The U.S. government has enacted changes to the Paycheck Protection Program (“PPP”) including the relaxation of PPP Loan Forgiveness rules with the goal of making it easier for many businesses to qualify for loan forgiveness on a larger portion of their loans. These changes were signed into law on Friday through the Paycheck Protection Program Flexibility Act of 2020 (PPPFA). This new legislation contains many important changes to the PPP.
Loan Forgiveness
The PPPFA extends the “covered period” from 8 weeks to 24 weeks from the date of the origination of the covered loan, or December 31, 2020, whichever is earlier. A borrower under an existing PPP loan may elect to keep the original 8 week covered period. The requirement that the Borrower use at least 75% of the forgivable amount of the PPP Loan on payroll costs was lowered to 60%. The Borrower may now use up to 40% on nonpayroll costs (mortgage interest, rent and utilities) for its loan forgiveness amount. However, the way the PPPFA is written, the new threshold is now a “cliff”, meaning that at least 60% of the loan amount must be spent on payroll costs in order to be eligible for forgiveness. It is not yet clear whether a Borrower electing to use the 8 week covered period should follow the new 60/40 rules or the original 75/25 requirement.
The Safe Harbor date to restore reductions in Full-time Equivalent (FTE) employees and wages has been changed from June 30, 2020 to December 31, 2020.
The PPPFA adds an exemption to the FTE Reduction calculation, if for the period beginning February 15, 2020, and ending December 31, 2020, the Borrower can document:
An inability to rehire employees who were employed as of February 15, 2020, and
An inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or
An inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements and guidelines issued by Health and Human Services, CDC or OSHA during March 1, 2020 to December 31, 2020 related to certain protocols for responding to COVID-19.
Deferral of Employer Payroll Taxes
Recipients of PPP loan forgiveness are no longer excluded from the deferral of the employer’s half of federal social security and Medicare taxes. Borrowers may now continue to defer payroll taxes through the end of 2020.
Loan Term and Deferral Period
The CARES Act (Section 1106) initially provided that a PPP loan would have a maximum maturity of 10 years from the date on which the Borrower applies for loan forgiveness. In its first Interim Final Rule (IFR) issued in early April 2020, the SBA reduced the loan maturity to two years. The PPPFA requires all new PPP loans made on or after the effective date (June 5, 2020) to have a minimum maturity of 5 years, up to a maximum of 10 years. The PPPFA also does not “prohibit lenders and borrowers from mutually agreeing” to modify the two-year term of existing PPP loans to conform with this new section. The six month deferral period before payments are due has been replaced. The deferral period now begins on the loan date and ends on the date that the SBA remits the amount of forgiveness to the lender.
If a borrower does not apply for forgiveness within 10 months after the last day of the covered period, the deferral period ends on that same date.
What’s Next?
The SBA will need to update the Loan Forgiveness Application released on May 15, 2020 for the changes enacted by the PPPFA. Additional guidance may also be released in the form of Frequently Asked Questions and new interim final rules to help borrowers and lenders implement all of the modifications required.
Some companies have already applied for and received forgiveness of their PPP loan amounts. With more than one million borrowers finishing their initial 8 week covered periods this week, time is of the essence to evaluate these options. If you wish to use the 8 week covered period, please contact your lenders about the appropriate steps to take to apply.
It remains unclear whether you can apply for forgiveness and prepare your FTE and salary reduction tests as of the date that you have fully used your loan proceeds towards qualified expenses. If businesses must wait to apply for forgiveness and perform these tests at the end of the 24 weeks, they will be faced with the challenge of having to maintain headcount and salary levels for full loan forgiveness, while not having the benefit of additional loan proceeds.
If you have not previously applied for a PPP loan, or you previously returned or did not accept your loan amount, you are still eligible to apply up until the loan application deadline of June 30, 2020. Of course, you still must meet the requirements of the program including the certification.
SBA Lenders accepting PPP Applications: (updated 6/9/2020)
NOTE: All changes above are retroactively applicable as if they were included in the original CARES Act, except for the change in loan term, which is prospective. As usual, please make sure to stay in contact with your accounting firm.