On June 3, 2020 the U.S. Senate voted unanimously to pass new Paycheck Protection Program (PPP) legislation that was approved last week in the House of Representatives. Known as the Paycheck Protection Program Flexibility Act of 2020 (the Act), this legislation seeks to ease some of the restrictions imposed under the PPP and make it easier for borrowers to achieve forgiveness. At the time of this writing, the bill is awaiting approval by the President, who is expected to sign the act into law shortly.
A few key takeaways from the Act:
- Under prior PPP guidance, the unforgiven portion of a PPP loan matured in 2 years. Under the Act, the maturity period is extended to 5 years. We note that this extended maturity is only applicable for loans made after this Act is passed. However, the Act notes that borrowers and lenders may mutually agree to extend the maturity period of previously issued loans.
- The Act reduces the requirement that 75% of forgivable costs must be “payroll costs” to 60%. Effectively, this increases the amount of non-payroll costs that are eligible for forgiveness from 25% to 40%. Based on the wording of the Act, it may appear as though the new 60% threshold for payroll costs will act as a “cliff” (i.e. if a borrower does not spend at least 60% of PPP loan proceeds on payroll costs, they are not eligible for any forgiveness). This would be inconsistent with recent guidance from the Small Business Administration (SBA). There could be a technical correction or additional guidance from SBA to clarify this.
- The Act extends the covered period for forgiveness from 8 weeks to the earlier of 24 weeks or December 31, 2020 (it is also important to note that a PPP borrower may still chose to use an 8-week covered period). While it seems clear that the $100,000 cap on annual salary remains in place, it would appear that this could increase the amount of forgiveness for each individual employee to $46,154 ($100,000/52 * 24); although we need to wait for additional guidance to confirm this.
- The Act extends the deadline for restoring full-time equivalents (FTEs) and salary reductions from June 30, 2020 to December 31, 2020. Under the CARES Act forgiveness would be reduced if the borrower reduced salaries or the number of FTEs and did not restore these by June 30, 2020. Under the Act, borrowers have more time to bring FTEs and salaries back to the levels they were at on February 15, 2020.
- Loan forgiveness will not be reduced for borrowers who are unable to rehire individuals who were employees of the borrower as of February 15, 2020 AND are unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; OR due to compliance with health regulations established by the Department of Health and Human Services, Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, the borrower is unable to return to the same business level it was operating at on February 15, 2020.
- Businesses who received funds under the PPP will be allowed to defer the employer portion of payroll taxes allowed under the CARES Act. Previously there was an exception to the payroll tax deferral provision for PPP borrowers.
- The period in which interest and principal payments are deferred will be extended from 6 months to either (i) the date the forgiveness amount is determined or (ii) 10 months after the covered period for forgiveness if the borrower fails to apply for forgiveness during that period. This may effectively set a deadline for PPP forgiveness applications at 10 months after the last day of the covered period.
As always, with new regulations, many additional questions still remain. Stay tuned for future updates.
 Based on SBA Form 3508 released May 15, 2020 and an Interim Final Rule released May 22, 2020, it was clear that the 75% rule did not function as a “cliff” but rather established a limitation on the amount of forgiveness based on forgivable payroll costs (i.e. PPP loan forgiveness could not exceed the quotient of x ÷ y, where x = forgivable payroll costs, and y = 75%).