The Paycheck Protection Program Flexibility Act (PPP Flexibility Act) was signed into law on June 5, 2020 and amends certain terms of the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The PPP has made available to small businesses up to $659 billion in potentially forgivable loans for the payment of payroll costs and certain other expenses. The following is a summary of the terms of the PPP that have been amended by the PPP Flexibility Act.
Covered Period for Receiving PPP Loans. The “covered period” during which PPP loans may be made has been extended to end on December 31, 2020 instead of June 30, 2020. Note that some members of Congress published a Letter of Congressional Intent stating that applications for loans should only be accepted on or prior to June 30, 2020. Additional guidance may be forthcoming on this issue. Also note that a different covered period applies for forgiveness purposes, as is further described below.
Minimum Maturity. PPP loans made after the enactment of the PPP Flexibility Act, to the extent not forgiven, will have a minimum maturity of 5 years. The maturity terms of any earlier PPP loan may be amended to provide for the same, if so agreed by the lender and borrower.
Deferral Period. The PPP Flexibility Act extends the required deferral of payments on a PPP loan until (1) the date on which the applicable forgiveness amount with respect to such loan has been determined and remitted to the lender or (2) the date that is 10 months after the end of the borrower’s covered period for loan forgiveness purposes, but only if the borrower has not applied for forgiveness by such date.
Covered Period for Forgiveness Purposes. Under the PPP, the “covered period” for loan forgiveness purposes was the 8-week period following the origination of the particular loan. The PPP Flexibility Act extends this period to end on the earlier of (1) 24 weeks after the origination of the particular loan or (2) December 31, 2020. However, a borrower that received a PPP loan prior to the enactment of the PPP Flexibility Act may elect to still use the 8-week period following the origination of its loan.
Reduced Forgiveness Due to Reductions in Employee Headcount or Salaries. Under the PPP, a borrower’s loan forgiveness amount may be reduced if either (1) its full-time equivalent (FTE) employee headcount is decreased or (2) salaries and wages are decreased by more than 25% for any of its employees who made less than $100,000 annualized in 2019.
However, the PPP Flexibility Act provides that a reduction in FTE employees will not lead to a proportionate reduction in the amount of loan forgiveness available to a borrower to the extent that the borrower is able to document either:
Right to Cure Reductions. In addition, a borrower now has until December 31, 2020 (rather than June 30, 2020) to cure any reductions in employee headcount or salaries that would otherwise reduce the amount of loan forgiveness available to the borrower.
Proportion of Funds Required to be Spent on Payroll Costs. Notwithstanding prior guidance by the Small Business Administration (SBA) and the Department of the Treasury (Treasury) providing that 75% of a PPP borrower’s loan forgiveness amount must have been spent on payroll costs, the PPP Flexibility Act requires a borrower to spend only 60% of its loan on payroll costs in order to receive loan forgiveness. In other words, up to 40% of the loan may be used to pay expenses (other than payroll costs) that are eligible for forgiveness under the PPP without affecting the borrower’s right to receive loan forgiveness. Note that at least 60% of the total PPP loan proceeds borrowed under the PPP must be spent on payroll costs; otherwise the loan is not eligible to be forgiven. We understand that discussions are taking place to modify this requirement.
Under the PPP, a borrower that had received forgiveness of all or part of its PPP loan would not be entitled to defer payment of its payroll taxes under Section 2302 of the CARES Act. The PPP Flexibility Act amends Section 2302 of the CARES Act to delete that restriction relating to PPP borrowers.
We expect the SBA and Treasury will release additional guidance in the Frequently Asked Questions and through additional Interim Final Rules interpreting both the PPP and the PPP Flexibility Act.
We previously circulated a legal alert (available here) outlining the general terms and conditions of the PPP and various legal alerts (available here, here, here, and here) highlighting PPP guidance from the SBA and Treasury as such guidance was published.