020 may mutually agree to extend the maturity date.
Safe Harbor and Rehire Periods Extended
- PPP loan forgiveness formerly required that employees be hired or rehired and/or salaries restored by June 30, 2020. The PPPFA has extended this date to December 31, 2020, giving employer borrowers more time to restore headcount and wages while still being eligible for loan forgiveness.
- There are also several other exemptions related to employee availability and loan forgiveness that have been modified to assist the employer under certain circumstances in which a small business can show it is unable to rehire its employees. In other words, a borrower will avoid a reduction in loan forgiveness if it is able to show in good faith (x) an inability to rehire individuals who were employed by it as of February 15, 2020 and to hire similarly qualified employees by December 31, 2020; or (y) an inability to restore its business activity to the levels achieved before the pandemic, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the director of the Centers for Disease Control and Prevention (CDC) or Occupational Safety and Health Administration (OSHA) during the period beginning on March 1, 2020 and ending on December 31, 2020, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirements related to COVID-19.
Extension of Deferral Period
- The PPPFA also extends the period for submitting applications for loan forgiveness to 10 months following the last day of the applicable Covered Period. Borrowers may now be able to defer payments of principal, interest and fees on their loans until the date on which the SBA remits the amount of the loan to be forgiven to the lender; provided borrowers apply for loan forgiveness within such 10-month period. If, however, borrowers do not apply within 10 months of the Covered Period, then they will have to make payments of principal, interest and fees in accordance with the terms of their PPP loan.
Payroll Tax Deferral
- The PPPFA permits PPP borrowers to delay their payment of payroll taxes through the applicability of Section 2302 of the CARES Act, which allows employers and self-employed individuals to postpone the payment of their share of Social Security taxes on employees’ wages.
For further information about the PPPFA or your PPP loan generally, please do not hesitate to contact Colleen M. Grady at 305-740-1960 or firstname.lastname@example.org.