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New law provides significant reforms, flexibility for PPP borrowers

Jun 5, 2020

On June 5, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (the “Act”) into law, providing several important modifications to the Paycheck Protection Program (“PPP”) that PPP borrowers should know about.

Most importantly, the Act extends the 8-week covered period established under the CARES Act during which PPP loan proceeds spent on particular payroll and non-payroll costs are eligible for forgiveness to the earlier of (a) 24 weeks after the loan origination date or (b) December 31, 2020. The Act provides that PPP borrowers who received loans prior to the date of enactment of the Act may still elect for the covered period to end on the original date that is 8 weeks after the loan origination date. Please note the PPP loan amount is still calculated based off of 2.5 months payroll as previously established by the CARES Act.

The Act would extend the deadline to apply for a PPP Loan from June 30, 2020 to December 31, 2020.

The Act provides that PPP loans made after the enactment of the Act shall have a minimum maturity date of 5 years.   The Act notes that lenders and borrowers are not prohibited from mutually agreeing to modify the maturity terms of prior-disbursed PPP loans to conform to this section, but are not required to do so.

The CARES Act placed limitations on forgiveness if there was a reduction in full-time equivalent (“FTE”) headcount or salary/wage reduction of more than 25 percent during the covered period, with a safe harbor exemption if such deficiencies were cured by June 30, 2020. The Act extends the safe harbor exemption from June 30, 2020 to December 31, 2020, which provides additional flexibility to borrowers who may not have been able to re-open yet due to the continuance of government lockdown orders. 

The Act also establishes a new safe harbor exemption for loan forgiveness without regard to a proportional reduction in the number of employees if a borrower, in good faith:

(A) is able to document (i) an inability to rehire individuals who were employees on February 15, 2020, and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or

(B) is able to document 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 established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on 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.

We hope the SBA will provide further guidance on what documentation is needed to comply with the above requirements, especially those related to complying with health and safety requirements.   The text of the Act suggests that businesses with lowered capacity requirements, such as restaurants, may be able to have additional flexibility in loan forgiveness if they are not hiring back all their staff for that reason.

The Act places a limit on forgiveness by allowing the ratio of PPP loan proceeds spent on payroll costs to non-payroll costs to be 60% to 40%, instead of 75% to 25% as previously established by the SBA in prior regulations.

The Act modifies the requirement that PPP borrowers receive payment deferral of all principal, interest and fees for a period of not less than 6 months and not more than 1 year to payment deferral until the date on which the amount of loan forgiveness is remitted to the lender by the government after a loan forgiveness determination date is made.

The lender still has 60 days after a loan forgiveness application is made to render a forgiveness determination, and then there is some additional period of time for the SBA to pay the forgiveness amount to the lender.  If a PPP borrower fails to apply for forgiveness within 10 months after the last day of the covered period, such PPP borrower shall begin to make payments on the date that is the 10th month after the end of the covered period.  This section applies to all PPP Loans made, so PPP borrowers may consider whether they will need to sign amendments to their promissory notes implementing this provision. 

Finally, the Act removes a limitation from the CARES Act that prohibited PPP borrowers from deferring their payroll taxes in accordance with the terms of the CARES Act after they had received loan forgiveness. The IRS has previously determined that PPP borrowers are allowed to defer payroll taxes until their loan forgiveness determination date, so this change would allow PPP borrowers to continue to defer payroll taxes even after that date.

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