On June 3, 2020, the Senate passed the House version of the Paycheck Protection Program Flexibility Act of 2020 (the “Act”). The Act makes important changes to the Paycheck Protection Program (“PPP”) regarding how borrowers can use PPP loan funds and maximize potential loan forgiveness. President Trump is expected to sign the Act into law shortly.
As with all things PPP related, we can expect that there will be additional guidance from the SBA and the Treasury Department. In this instance, the Senate has also indicated that, although it passed the House’s version of the bill, “technical problems” still need fixing – so expect additional changes to be announced in the coming weeks. In the meantime, the Act provides important flexibility to borrowers and addresses some of what were considered shortcomings of the earlier program rules.
Below is a summary of the main changes contained in the Act. Every business faces unique challenges and decisions during these unprecedented times, and must carefully consider its own specific circumstances when making decisions related to the PPP. Borrowers should work closely with their FOS attorneys, accountants and lenders for assistance in navigating this ever-changing PPP landscape, and determining what is their best course of action.
• Borrowers may extend the “covered period” from 8 to 24 weeks. The PPP originally provided that borrowers must use the proceeds of the PPP loan for eligible expenses during the 8-week period following disbursement to be eligible for forgiveness. Now amounts spent for qualified expenses up to 24 weeks after the loan is disbursed, or until December 31, 2020, (whichever date is earlier) will be eligible for forgiveness. This will allow borrowers additional time to spend down their PPP loan and achieve maximum loan forgiveness.
Caution is warranted, though, before concluding that extending the covered period is most beneficial for a borrower. Certain borrowers which had loans disbursed before the Act may benefit from instead electing the original 8-week covered period, especially if they have already incurred sufficient payroll expenses to qualify for forgiveness yet this year. Similarly, extending out the covered period to 24 weeks may pose challenges to businesses in terms of maintaining payroll and headcount, even under the new more flexible rules.
• The amount borrowers must spend on payroll is reduced from a 75% sliding scale to a 60% cliff for forgiveness. The Act does away with the SBA’s 75% payroll test, and instead imposes a requirement that borrowers must spend at least 60% of the PPP loan on payroll, or none of the loan will be forgiven. Numerous members of Congress have indicated that the intention was not to do away with the sliding scale of forgiveness, where a portion of the PPP loan could be forgiven and the remainder subject to repayment, but that will require additional technical tweaks.
• Repayment is extended to 5 years from 2 years, still at 1% interest.
• Borrowers have up to 24 weeks to restore workforce. Previously under the PPP, employers needed to restore their workforce by June 30, 2020, or have the amount of loan forgiveness reduced. Now, borrowers can use the 24 week period – until December 31, 2020 – to re-hire employees.
• Additional exceptions for reduction in workforce. The rules previously provided that businesses would not have their loan forgiveness reduced for positions where employees refused good faith offers to rehire or for employees who were fired for cause, voluntarily resigned or voluntarily reduced their hours. The Act provides additional exceptions for situations where employers cannot find qualified employees to rehire, or where businesses can document an inability to restore activity to the same levels as February 15, 2020 due to social distancing or other federal health guidance. As outlined in the Act, the standard for inability to restore business activity is very vague, so hopefully additional guidance will be issued clarifying this provision.
• Borrowers may defer the employers’ share of payroll taxes. Such deferral was previously prohibited under the PPP.
While these changes are undoubtedly helpful to many, borrowers will have to analyze a number of different PPP scenarios to determine which course of action is most beneficial to them. It is unclear when lenders will begin to accept loan forgiveness applications, and whether the loan forgiveness application form that was previously released can still be used.
Businesses who are dealing with extraordinary disruptions to their regular activities are also having to navigate an ever-shifting set of rules related to the PPP. FOS is here to help. If you have any questions about PPP, PPP loan forgiveness, or any other legal matter, please contact your FOS attorney.