Moving Forward… Congress Loosens Restrictions on PPP Loan Program: What the Paycheck Protection Program Flexibility Act Means for Your Business.

On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”).  The PPP Flexibility Act loosens some of the restrictions on the forgivability of Paycheck Protection Program Loans (“PPP Loans”) that were imposed by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and subsequent guidance from the Small Business Association (the “SBA”) and the United States Department of the Treasury (“Department of Treasury”).  The aim of the PPP Flexibility Act is to better tailor the forgivability provisions of the CARES Act PPP Loan Program to the evolving economic realities faced by borrowers.  Below we discuss the changes made by the PPP Flexibility Act to the PPP Loan Program forgivability provisions.

MORE TIME TO SPEND PPP LOAN PROCEEDS

Under the CARES Act, a borrower was required to spend the loan proceeds received from PPP Loans within eight weeks after the date the borrower received the loan proceeds.  The CARES Act referred to this as the “covered period.”  The PPP Flexibility Act extends the covered period from 8 weeks to 24 weeks.  However, the PPP Flexibility Act allows borrowers who received PPP Loans prior to enactment of the PPP Flexibility Act to elect to keep the 8-week covered period with respect to their PPP Loans.

 MORE OF THE PPP LOAN PROCEEDS MAY BE USED FOR NON-PAYROLL EXPENSES

The CARES Act limits a borrower’s use of PPP Loan proceeds to payroll costs, mortgage or rent payments, utilities and interest payments.  The SBA and Department of Treasury issued guidance stating, for purposes of forgivability of PPP Loans that at least seventy-five percent (75%) of the PPP Loan proceeds had to be used for payroll costs.  The PPP Flexibility Act lowered the minimum amount of the PPP Loan proceeds that must be used for payroll costs without jeopardizing forgivability. Under the PPP Flexibility Act, as long as a borrower uses at least sixty percent (60%) of PPP Loan proceeds for payroll costs, the PPP Loan will be eligible for forgiveness.  This leaves the remaining forty percent (40%) of the PPP Loan proceeds available for payment of interest on a covered mortgage obligation, payment of rent on a covered rent obligation, or payment of a covered utility obligation.  Further guidance is needed regarding the consequences of spending less than sixty percent (60%) of PPP Loan proceeds on payroll costs.

 MORE TIME TO RESTORE STAFFING AND SALARIES TO PRE-COVID-19 LEVELS

To receive full forgiveness, the CARES Act requires recipients of PPP Loans to restore their number of full-time equivalent employees to February 15, 2020 levels by June 30, 2020.  Similarly, the CARES Act requires recipients of PPP Loans to restore individual employee salaries to at least seventy-five percent (75%) of February 15, 2020 salaries by June 30, 2020.  The PPP Flexibility Act, however, extends the deadline for re-hiring employees and reinstating salaries to December 31, 2020.  In addition, the PPP Flexibility Act provides exceptions to these requirements that were not provided in the CARES Act (see below).

 ADDITIONAL EXCEPTIONS TO REQUIREMENT TO RESTORE STAFFING LEVELS

The CARES Act provides no exceptions to the limitations on forgivability related to restoring February 15, 2020 staffing and salary levels.  Several exceptions were provided by guidance issued by the SBA and the Department of Treasury.  Legislators recognized that, for many reasons including state public health restrictions on operations or difficulties in persuading employees to return to work, many borrowers may be unable to restore staffing and salary levels in such a short period of time.  For this reason, the PPP Flexibility Act provides that PPP Loans are fully forgivable even if the borrower cannot restore staffing and salaries to February 15, 2020 levels if the borrower can document either of the following:

  • An inability to hire individuals who were employees on February 15, 2020, and an inability to hire similarly qualified employees to unfilled positions by December 31,2020; or
  • An inability to return to the same level of business activity that the borrower was engaged in before February 15, 2020, due to COVID-19-related compliance with return-to-work legal and safety standards.

 EXPAND ABILITY TO DEFER PAYROLL TAXES

The CARES Act permits an employer to defer paying the employer’s portion of payroll taxes incurred from March 27, 2020 through December 31, 2020, unless the employer receives PPP Loan forgiveness. The PPP Flexibility Act removed this CARES Act restriction imposed on PPP Loan recipients.  PPP Loan recipients are now permitted to defer paying the employer’s portion of payroll taxes incurred during the period spanning March 27 through December 31, 2020.  Employers that elect to defer payroll taxes are required to pay one-half of the deferred payroll tax by December 31, 2021, and the other one-half by December 31, 2022.

EXTENDED DEFERRAL PERIOD

The CARES Act allows PPP Loan recipients to defer making payments on their PPP Loans for six months after receiving the loan.  The PPP Flexibility Act allows borrowers to defer payments on their PPP Loans until their lender receives the forgiven PPP Loan amount from the SBA, or ten (10) months after the last day of the applicable 8-week or 24-week “covered period”.

 EXTENDED MATURITY DATE

The CARES Act required lenders to issue PPP Loans with a maturity date of two years.  The PPP Flexibility Act requires all PPP Loans made on or after June 5, 2020, to have a maturity date of five years.  Although the 5-year maturity date only applies to PPP Loans made after June 5, 2020, borrowers who received PPP Loans prior to June 5, 2020, are permitted to enter into an agreement with their lenders to extend their 2-year maturity dates. The deadline to apply for PPP Loans remains on June 30, 2020.

 WHAT DO YOU DO IF YOU HAVE QUESTIONS ABOUT PPP LOANS?

While this client advisory is intended for informational purposes only and is not legal advice, we encourage you to call your SMDK attorney for advice regarding your specific situation. We are available to assist you in answering questions about PPP Loans or other provisions of the PPP Flexibility Act or CARES Act and how these laws apply to you or your business.