The PPPFA Makes It Easier To Receive Forgiveness of PPP Loans
The Paycheck Protection Program Flexibility Act Makes It Easier To Receive Forgiveness of PPP Loans
By Marc Reiner
The Payroll Protection Program (“PPP”) established by the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) has been met with a decidedly mixed reception. In short, the PPP provides a low-interest loan corresponding to a business’s payroll, rent, and utilities, with a large portion of the loan being forgivable provided the business maintains a comparable number of employees at a comparable level of pay. Although businesses have been pleased at the influx of funds to help maintain payroll, the main complaint has been the speed and availability of funds. Many lending banks were simply not ready to make the loans envisioned by the PPP. In addition, the terms of repayment and determining what portion of a loan is forgivable was confusing to borrowers.
On June 5, 2020, the president signed into law the Paycheck Protection Program Flexibility Act (“PPPFA”), which makes several significant modifications to the PPP. The changes make it easier for borrowers to receive forgiveness of their PPP loans and provide more favorable repayment terms. A summary of the PPPFA follows.
Reduction of the Payroll Costs Requirement to Only 60% of the Loan Proceeds
- The PPP required businesses to spend at least 75% of the loan on payroll costs and the remaining 25% could be spent on eligible non-payroll costs, such as rent and utilities.
- The PPPFA reduces the amount of the loan that must be spent on payroll costs from 75% to 60%, allowing for up to 40% of the loan to be used for eligible non-payroll costs.
Extension of the “Covered Period” to 24 weeks, Up to December 31, 2020
- The CARES Act established an eight-week “covered period” during which a PPP borrower can incur costs eligible for forgiveness. The PPPFA extends the “covered period” to 24 weeks from the date of the loan or December 31, 2020, whichever is earlier.
- Employers can now incur eligible payroll and non-payroll costs during the 24-week covered period.
Extension of the Full-Time Equivalent and Salary Restoration Deadline to December 31, 2020
- Under the PPP as originally enacted, the amount of a PPP loan that is eligible to be forgiven is reduced in proportion to the loss of full-time equivalent employees (“FTE”) and also may be reduced if the average annual salary or hourly wage of certain employees is reduced by more than 25% compared to prior salary.
- The previous deadline to restore FTEs and salary requirements to be eligible for forgiveness was June 30, 2020. This deadline has now been extended to December 31, 2020.
Additional Exemptions for Rehiring of Employees
- The PPPFA provides new exemptions that allow a business to still receive loan forgiveness with respect to payroll costs if the borrower can demonstrate:
- an inability to rehire individuals who were employees on February 15, 2020;
- 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 that existed before February 15, 2020, due to compliance with requirements or guidance established by the Department of Health and Human Services, the CDC, or OSHA during the period of March 1, 2020 to December 31, 2020, relating to COVID-19 standards for sanitation, social distancing, or other worker or customer safety requirements.
- This documentation must be provided with the loan forgiveness application.
Extension of the Term for Repayment from 2 Years to 5 Years
- The original term for any unforgiven portion of a PPP loan was two years from origination. The PPPFA extends this term to five years for any loans made after the enactment of the act
- The PPPFA also allows lenders and borrowers to agree to modify the maturity terms of any preexisting PPP loan in conformance with this extension.
Loan Payment Deferral Period Extended
- The PPPFA extends the deferral period of payment of PPP loan principal, interest, and fees from the first 6 months of the loan to the date on which the Small Business Administration (“SBA”) remits the amount of forgiveness to the lender.
- If a borrower fails to apply for forgiveness within 10 months after the last day of the Covered Period (i.e. 24 weeks or December 31, 2020, whichever is earlier), the borrower is not required to make payments of principal, interest and fees until 10 months after the last day of the Covered Period.
Payroll Tax Deferral Available for Borrowers with Forgiven PPP Debt
- The PPPFA expands deferral of certain payroll taxes to all borrowers regardless of PPP loan forgiveness.
The PPPFA, like the PPP before it, raises many questions regarding the interpretation and application of the law. We anticipate further guidance from the SBA on the PPPFA and will share that guidance accordingly.
Marc Reiner’s current practice includes General Commercial Litigation; the registration of trademarks; litigation and counseling in the areas of trademarks, copyrights, false advertising, cybersquatting, and violations of the rights of privacy and publicity.