In response to widespread concern from the business community around the popular Paycheck Protection Program (the “PPP”), the Paycheck Protection Program Flexibility Act (the “PPPFA”), enacted on June 5, 2020, was designed to provide increased flexibility in compliance for employers using PPP loans to offset the economic impacts of COVID-19. The original PPP loan program provides businesses with loans through lenders that are fully guaranteed by the Small Business Administration (“SBA”) and are eligible for forgiveness depending on whether a business meets certain criteria.
The following summarizes the provisions of the PPPFA and related changes to the original Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).
The CARES Act provides an eight-week covered period where PPP loan proceeds used for qualified expenses during this covered period are eligible for forgiveness. In order to receive forgiveness of the entire PPP loan, the CARES Act requires that businesses spend the funds on qualified expenses (i.e. payroll costs, rent, mortgage interest payments and utilities) within eight weeks from the date the funds were received. However, the CARES Act also imposes restrictions and potential reductions to the amounts eligible for forgiveness. Businesses expressed concerns that the eight-week period was too short given that they may still be subject to significant operating restrictions because of COVID-19. In particular, many restaurants and retail establishments were forced to close or significantly reduce operations due to stay-at-home orders and other restrictions. Many businesses also had to lay-off or furlough employees due to the impact of such operating restrictions and stay-at-home orders and faced reductions in their forgiveness amounts due to related full-time equivalent employee (“FTE”) reductions (as further discussed below). Businesses lobbied for more time to properly use the PPP loan for qualified expenses and expressed concerns on the impact of the FTE reductions.
In response, the PPPFA extends the covered period from eight weeks to 24 weeks and qualified expenses incurred or paid during this extended covered period are eligible for forgiveness. Accordingly, businesses that have already received, or that plan to receive, a PPP loan have until the earlier of: (a) 24 weeks from the date the PPP loan is received, or (b) December 31, 2020, to use the PPP loan for qualified expenses. Businesses that received loans prior to June 5, 2020 may elect either the eight-week period or the 24-week period.
The original PPP loan program provided that, when computing the amount of the PPP loan eligible for forgiveness, (i) at least 75% of the PPP loan must be used for payroll costs, and (ii) no more than 25% of the PPP loan may be used on other qualified non-payroll expenses (i.e., rent, mortgage interest payments and utilities). In response to concern from businesses over such arbitrary thresholds, the PPPFA reduced the amount of a PPP loan that must be spent on payroll costs to 60%, with 40% now eligible for use on other qualified non-payroll expenses (i.e., rent, mortgage interest payments and utilities).
In a joint statement issued on June 8, 2020 (the “Joint Statement”), SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin clarified that businesses that spend less than 60% of the PPP loan on payroll expenses may still qualify for partial PPP loan forgiveness, provided that at least 60% of any forgiven amount was used for payroll expenses. This approach is consistent with the approach taken in the Interim Final Rules and outlined in the PPP Loan Forgiveness Application with respect to the prior 75% threshold requirement.
For example, assume a business received a $100,000 PPP loan and spends only $50,000 on payroll expenses with the remaining $50,000 spent on rent and utilities. Under the guidance in the Joint Statement, a maximum of $83,333 of expenses are eligible for forgiveness (or $50,0000/60%).
Also, for example, assume a business received a $100,000 PPP loan and spends only $30,000 on payroll expenses with the remaining $70,000 spent on rent and utilities. Under the guidance in the Joint Statement, a maximum of $50,000 of expenses are eligible for forgiveness (or $30,0000/60%). In other words, a business that spends less than 60% of its PPP loan on payroll expenses will still be eligible for forgiveness of its payroll expenses plus qualified non-payroll expenses equal to 66.66% of its payroll expenses.
