*This article was updated on June 5, 2020, to reflect that President Trump signed the bill, and updated again on June 12, 2020, to reflect the issuance of new guidance.
On June 11, 2020, the Small Business Administration (SBA) and Department of Treasury (Treasury) released an interim final rule revising the first interim final rule and interpreting the Paycheck Protection Program Flexibility Act of 2020 (PPPF Act) that was signed into law on June 5, 2020. The PPPF Act modifies Title I of the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020, as revised by the Paycheck Protection Program and Health Care Enhancement Act enacted on April 24, 2020 (collectively referred to herein as the CARES Act). There are many welcomed changes within the PPPF Act; however, there are still questions and some concerns that will need to be addressed through additional rulemaking by the SBA and the Treasury. This article summarizes the changes made by PPPF Act and describes some of the concerns that still need to be addressed.
What does the PPPF Act change?
Changes to the "covered period" as defined in Section 1102 of the CARES Act
The “covered period” in this section of the CARES Act is extended from June 30, 2020, until Dec. 31, 2020. With the change extending the “covered period” as defined within this section of the CARES Act, the fear that allowable uses of the covered loan would expire on June 30, 2020, is eliminated because the new date is now Dec. 31, 2020. However, congressional intent found here firmly states that this extension does not pertain to the issuance of PPP loan after June 30, 2020, and that this date remains firm in accordance with section 1102(b) of the CARES Act.
Changes to the “covered period” as defined in Section 1106 of the CARES Act
This expands the eight-week forgiveness period that begins upon receipt of the PPP loan funds to the earlier of (i) 24 weeks from the loan funding date or (ii) Dec. 31, 2020. However, only borrowers that obtained a PPP loan prior to the enactment of PPPF Act have the option to elect their original eight-week period.
Payroll maximum per employee: The payroll maximum per employee has been changed during the revised covered period option (described above) to $46,154. However, the maximum amount is still $15,385 for borrowers using the original eight-week covered period.
75%/25% forgiveness ratio: The forgiveness ratio is modified to a 60%/40% split. 60% of the requested loan forgiveness amount must be used on eligible payroll costs and 40% of the requested loan forgiveness amount can be spent on eligible non-payroll expenses. This new 60%/40% ratio test must be satisfied regardless of which covered period option is chosen and the new interim final rule interpreted the PPPF Act to mean loan forgiveness will be on a proportionate sliding scale basis.
Loan term: The two-year loan term upon enactment of the PPPF Act will be changed to a minimum of five through a maximum of 10 years. However, for all existing PPP loans, the lender and borrower must mutually agree to a change in terms and document the same because it is not automatic. There is language within section 1109 of the CARES Act that may support a borrower's request to have a lender amend the maturity date of the Note.
Payment deferral period: The PPPF Act extends the six-month payment deferral period to the date that loan forgiveness is determined. This will avoid situations where loan payments begin and must later be refunded because a forgiveness decision is made after the six-month deferral period. The payment deferral period for a borrower that is not seeking loan forgiveness is now 10 months and payments of principal, interest, and fees on such PPP loan begin thereafter.
Payroll tax deferral under Section 2302 of the CARES Act: Previously, the IRS issued guidance allowing borrowers to take advantage of a deferral for the employer’s share of Social Security payroll taxes until the borrower received notice that some or all of its PPP loan would be forgiven. Now, borrowers may avail themselves of this deferral until Dec. 31, 2020, and payment on half of the deferred amount is due to the Internal Revenue Service (IRS) by Dec. 31, 2021, and the remaining half is due by Dec. 31, 2022.
Loan forgiveness reductions: Originally, borrowers had a safe harbor date of June 30, 2020 to bring salaries and full time equivalent (FTE) employee counts back to pre-COVID-19 levels or suffer a reduction in loan forgiveness. The PPPF Act has extended that safe harbor date to Dec. 31, 2020. Additionally, the PPPF Act also allows an exemption from loan forgiveness reduction if an employer documents that it: (i) is not able to hire individuals who were employees as of Feb. 15, 2020, (ii) could not find qualified employees to backfill its FTE workforce reduction, or (iii) could not restore its business to comparable activity as a result of federal health guidelines, or social distancing requirements. This new relief does not include an inability to hire employees due generally to decreased economic activity.
Applying for loan forgiveness: The PPPF Act states that borrowers will have 10 months from the conclusion of its chosen covered period to apply for loan forgiveness. The changes within the PPPF Act will also necessitate the need for a revised Loan Forgiveness Application to be issued.
The new interim final rule states new guidance will be issued to revise prior interim final rules that provided guidance on loan forgiveness and loan review procedures. Hopefully, some questions and thoughts that remain and are noted below will be answered at that time.
- Will the SBA and Treasury clarify or retract the rule within Interim Final Rule #3 (3245–AH36), issued on April 14, 2020, requiring 75% of the loan proceeds be used on eligible payroll costs? Or will that rule remain, undermining the usefulness of the newly established 60%/40% ratio for PPP loan funds that forgiveness is requested?
- Current borrowers need to determine if they should elect the alternative 24-week covered period given the FTE and salary loan forgiveness reductions that may negatively impact them if the borrower does not have enough money to pay employees for the entire 24-week period. For example, a borrower needs to consider (i) how much of its PPP loan has it used, (ii) eligible payroll expense changes, (iii) current and prospective future FTE counts, (iv) eligible non-payroll expense changes, (v) and other SBA and Treasury PPP regulation and guidance provisions affecting the business.
- It is our belief that rulemaking should be implemented to lessen the detrimental impact the 24-week period may have on a borrower. For example, this provision would be more effective if each borrower could elect a consecutive period of time between the eight-week period and the 24-week period of time that best works for its business and then be held accountable to the loan forgiveness reduction rules for that specific time period. This is an important change because many borrowers may not have the ability to continue paying employees after their PPP loan funds run out and, currently, there is no ability to increase the amount of PPP money a borrower receives. Hence, if a borrower can only use PPP loan funds for 12 weeks and thereafter cannot retain the required FTE count for the remainder of the 24-week period and does not qualify for an FTE exemption, it will suffer a detrimental loss in its requested forgiveness amount. We do not think this is Congress's intent and hope to see a rule or further legislation that addresses this issue.
- Will the SBA and Treasury take into account state health guidelines that limited business activity in the event a state’s health guidance is more stringent than the federal government’s health guidance?
Taft's SBA Task Force stands ready to assist with all PPP loan-related questions. Our team can provide counsel on the proper use of funds, loan forgiveness calculations, and applying for loan forgiveness, provide up-to-date rules and guidance governing the program, and advise on the intricacies of how to most effectively navigate the rules and guidance for your specific business.
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