On June 5, 2020, President Trump signed into legislation the bipartisan bill titled the Paycheck Protection Program Flexibility Act of 2020 (PPPFA). The PPPFA modifies the Paycheck Protection Program, which was first introduced under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The modifications provide borrowers more control over the use of funds and make it easier to obtain forgiveness. The following is a summary of the key changes.
1. Extended Maturity Date From 2 Years to 5 Years
Under the CARES Act, the minimum maturity date for loan amounts after the forgiveness period was not defined. The Small Business Administration (SBA) then released an Interim Final Rule clarifying that the minimum maturity date was two years. The PPPFA has extended the term to five years: “The covered loan shall have a minimum maturity of 5 years and a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness under that section.”
2. Extension of Covered Period From Eight Weeks to a Maximum of 24 Weeks
Under the CARES Act, the covered period of the loan (i.e., the time period in which you may spend the loan funds) was February 15, 2020 to June 30, 2020, an eight-week period. The PPPFA extended the covered period to 24 weeks from the origination date of the loan, or December 31, 2020, whichever is earlier.
Please note that a borrower who received a PPP loan before the enactment of PPPFA may elect to use the original eight-week period.
The Congressional Intent for the bill makes clear that the extension was to “allow borrowers who received PPP loans before June 30, 2020 to continue to make expenditures for allowable uses until December 31, 2020.” The extension was not to allow the “Small Business Administration (SBA) to issue any new PPP loans after June 30, 2020, as this date remains fixed by section 1102(b) of the CARES Act.”
3. Extension of Timeline to Rehire Employees and Good-Faith Exemptions
Under the CARES Act, the amount of a PPP loan that has been eligible for forgiveness is reduced in proportion to the loss of full-time equivalent employees between February 15, 2020 and 30 days after the enactment of the CARES Act (i.e., April 26, 2020); however, borrowers would not be subject to reduced PPP loan forgiveness if they rehired the employees by June 30, 2020. The PPPFA has explicitly extended the deadline to rehire employees from June 30, 2020 to “December 31, 2020.” Because the PPPFA extended the deadline to rehire employees to “December 31, 2020” rather than the end of the “covered period,” it is ambiguous whether the extension is applicable to borrowers who elect to use the original eight-week period. Until there is further guidance, we suggest assuming that the aforementioned extension is not applicable to borrowers who elect to use the original eight-week period—a suggestion that holds through for the good-faith exemptions as well. In other words, borrowers who elect to use the original eight-week covered period should rehire their full-time employees or make use of the good-faith exemptions below by June 30, 2020 in order to avoid reduction in loan forgiveness.
The PPPFA also preserves loan forgiveness for borrowers who can document either 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 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.
4. Mandatory Payroll Spending Reduced from 75% to 60%
Under the CARES Act, there was no mandatory requirement to use a certain percentage of the PPP loans on payroll costs. The SBA’s Interim Final Rule then limited forgiveness to borrowers who spend at least 75% of the PPP loans on payroll costs. The PPPFA has reduced this amount to 60%.
5. Extension of Loan Deferral Period
Under the CARES Act, complete payment deferment relief was eligible for borrowers loans for a period of not less than six months, including payment of principal, interest, and fees, and not more than one year. The SBA’s Interim Final Rule clarified that borrowers would not have to make any payments for six months following the date of disbursement and may receive authorization from the Administrator to defer loan payments for up to one year. The PPPFA has extended the deferment period to the date on which the lender is reimbursed by the SBA for the forgivable portion of the loan. However, if an eligible recipient fails to apply for loan forgiveness within 10 months after the last day of the covered period, such borrower would begin to make payments of principal, interest, and fees on such covered loan no earlier than the aforementioned 10th month.
Practically, the extension of the deferment period allows borrower to submit the application for forgiveness beyond the 10/31/2020 date currently listed on the form. The expiration date would now be 10 months after the last day of the covered period as applicable to the borrower.
6. Eligibility of Employment Tax Deferral
Under the CARES Act, employers were able to defer the payment of applicable 2020 employment taxes (including Social Security), with 50% due on December 31, 2021 and the remaining 50% due on December 31, 2022. There was, however, an exception for PPP loan borrowers who sought loan forgiveness. The PPPFA removed the exception, allowing such borrowers to be eligible for tax deferrals.