Congress Passes PPP Loan Amendments

Corporate & Capital Markets

As of last night, the U.S. House of Representatives and the U.S. Senate have passed the Paycheck Protection Program Flexibility Act of 2020 (the "Flexibility Act"), which the President is expected to sign into law this week. The Flexibility Act was passed to make certain changes to the Paycheck Protection Program ("PPP") that will provide PPP borrowers with more time and flexibility to utilize PPP loan proceeds in the face of continuing uncertainty in operating their businesses and maintaining employee headcount due to the ongoing COVID-19 pandemic.

Application Deadline for New Loans Extended

The Flexibility Act extends the application deadline for new loans from June 30, 2020 to December 31, 2020. As of May 30, the Small Business Administration had approved and funded 4,475,599 loans for a total of $510,234,498,923,[1] with approximately $130 billion remaining available.[2]

Forgiveness Implications

The bulk of the changes implemented by the Flexibility Act amend certain loan forgiveness provisions in the CARES Act and are comprised of the following:

  • Expansion of Covered Period. The "covered period," which under the CARES Act was the eight-week period from the initial disbursement of loan proceeds, is extended to the earlier of 24 weeks from the disbursement date or December 31, 2020. Existing borrowers can elect to use the original eight week covered period when applying for forgiveness. The chosen covered period (8 weeks or 24 weeks) will be used for determining average full-time employee headcount and salary/wage levels for purposes of calculating any reductions to the forgiveness amount.
  • New Forgiveness Application Deadline. The deadline to apply for forgiveness is no later than 10 months after the last day of the borrower’s covered period.
  • Reduced Percentage of Loan Proceeds Used for Payroll. For purposes of calculating a borrower’s forgiveness amount, the Flexibility Act reduces the required amount of loan proceeds to be used for payroll costs from 75% to 60%, allowing 40% of the loan proceeds to be used for non-payroll costs (rent, mortgage interest and utilities). The introductory language to this provision ("To receive loan forgiveness under this section") could be interpreted to provide that, absent additional guidance or legislative action, none of the loan will be forgiven if only 59.9% (or less) of the proceeds are used on payroll costs.
  • Expanded Exemptions for Reductions in Full-Time Employees. The Flexibility Act expands the list of exemptions applicable to limits on the forgiveness amount for reductions in employees. Specifically, the forgiveness amount will not be affected by a reduction in employees if the borrower is able to document an inability to: (i) rehire terminated employees, (ii) hire similarly qualified employees, or (iii) return to the same level of business activity as it was operating at before February 15, 2020 due to compliance with regulatory requirements or guidance established by HHS, CDC, or OSHA between March 15, 2020 and 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. This expands upon prior guidance from SBA and appears to indicate a complete exemption from the full-time employee forgiveness calculation. Future guidance will need to clarify the magnitude of the effect on (i) employee rehiring and hiring and/or (ii) business activity due to COVID-19-related operating restrictions that would be necessary to trigger this exemption.
  • Extended Deadline for Rehiring and Restoration of Pay. The Flexibility Act extends the deadline for rehiring employees and restoring salary and wage reductions in excess of 25% from June 30, 2020 to December 31, 2020, where the termination or wage reduction, as applicable, occurred between February 15, 2020 to April 26, 2020.
  • Deferral of Payment of Principal, Interest and Fees Extended. The Flexibility Act permits a borrower to defer payment of principal, interest and fees until the date on which the amount of loan forgiveness is remitted to the lender. Currently, payments are deferred until seven months from the loan disbursement date. For borrowers that do not apply for forgiveness, repayment begins on the date that is 10 months after the last day of the borrower’s covered period (i.e., eight weeks after disbursement, 24 weeks after disbursement, or December 31, 2020, depending on the disbursement date and other factors). Note that electing to use the original eight week covered period and applying for forgiveness quickly will limit a borrower’s ability to defer loan payments (if a portion of the principal loan amount is not forgiven and remains outstanding).

PPP Loan Maturity Extended for New Loans

The Flexibility Act extends the maturity of new loans from a two-year term, as provided for in the CARES Act, to a five-year term. This extension applies to loans obtained after the Flexibility Act is enacted. Existing loans remain subject to the original two-year term, but the Flexibility Act permits borrowers and lenders to negotiate a longer term of up to five years.

Payroll Tax Deferral Expansion

The CARES Act restricted borrowers that had obtained forgiveness from thereafter deferring the employer portion of federal payroll taxes. The Flexibility Act removes that restriction, which enables borrowers (even those that have applied for and obtained forgiveness of all or a portion of the loan amount) to defer payment of the employer portion of federal payroll taxes incurred between March 27, 2020 and December 31, 2020. The Flexibility Act did not affect the CARES Act provisions that such deferred tax amounts must be repaid by December 31, 2022 (with 50% deferred until December 31, 2021 and the remaining 50% deferred until December 31, 2022).




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