New Paycheck Protection Program Flexibility Act Provides More Benefits To Small Business Owners

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On June 5, 2020, the President signed H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020, or PPPFA.  The PPPFA is intended to address concerns raised by small business owners regarding Paycheck Protection Program (PPP) loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was enacted in March. 

The PPPFA seeks to ease restrictions imposed on borrowers under the CARES Act, particularly with respect to obtaining forgiveness of a PPP loan.  The following are key provisions:  

  • Reduction of the Amount of Loan Proceeds Required to be Paid toward Payroll-Related Purposes:  Pursuant to guidance issued by the Small Business Administration (SBA) and the United States Treasury following enactment of the PPP, borrowers seeking loan forgiveness were required to spend 75% of PPP loan proceeds on payroll-related costs in order to qualify for forgiveness.  The PPPFA reduced the 75% requirement to only 60%.  In other words, the PPPFA allows businesses to spend up to 40% of PPP loan proceeds on non-payroll expenses such as rent, mortgage interest or utilities, while spending at least 60% on payroll-related expenses.  On June 11, the SBA issued an interim final rule explaining that the SBA, in consultation with Treasury “interprets this requirement as a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness.”  The SBA interim final rule provides the following helpful example:  “[I]f a borrower receives a $100,000 PPP loan, and during the covered  period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in nonpayroll costs constituting 40 percent of the forgiveness amount).”
  • Additional Safe Harbors for Loan Forgiveness:  Under the CARES Act, the amount of loan forgiveness is reduced if a borrower reduced its workforce, or employee salary or wages, unless the borrower rehired employees and restored salary and wage levels by June 30, 2020.  The PPPFA extends the time for a borrower to restore workforce count, salary and wage levels and avoid a resulting reduction in loan forgiveness to December 31, 2020.

    The PPPFA also creates two additional safe harbors allowing borrowers to preserve loan forgiveness eligibility despite a workforce reduction. First, if a borrower reduced its workforce and, in good faith, can document an inability to rehire previously employed individuals or similarly qualified individuals by December 31, 2020, such a reduction in workforce will not reduce the borrower’s loan forgiveness amount.

    Additionally, if a borrower reduces its workforce and, in good faith, can document an inability to return to its pre-February 15, 2020, level of business activity 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 in response to COVID–19, such a reduction in workforce will not reduce the borrower’s loan forgiveness amount.
  • Extension of Covered Period:  Under the CARES Act, borrowers were required to use their PPP loan proceeds by June 30, 2020.  The PPPFA extends that date to December 31, 2020. 
  • Extension of Loan Forgiveness Covered Period:  Under the CARES Act, borrowers could receive forgiveness for eligible costs incurred and payments made during an eight-week loan forgiveness “covered period” that began on the loan origination date.  The PPPFA extends the loan forgiveness covered period to the earlier of 24 weeks after the loan origination date or December 31, 2020.  Borrowers who already received PPP loans can continue to use an eight-week loan forgiveness covered period instead.
  • Extension of Maturity Date:  The PPPFA extends the minimum maturity date for PPP loans to five years.  This change applies only to PPP loans made on or after June 5, 2020, but the PPPFA and the SBA interim final rule both allow borrowers and lenders to mutually agree to extend the maturity of pre-June 5 PPP loans to five years. 
  • Deferral of Initial Loan Payments.  The PPPFA extends the time for a borrower to begin payments of principal, interest, and fees on any unforgiven PPP loan amount. The CARES Act provided for a payment deferral period of no less than six months and no more than twelve months.  The payment deferral period has been extended until the date the PPP lender makes its forgiveness determination, provided that the borrower applies for forgiveness within ten months of the end of the 24-week PPP loan forgiveness covered period.  If a borrower does not seek loan forgiveness within that ten-month period, the deferral period ends on that ten-month anniversary date.  The SBA interim final rule provides the following helpful example:  “[I]f a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020.  If the borrower does not submit a loan forgiveness application to its lender by October 10, 2021, the borrower must begin making payments on or after October 10, 2021.”

The SBA, in consultation with Treasury, has promised to issue further rules and guidance regarding the PPPFA’s changes to PPP funding.

Please find Cox, Castle & Nicholson’s previous summary of the PPP program, here, and update, here.  Cox, Castle & Nicholson’s COVID-19 task force has provided technical assistance and advice to many of the firm’s clients on PPP matters.  Please feel free to contact us to discuss your PPP questions.

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