Paycheck Protection Program Flexibility Act Provides PPP Loan Recipients Much Needed Relief
The Paycheck Protection Program (PPP) represented a lifeline to many businesses struggling to stay afloat amid the Coronavirus pandemic by providing forgivable loans to businesses to cover payroll and certain non-payroll costs. Unfortunately, businesses who were fortunate enough to obtain the loan encountered restrictions on the usage of loan proceeds for loan forgiveness eligibility, and otherwise vague and confusing language in the Act and subsequent guidance from the Small Business Administration (SBA). On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (Act) which provides additional flexibility, most notably in granting borrowers additional time to spend the forgivable loan proceeds, as well as relaxing loan forgiveness penalties for borrowers who have been slow to restore their staffing to pre-pandemic levels. A summary of these changes is provided below.
- 8-Week Covered Period Significantly Increased: One of the most criticized aspects PPP loan forgiveness was the requirement that forgivable amounts had to be spent or incurred within an 8-week covered period. The 8-week period began either when the borrower received the loan, or the following pay period. This left businesses, many of which were forced to suspend or substantially curtail operations due to the pandemic, scrambling to find ways to spend the money over the 8-week covered period. Under the Act, loan recipients will now be allowed a period of 24 weeks from receipt of the loan or until December 31, 2020 (whichever is earlier) to use PPP proceeds on eligible payroll expenses. This triples the previous 8-week period in which PPP proceeds had to be used and provides businesses with much needed breathing room to do what is necessary to resume operations without having to forfeit loan forgiveness. Borrowers still retain the right to apply for loan forgiveness based on an 8-week covered period.
- Expansion of Non-Payroll Expenses: Previously, borrowers were required to spend at least 75% of loan proceeds on actual payroll costs. The Act provides borrowers must spend at least 60% on actual payroll costs. This enables borrowers to spend up to 40%, on non-payroll expenses such as mortgage interest, rent and utility costs. However, unlike the SBA previous interpretations, the langue of the Act suggests if you do not spend at least 60% on actual payroll costs, none of the loan will be forgiven. It is unclear whether this “cliff” was intended by Congress or is the result of a drafting oversight. This will be one of the closest watched provisions as we await further guidance from the SBA.
- Extension of Time to Restore FTE/Hourly Wage: Previously, borrowers could avoid a loan forgiveness penalty if FTE or hourly wage levels were reduced during the covered period by restoring such levels by June 30, 2020. The Act extends the deadline to restore FTE and/or staffing levels to December 31, 2020.
- Additional Forgiveness Relief for Struggling Businesses: The Act provides further relief for businesses who are unable to restore staffing levels either for economic reasons, or because of compliance with state and federal safety mandates. Under the Act, FTE reduction that occurs between February 15, 2020 and December 31, 2020 will not result in loan forgiveness reduction, if the borrower can document the following in good faith:
- An inability to rehire individuals who were employees of the recipient on February 15, 2020 and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
- An inability to return to the same level of business activity at which the recipient was operating at before February 15, 2020, due to compliance with public health and safety requirements, such as maintenance of sanitation standards and compliance social distancing.
This is a welcome amendment, particularly for businesses such as restaurants who have been hit particularly hard as a result of not being to remain open because of governor orders.
- Extension of Loan Term: Recipients will not be required to repay their PPP loan proceeds, in full, until five years after receipt of the loan. Although this revision technically only applies to loans approved after passage of the amendments, business may renegotiate their current two-year maturity period with their lender to take advantage of the five-year period.
Eligibility to Defer Social Security Taxes: All recipients, regardless of whether their PPP loan is forgiven before December 31, 2020 may defer their 2020 share of Social Security taxes into 2021 and 2022.
Considering these new amendments to the PPP, we expect that the Small Business Administration may issue additional guidance for recipients. We will monitor any such guidance and provide updates. In the meantime, please reach out to Mike Warner, Jason Patterson, or your Franczek attorney with any questions.