Changes to Paycheck Protection Program (PPP) Forgiveness Provisions Signed by POTUS
Late Wednesday night, the US Senate unanimously passed legislation, previously approved by the US House of Representatives, that makes several important changes to the PPP loan forgiveness rules, including tripling the time allotted for small businesses and other PPP loan recipients to spend the funds and still qualify for forgiveness of the loans.
The forgiveness provisions of the CARES Act, which was passed into law to provide business economic relief and encourage employee retention, and the subsequent SBA interpretations of the CARES Act, have been roundly criticized for their lack of flexibility and narrow applicability. This new law, called the Paycheck Protection Flexibility Act (PPFA), was signed by the President this morning.
With the original eight-week window in which to spend the PPP loan funds about to expire for many early borrowers, this new flexibility comes at just the right time to help many businesses and their employees.
The PPFA’s main provisions include the following:
- An already existing PPP borrower can now choose to either keep the original eight-week (8) period or to extend it to twenty-four (24) weeks. New PPP borrowers will have a 24-week covered period. However, the covered period cannot extend beyond December 31, 2020. This flexibility should make it easier for more borrowers to achieve almost full, if not completely full, loan forgiveness. By the way, the deadline for applying for a PPP loan remains June 30, 2020.
- Under the bill, the payroll cost requirement drops from 75% (which was not specifically in the CARES Act itself, but was an SBA ruling) to 60%. However, as the PPFA is written, the payroll cost requirement would now be a "cliff", meaning that borrowers must spend at least 60% on payroll or NONE of the loan will be forgiven. Under current SBA rules, a borrower is required only to REDUCE the amount eligible for forgiveness using a sliding scale if less than 75% of eligible funds are used for payroll costs, but forgiveness is not eliminated entirely if the 75% threshold is not met. There is indication from House bill sponsors that this "cliff" rule was unintended, and a technical fix could be made to restore the sliding scale.
- Borrowers can also use the new 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This also must be done by December 31, 2020, a change from the previous deadline of June 30.
- The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they do not fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows PPP borrowers to adjust loan forgiveness if they could not find qualified employees or were unable to restore business operations to February 15, 2020 levels due to COVID-19 related operating restrictions. This is a huge positive development for those businesses who have not yet been allowed to open or are forced to operate a less than full capacity due to government mandates.
- New PPP borrowers now have a minimum of five years to repay the loan instead of just two. Existing PPP loans can also be extended if the lender and borrower agree. The interest rate remains at 1%. Recall that the CARES Act provided that the loan repayment terms could be for up to ten years, but for some reason, SBA had previously taken the position that the maximum loan term could only be two years.
- The PPFA would extend the deferral period of PPP loans from six-months to one-year. This provision appears to apply to all PPP loans, including existing loans. It remains to be seen how this provision will be implemented given that many lenders set up PPP loans to require debt service beginning after six-months. Further, the law would require a borrower to begin its PPP loan after ten months if it has not requested forgiveness by that time.
- The bill allows businesses that took a PPP loan to also delay payment of their payroll taxes, which is currently prohibited under the CARES Act.
WE at EGP continue to monitor developments concerning PPP and other Covid-19 relief provisions. While it is anticipated that more changes and additional relief will be forthcoming, the PPFA provides much needed breathing room for businesses to be able to use PPP loan funds in a way that maximizes their ability to weather this current crisis, provide maximum employment opportunities as soon as feasible and enhance US economic recovery.
If you have any questions or need assistance with this or any other matter, please reach out to your EGP relationship associate.