The original CARES Act (as further updated in the Interim Final Rules and in the PPP Loan Forgiveness Application) provided that any amount of loan forgiveness would also be subject to a proportional reduction calculated based on reductions in FTEs during the covered period (the “FTE Reductions”). The CARES Act allowed businesses to avoid reduction in forgiveness amounts for FTE Reductions (i) related to employees that were laid-off from March 27 2020 to April 26, 2020 (the “Safe Harbor Period”) as long as the employer restored the FTEs by June 30, 2020 or (ii) under certain conditions related to specific employees that (a) refused an offer of rehire, (b) were terminated for cause or (c) left their job voluntarily or took a voluntary salary/wage reduction.
The PPPFA has added two provisions that would potentially eliminate the FTE Reductions (explained below). The PPPFA also allows businesses until December 31, 2020 to rehire employees previously laid off during the Safe Harbor Period. The PPPFA did not extend the Safe Harbor Period itself and employees that are laid off after April 26, 2020 will result in an FTE reduction, even if rehired by December 31, 2020 (unless the reduction is eliminated as discussed below). While the PPPFA extends the deadline for rehiring employees laid-off during the Safe Harbor Period, it does not change the manner in which salaries or wages are calculated for purposes of loan forgiveness. Accordingly, the salary limitations previously discussed still apply. For example, the pro-rata limitation on forgivable payroll costs for an employee remains $15,385 (or 8/52 * $100,000).
The PPPFA adds two provisions that would eliminate the FTE Reductions. Under these provisions, a business must be able to document, in good faith:
The PPPFA only references federal agencies and related guidance. As many businesses were forced to shut-down due to orders at the state, county or city level, a question remains as to whether such state and local orders will be permissible documentation of a business’s inability to operate at its pre-COVID-19 level. The SBA is expected to issue additional guidance addressing the FTE reduction exemptions and related documentation requirements.
Under the CARES Act, businesses with a remaining PPP loan balance after forgiveness had two years to repay the loan. The PPPFA now provides that businesses will have five years to repay any outstanding PPP loan balance. Importantly, the five-year term only applies to loans made on or after June 5, 2020. Businesses that received PPP loans prior to the enactment of the PPPFA remain obligated to repay the loans under the original two-year maturity, however, the PPPFA provides that such businesses are permitted to negotiate an extended maturity with their lender. The remaining balance on any PPP loan is subject to a 1% interest rate.
The original CARES Act and subsequent guidance requires lenders to defer principal and interest payments on the PPP loans for six months. The PPPFA modifies this deferral period to extend until the date on which loan forgiveness funds are remitted by the SBA to the lender. After the covered period ends, businesses are required to submit a PPP loan forgiveness application to their lender together with documentation supporting the calculation of their loan forgiveness amount. The lender then has 60 days to review the application and make a decision on whether all or a portion of the loan forgiveness amount is accepted and to submit its decision to the SBA. The SBA has an additional 90 days to review the forgiveness application and related PPP loan. The extended deferral period under the PPPFA incorporates the lender and SBA review periods related to the forgiveness application. If a business does not file for forgiveness within 10 months after its covered period ends, then the business must begin paying principal and interest on the PPP loan.
As we previously discussed, the CARES Act prevented a business that receives a PPP loan from deferring the deposit and payment of the employer portion of Social Security taxes once the PPP loan is forgiven. The PPPFA eliminates this restriction so that a business may now defer the deposit and payment of the employer portion of Social Security taxes in accordance with the terms of the CARES Act both before and after the PPP loan is forgiven. The elimination of this restriction will allow business to obtain the benefits of both deferring the employer portion of Social Security taxes and PPP loan forgiveness rather than having to decide which benefit to pursue.
If you have any questions on these various programs, please feel free to call or e-mail your regular contact at Thompson Coburn LLP. For more information from Thompson Coburn LLP related to COVID-19, please visit our resource page.
Ed Buchholz is a member of Thompson Coburn’s Tax group. David J. Kaufman is a member of Thompson Coburn’s Corporate & Securities Practice group. Vicky Gilbert and Kristen Greenberg are members of Thompson Coburn’s Banking practice group.
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