On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act of 2020 (the “Act”), a bipartisan measure aimed at providing additional flexibility and extended relief to small business borrowers under the Paycheck Protection Program (“PPP”). Below is a summary of the key provisions of the Act, highlighting material deviations from those terms initially proposed under the CARES Act and subsequent guidance and regulations issued by the Small Business Administration (“SBA”) in consultation with the Department of Treasury (the “Treasury”).
- Extension of Maturity Date. The Act extends the maturity date for all PPP loans made on or after the effective date of the Act from 2 years to 5 years. The Act specifically provides that nothing contained in any previously enacted PPP legislation (including the CARES Act and the Paycheck Protection Program and Health Care Enhancement Act) will prohibit lenders and borrowers from mutually agreeing to modify the maturity terms of any PPP loan in effect prior to the date of the Act in order to conform to the Act. Consistent with PPP guidelines, such provisions are applicable only to that portion of a PPP loan that remains outstanding after application of the forgiveness provisions of the PPP.
- Loan Forgiveness.
(a) Extension of Covered Period. As originally proposed, the forgiveness amount of any PPP loan was to be determined based on the total loan proceeds deployed to cover payroll costs and certain operational expenses over the 8-week period following disbursement of the loan, subject to adjustment. Subsequent SBA guidance contained in the Paycheck Protection Program Loan Forgiveness Application provided for an alternate covered period, commencing on the day of the first pay period following disbursement of PPP loan proceeds. The Act further extends such covered period to the earlier of (i) the date that is 24 weeks after the loan origination date, or (ii) December 31, 2020. Notwithstanding the foregoing, borrowers to which PPP loan proceeds have already been disbursed may elect to use the original 8-week period.
(b) Use of Proceeds. To be eligible for forgiveness under the PPP, the Act provides that borrowers must use at least 60% of the loan amount to fund payroll costs, reduced from the originally proposed 75%. and up to 40% of the loan proceeds (increased from 25%) may be used for eligible non-payroll expenses.
(c) Safe Harbor. The aggregate forgiveness amount remains subject to decrease in connection with any reduction in a borrower’s full-time equivalent employee headcount measured against the applicable reference period. However, the Act extends the existing safe harbor, such that borrowers will be eligible for the full forgiveness amount if such employee headcount is restored by December 31, 2020.
(d) New Exemptions. The Act incorporates the following new exemptions to the PPP forgiveness amount adjustment due to workforce reductions.
(i) Exemption Based on Employee Availability. During the period beginning on February 15, 2020 and ending on December 31, 2020, the aggregate forgiveness amount shall be determined without proportional adjustment for workforce reductions if an eligible borrower is able to document an inability to rehire individuals who were employees of borrower on February 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
(ii) Exemption Based on Business Operations. In addition to the above, the Act provides that the forgiveness amount will not be proportionately reduced due to workforce reductions if an eligible borrower is able document an inability to return to the same level of operating capacity as such business was able to sustain prior to February 15, 2020, due to compliance requirements or guidance issued by the Department of Health and Human Services, the Center for Disease Control and Prevention and/or the Occupational Safety and Health Administration, in each case between March 1, 2020 and December 31, 2020, related to maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement in connection with COVID-19.
- PPP Loan Deferral Period. The Act extends the PPP loan repayment deferral period from 6 months to either (a) such date on which the forgiveness amount is remitted to lender, or (b) such date that is 10 months after the last day of the covered period, in the event that borrower fails to apply for forgiveness within such 10-month period.
- Payroll Tax Deferral. The Act revokes the initial prohibition imposed by the CARES Act with respect to a borrower’s deferral of payroll taxes. As a result, all borrowers are now eligible to defer payment of payroll taxes, regardless of whether all or any portion of such borrower’s PPP loan is ultimately forgiven.
We are continuing to monitor any developments, including supplemental guidance issued by the SBA and/or the Treasury. For additional information regarding the PPP and related federal guidelines, please reference our comprehensive Paycheck Protection Program Guide, linked here, which will be updated promptly to reflect the provisions of the Act. Our attorneys are available to guide you and answer any questions regarding this Alert and our prior alerts, all of which can be found in our COVID-19 Resource Center.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.