FORGIVENESS OF PPP LOANS EASIER UNDER PAYCHECK PROTECTION PROGRAM FLEXIBILITY ACT of 2020
The Paycheck Protection Program Flexibility Act (the “PPPFA”), signed into law on June 5, 2020, dramatically alters critical elements of forgiveness of PPP loans. Key changes in the proposed new legislation include:
- Tripling the “covered period” from 8 weeks to 24 weeks from the date of the loan’s origination, or December 31, 2020, whichever is earlier. This is important for borrowers who have had a hard time spending the PPP loan proceeds because they have not been able to open, or fully reopen, their business. Businesses can still use the 8-week period if it received the PPP loan prior to the PPPFA being signed into law.
- Allowing business to spend up to 40% on non-payroll costs. Extending the “covered period” allows businesses to use PPP funds on almost four more months of mortgage interest, rent and utility costs. This change would not bring much benefit to businesses without changes to the original requirement that businesses spend 75% of loan proceeds on payroll costs. The PPPFA requires businesses spend only 60% of PPP loan proceeds on payroll costs. BE CAREFUL, however. The wording of the PPPFA creates a potential trap for businesses that did not exist in the original law: “[T]o receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs….” Thus, if a business fails to spend 60% on payroll, there is a risk none of the PPP loan is forgiven. Under the original law, forgiveness was a sliding scale and a loan would not be forgiven only for the amount that did not meet the 75%/25% metrics. Several congress people have identified this problem and have stated a desire for the SBA to utilize the previous sliding scale methodology, but the wording of the law is pretty clear.
- Providing businesses more time to replace FTEs or restore salary/hourly wages to February 15, 2020 levels. The PPPFA extends the period for businesses to restore the FTEs and salary/hourly wage to February 15, 2020 levels from June 30, 2020 to December 31, 2020. Thus, as long as your FTE levels and wages are at February 15, 2020 levels before the end of 2020, it will not cause a reduction in the amount of the loan forgiven.
- Providing a way for a business to show its inability to replace FTEs by the end of the year should be excused. A business can avoid a reduction in forgiveness for not restoring FTEs if it can document any of the following:
- Inability to rehire individuals who were employees on February 15, 2020;
- Inability to hire similarly qualified employees for unfilled position on or before December 31, 2020; or
- Inability to return to the same level of business activity as such business was operating before February 15, 2020 due to compliance with guidance issued by the Secretary of HHS, Director of CDC, or the OSHA during the period beginning on March 21, 2020 and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19. This is an important catchall for many businesses – if the world is such that a business is unable to fully open due to governmental orders (e.g., restaurants, bars), any loss in FTEs will not be taken into account in determining loan forgiveness.
- Providing more time to repay PPP loan proceeds that are not forgiven. The original 2-year payback period will be extended to 5 years. Although this only applies to loans made after passage of the PPPFA, lenders and borrowers can renegotiate existing PPP loans to match the 5-year repayment period.
- Potentially extending the deferral period. Originally, the payment of principal and interest was deferred for six months. THE PPPFA allows deferral until the date the lender receives the forgiveness amount from the SBA, which is likely to be significantly longer.
- Expanding the use of the deferral of certain payroll taxes for businesses with a PPP loan. The CARES Act, in addition to granting PPP loans, allowed employers to defer their 6.2% share of 2020 Social Security tax until the end of 2021 (50%) and end of 2022 (50%). Deferral was only available, however, to a PPP borrower until the moment the loan is forgiven. THE PPPFA allows an employer to double dip: PPP loan borrower now can defer all of 2020 Social Security tax burden into 2021 and 2022, even if the loan is forgiven prior to the end of the year.
Although THE PPPFA provides welcome relief to PPP borrowers, there are still questions remaining that affect loan forgiveness. For example, the amount of wages eligible for forgiveness for an employee making $100,000 or more a year should increase along with the longer covered period (from $15,385 to $46,153), but this increase is not clear in the PPPFA. Also, can you seek forgiveness of your loan prior to the end of the year or must you now wait? Hopefully, the SBA will provide guidance on these issues. Regardless, THE PPPFA is good news for businesses with a PPP loan.
If you have questions about your PPP loan, forgiveness, or obtaining a PPP loan (the deadline is June 30, 2020), contact the attorneys at Mesch Clark Rothschild.