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Changes to PPP Loans Under the Paycheck Protection Program Flexibility Act

June 4, 2020

Overview

On June 3, 2020, Congress passed and on June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”) to modify certain provisions of the CARES Act related to forgiveness of Paycheck Protection Program (“PPP”) loans, to allow recipients of loan forgiveness to defer payroll taxes, and for other purposes. The PPP Flexibility Act attempts to address the difficulties experienced by many PPP loan recipient businesses in meeting the requirements for loan forgiveness while their business is still subject to COVID-19 restrictions. 

The PPP Flexibility Act makes the following modifications to the PPP:

  • Extended Maturity of Loans: For loans made after the date of enactment of the PPP Flexibility Act that have a remaining balance after reduction based on loan forgiveness, creates a minimum maturity date of five years from when the borrower applies for loan forgiveness and permits lenders and borrowers of previously originated PPP loans to mutually agree to modify the maturity terms of the loan to conform with the five-year minimum.

The CARES Act set the maximum PPP loan term at 10 years, and the SBA in its rules set the term for two years. This change extends the two-year repayment term to five years for new loans, acknowledging the reality that many businesses potentially will be suffering the impacts of COVID-19 restrictions for several years to come. It will be important for borrowers that already have PPP loans to discuss modifying their repayment dates with their lenders if the borrowers expect a portion of their loan to not be forgiven.

  • June 30 Deadline to December 31, 2020 Change For Use of Proceeds: Expands the period for use of the PPP loan proceeds from expiring June 30, 2020 to expiring December 31, 2020.

For borrowers who have more recently received a PPP loan or may still obtain a PPP loan, the previous June 30 deadline for using the PPP loan proceeds was unworkable as it could fall before the end of the eight-week period. This extension provides all borrowers the flexibility to apply the loan proceeds for allowable uses through the end of the year; however, for forgiveness, funds will need to be used within the specified “covered period.”

  • Time Period Extended For Forgiveness: Changes the “covered period” in which PPP loan proceeds must be used for certain purposes to be eligible for forgiveness from eight weeks from origination of the loan to the earlier of: (i) 24 weeks from origination or (ii) December 31, 2020 (although permits borrower of previously originated loan to elect eight-week covered period).

This change provides a larger spending window for borrowers to deploy the PPP funds as needed for their business operations, instead of forcing them to use funds when their business may not yet have reopened or is still operating at reduced capacity.

  • Added Employee Availability or Inability to Return to Same Level of Business to Forgiveness Considerations: Provides that loan forgiveness is determined without regard to the reduction in full-time equivalent employees if:
    • The borrower in good faith is able to document an inability to rehire individuals who were employees on February 15, 2020 and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020;

      or

    • The borrower in good faith is able to document an inability to return to the same level of business activity as the borrower’s business was operating at before February 15, 2020, due to compliance with requirements or guidance issued by Health and Human Services, CDC, or OSHA during the period beginning March 1, 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.

In the SBA’s Interim Final Rule on Loan Forgiveness, a borrower’s loan forgiveness would not be reduced due to reduction in FTE with respect to those employees that were offered in writing to be rehired on the same terms and rejected the offer and the borrower informed the applicable state unemployment insurance office of the rejected offer. This change adds to that concept. Perhaps more importantly, the change alternatively provides a broad exception from the proportionate reduction in loan forgiveness due to reductions in FTE if as of December 31, 2020 the borrower still has been unable to return to full business activity due to compliance with federal (but not state) regulatory guidance or restrictions. If the COVID-19 pandemic continues for many months, as some predict, this flexibility may eliminate the FTE-based loan forgiveness reduction test for many borrowers.

  • Modified Payroll Cost Forgiveness Limit to 60%: Requires for forgiveness that at least 60% of the loan proceeds (rather than at least 75% of the potential forgiveness amount) be used for payroll costs, and permits up to 40% to be used for the other uses that are subject to forgiveness (i.e., payment of interest of any covered mortgage obligation, any covered rent obligation, or any covered utility payment).

In its Interim Final Rules and the Loan Forgiveness Application, the SBA added a requirement that at least 75% of the loan forgiveness amount must be used for payroll costs within the covered period for forgiveness. With this change, Congress provided that at least 60% of the proceeds must be used for payroll cost for forgiveness purposes; meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven. There is an expectation that this may be changed to restore the sliding scale.  In any event, the change may provide slightly more flexibility for use of proceeds for the other critical overhead expenses of mortgage interest, rent, and utility payments under contracts in place as of February 15, 2020.

  • Replaced Six-Month Deferral with Deferral Until the Date the Loan Forgiveness Amount Is Remitted to Lender: Extends the deferral period for the initial payment on the PPP loan until the forgiveness amount has been remitted by the SBA to the lender.

Originally under the CARES Act, no payment was required under a PPP loan until six months after the loan was funded. With the extension of the covered period for forgiveness, it was necessary to extend the initial payment date. To understand the implications of this change, a borrower now has until 24 weeks after funding of the PPP loan or December 31, 2020 (whichever is earlier) to apply the loan proceeds toward certain permitted uses that would then serve as the basis for calculating the amount of loan forgiveness. At that point, the borrower would apply for loan forgiveness with its lender, who has 60 days to act on the application, and forward its recommendation on to the SBA. The SBA then has 90 days to act on that recommendation and to remit the forgiveness proceeds and interest to the lender, at which point the payments on the unforgiven balance of the PPP loan would begin.   

Required Payments if No Forgiveness Application Within 10 Months: Provides that if a borrower does not apply for forgiveness, the earliest date for commencement of payments of principal, interest and fees is 10 months after the last day of the covered period. 

If the timing schedule described above is not applicable because a borrower does not apply for forgiveness, at a minimum the loan would be deferred 10 months after the 24-week covered period.

  • Payroll Tax Deferral Benefit: Allows borrowers to benefit from the payroll tax deferral notwithstanding the forgiveness of PPP loan indebtedness.

The CARES Act provides employers the ability to defer certain payroll taxes that otherwise would be payable before January 1, 2021, to be paid 50% by December 31, 2021, and the remainder by December 31, 2022, but had excluded from this payroll tax deferral certain businesses that benefit from forgiveness of PPP loan indebtedness. This change removes that exclusion so that PPP loan borrowers who obtain PPP loan forgiveness can also benefit from the payroll tax deferral without limitation.

These changes are intended to address concerns expressed by borrowers since enactment of the CARES Act by providing borrowers more time to use loan proceeds, thereby enabling them to wait to rehire employees or restore employee hours until such time that their business is again operating and such employees are needed. Although Congress finally heard the borrowers’ frustration, these changes may be coming too late for many loan recipients who already rehired employees to meet the previous requirement to spend 75% of forgiveness proceeds on payroll costs within eight weeks notwithstanding that their businesses were still closed or operating at significant reduced capacity. For more recent PPP loan recipients, these changes under the PPP Flexibility Act should provide businesses the ability to more strategically plan use of the PPP loan proceeds to sustain their business through this COVID-19 pandemic which is stretching out longer than initially expected.

Schwabe’s attorneys have been closely following the updates to the PPP loan rules so that we can assist our clients in navigating the changes. For more information on how we may be able to assist you, please contact us today.

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