On Wednesday, June 3, the Senate passed the Paycheck Protection Program Flexibility Act of 2020. The bill, which had previously passed the House and which President Trump signed today, makes significant improvements to the Paycheck Protection Program (PPP) by easing the rules for loan forgiveness. Changes include extending the covered period during which a PPP loan recipient may use loan proceeds and still be eligible for loan forgiveness, raising the percentage of nonpayroll expenses for which such loans may be used, and extending the timeframe that an employer has to rehire employees and creating a new exemption for situations in which such rehires are not possible. The bill also repeals a rule that would have prevented borrowers whose loans are forgiven from taking advantage of a provision in the CARES Act that allows the deferment of an employer’s share of payroll taxes. H.R. 7010.
Last week, on May 28, the House of Representatives passed H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act) by a 417-1 vote. The bill quickly made its way to the Senate, where it passed on a voice vote on June 3. It is now headed to the White House where President Trump is expected to sign it today. As discussed below, the PPP Flexibility Act makes significant improvements to the Paycheck Protection Program (PPP) which was passed on March 27 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Under the PPP, the Small Business Administration (SBA) is authorized to guarantee loans to eligible businesses and nonprofits affected by the coronavirus pandemic (COVID-19). If certain criteria are met, the PPP loans are eligible for tax-free loan forgiveness.
Time for Using Loan Proceeds Increased from 8 Weeks to 24 Weeks
Under the PPP, loans could be forgiven up to an amount equal to the sum of certain costs incurred and payments made during the eight-week period beginning on the loan origination date (“covered period”).
The PPP Flexibility Act extends the timeframe in which PPP funds must be used in order to have the loan forgiven. The covered period is now the period beginning on the date of the origination of the covered loan and ending the earlier of –
(1) the date that is 24 weeks after such date of origination; or
(2) December 31, 2020.
Observation: The December 31 end date will only apply to PPP loans originated after July 16, 2020.
Existing Loans Grandfathered. The PPP Flexibility Act provides borrowers who received their loans before its enactment (the date on which it’s signed into law) with the option of using the original eight-week covered period provided for in the CARES Act.
New Exemption for Loan Recipients Who are Unable to Rehire Employees
Part of the loan forgiveness calculation involves a reduction in the amount that may be forgiven if an employer reduces employee headcounts or wages. The PPP Flexibility Act adds a new loan forgiveness exemption based on employee availability.
Under this exemption, during the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness is determined without regard to a proportional reduction in the number of full-time equivalent (FTE) employees if an eligible recipient, in good faith is able to document either –
(1) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
(2) 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.
The PPP Flexibility Act does not define the terms “inability to rehire”, “inability to hire”, and “inability to return to the same level of business activity,” presumably leaving it to the SBA to provide guidance on their exact meaning.
Borrowers Can Spend More of the Loan Proceeds on Nonpayroll Costs
Pursuant to an interim final rule issued by the SBA after the passage of the CARES Act, PPP borrowers had to use 75 percent of the total loan proceeds on payroll costs.
Observation: This was a big point of contention among business owners who said the 75 percent rule made the loans useless because money was needed for operating costs like rent and utilities.
The PPP Flexibility Act reduces the amount that must be spent on payroll to 60 percent. Thus, 40 percent of a PPP loan can be used for nonpayroll costs.
Caution: However, as the law is written, if less than 60 percent is spent on payroll, no loan forgiveness will be granted. The change effectively creates a cliff that did not exist with respect to the SBA’s 75 percent rule.
Loan Maturity Date Extended
Under the PPP, borrowers that didn’t qualify for loan forgiveness generally were required to repay the loan over a two-year period.
The PPP Flexibility Act extends this period to five years.
More Borrowers Now Eligible for Payroll Tax Deferment
One of the provisions in the CARES Act allows the deferment of an employer’s share of social security tax. However, the provision did not apply to employers that had their PPP loan forgiven.
The PPP Flexibility Act now allows employers who have their PPP loan forgiven to also delay paying 50 percent of the their share of social security tax due until December 31, 2021, and delay paying the remaining 50 percent due until December 31, 2022.
Extension of Loan Payment Deferral Period
Under the CARES Act, PPP loan payments are deferred for six months. Thus, borrowers were not required to make any payments of principal and interest for six months following receipt of the loan, although interest continues to accrue on the loan during this deferment period.
The PPP Flexibility Act extends the existing six-month loan deferral period until the date on which the amount of forgiveness determined is sent to the lender. If a borrower fails to apply for forgiveness within 10 months after the last day of the covered period, payments of principal, interest, and fees on such loans begin on the day that is not earlier than the date that is 10 months after the last day of such covered period.