Since our last update, there have been several important changes to the Paycheck Protection Program under the CARES Act. On June 5th, Congress passed the Paycheck Protection Program Flexibility Act (PPFA), effectively amending the PPP by modifying certain provisions related to loan forgiveness and loosening guidelines for borrowers. Also, in an on-going effort to support PPP borrowers, the Treasury Department has issued additional guidance, including new interim final rules and additional FAQs.
Below are the key points of each:
The PPP Flexibility Act:
- Borrowers now have more time to use loan funds while retaining the possibility of forgiveness. Specifically, the “covered period” during which borrowers may use loan funds and still qualify for loan forgiveness has been extended to 24 weeks after either loan origination or December 31, 2020, whichever occurs first. Previously, the covered period was 8 weeks from disbursement. Borrowers who received their loans prior to the PPFA may use either the 24-week period or the original eight-week period.
- To obtain forgiveness, borrowers must use at least 60% (instead of 75%) of the covered loan amount for payroll costs, and may use up to 40% (instead of 25%) of such amount for any payment of interest on any covered mortgage obligation, rent obligation, or utility payment.
- The minimum loan repayment period has been extended from 2 years to 5 years. This is not retroactive, but borrowers and lenders are permitted to amend the loan to extend the maturity date.
- Borrowers can avoid reductions in forgiveness if they reinstate their full time employee numbers and wages to pre-pandemic levels by December 31, 2020 (instead of June 30, 2020). Borrowers can also avoid reductions in forgiveness if they can document (a) an inability to rehire individuals who were employees on February 15, 2020 and an inability to hire similarly qualified employees for unfilled positions, on or before December 31, 2020; or (b) an inability to restore operations to pre-February 15, 2020 levels due to COVID-19 restrictions.
- The deferral period for loans after the enactment of the PPFA is now either (a) the date that the lender receives the forgiveness amount from the SBA or (b) 10 months after the end of the new 24-week covered period if the loan is not subject to forgiveness (previously, the deferral period was 6 months from disbursement).
- Previously, borrowers were not eligible for the payroll tax deferral under the CARES Act. The new law removes this restriction and allows PPP borrowers to both receive loan forgiveness and utilize the payroll tax deferral outlined in the CARES Act.
New Interim Final Rules:
- All PPP lenders are authorized to increase existing PPP loans to partnerships or seasonal employers, based on revised guidance concerning how to calculate such loans.
- The impact of foreign affiliates on a borrower’s qualification to obtain a PPP loan has been clarified. Previously, SBA guidance suggested the possibility that employees of foreign affiliates could be excluded from the 500-employee test. The new interim final rule clarifies that employees of foreign affiliates are included for purposes of determining whether a PPP borrower has more than 500 employees.
- Borrowers received guidance on the process of seeking forgiveness of their PPP loan, as well as on the timing and payment of payroll costs that might be eligible for forgiveness. This rule also covers caps on the amount of loan forgiveness available for owner-employees and self-employed individuals.
- Additional clarifications on what borrowers should expect from the SBA’s loan “review” process and a subsequent determination of ineligibility.
- The first interim final rule, originally published on April 2, 2020, has been revised to conform to the PPFA (see above), including changes to key provisions such as minimum loan maturity, extension of the deferral period for loan payments, and forgiveness and use of proceeds provisions. It has also been revised to include a reduction in the “look back” period (from 5 years to 1 year) for applicants who have been convicted of a felony, so long as the felony did not involve fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance.
New FAQs for borrowers and lenders:
- Additional guidance on the loan “review” process and the “safe harbor” for loans less than $2 million.
- Extension of the deadline for lenders to submit initial SBA Form 1502.
As always, we are happy to assist you with any aspect of the government’s relief assistance provided for under the CARES Act, including the PPP and EIDL programs. Please contact Michael Cashton at firstname.lastname@example.org or (401) 744-9647 or visit our website’s Contact Us page.
Michael Cashton is a member of our New England-based team and brings over 20 years of experience representing emerging businesses, major corporations, and individual entrepreneurs across a range of industries, including consumer goods, SaaS/PaaS, ad-tech, digital gaming, e-commerce, retail, food service, and arts/entertainment. Before joining Outside GC, Michael served as VP of Legal for Hasbro, Inc., an international consumer products and branded entertainment company. He can be reached at email@example.com or 401-744-9647