Last night, June 3, 2020, the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act) was unanimously approved by the Senate, after overwhelming approval by the House last week. Under the PPP Flexibility Act, which is expected to be signed into law by the President, the CARES Act was amended to provide additional flexibility to borrowers. The highest profile change is to the definition of “covered period,” which now shifts from eight weeks from loan origination to the earlier of 24 weeks or Dec. 31, 2020.
Initially passed in March as part of the CARES Act, the Paycheck Protection Program (PPP) was established with the goal of providing businesses with fewer than 500 employees loans necessary to cover payroll and some operating costs to help weather the severe financial impact of the COVID-19 pandemic. However, the PPP has been fraught with challenges since its inception in late March. Applicants began applying for the emergency loans when funding became available on April 3. However, the first tranche of funding—$349 billion—quickly was depleted following heavy demand. In still other instances, small businesses without existing relationships at participating banks were disenfranchised from the program. Key aspects of the last round of funding sought to avoid such issues thereby evening the playing field for such businesses.
Also at issue was the question of which businesses would qualify for loan forgiveness, a key feature of the PPP funds. The Small Business Administration (SBA), which administers the PPP, has updated its guidance several times over the past six weeks to offer clarity and fine-tune the program guidelines.
The PPP Flexibility Act amends the CARES Act in several meaningful ways and is designed to help borrowers by:
- Changing the definition of “covered period” from eight weeks from loan origination to the earlier of 24 weeks after origination or Dec. 31, 2020. This expands a borrower’s ability to maximize loan forgiveness. Importantly, however, a borrower who received a loan before the enactment of the PPP Flexibility Act may still elect the original eight-week period. Borrowers using the new longer covered period will be obligated to maintain payroll levels for an extra 16 weeks, all of which have the ability to impact loan forgiveness.
- Extending the loan term to five years for all new loans. Existing loans will retain their two-year term, though the bill expressly gives lenders and borrowers the right to negotiate a longer term if they both agree.
- Lowering the percentage that must be used for payroll expenses from 75% to 60%. However, if at least 60% of the loan is not used for payroll-related expenses, forgiveness may be disallowed entirely.
- Expanding the exemptions related to reduction of employees based on employee availability. The forgiveness amount will not be affected by a reduction in employees if the borrower is able to document (a) an inability to rehire former employers and cannot hire “similarly qualified employees for unfilled positions on or before Dec. 31, 2020”, or (b) that it is unable to return to the same level of business activity at which it was operating before Feb. 15, 2020.
- Extending the deferral period for payments from six months to the “date on which the amount of forgiveness … is remitted to the lender.” If a borrower fails to apply for forgiveness within 10 months of the last day of the covered period, the borrower will need to start making payments after the 10 months.
- Extending the end date of the PPP from June 30, 2020 to Dec. 31, 2020. However, June 30, 2020, remains the deadline to submit an application for a loan.
- Allowing borrowers to continue to defer payment of its share of social security taxes even after its PPP loan is forgiven. Under the payroll tax deferral provision in the CARES Act, a company could defer its share of social security taxes accruing through the end of 2020, paying half of the deferred amount by Dec. 31, 2021, and the other half by Dec. 31, 2022, but could not defer taxes accruing after its PPP loan was forgiven. The PPP Flexibility Act changes this result, allowing a company to continue tax deferral after forgiveness of its PPP loan.
On balance, the PPP Flexibility Act contains some useful changes for borrowers, although certain businesses will derive more benefit than others. As with prior changes to the PPP, borrowers should expect the SBA, in consultation with the Treasury Department, to provide further guidance with answers to frequently asked questions and further regulations with interim final rules.
For more information, contact OFP’s Corporate Group.