President Signs Paycheck Protection Program Flexibility Act into Law, Implementing Bipartisan PPP Amendments Broadly Supported by Congress
Following passage by the House of Representatives and the Senate on an overwhelmingly bipartisan basis, the Paycheck Protection Program Flexibility Act of 2020 (the Act) was signed into law by President Trump on June 5, 2020. Among other things, the Act provides borrowers under the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) more time and additional flexibility to use PPP loan proceeds on a forgivable basis.
As previously discussed in our May 29 webinar following House approval of the Act, this legislation amends the PPP-related provisions of the CARES Act in a variety of important respects, which are summarized below:
- Extended Forgiveness Period: The Act extends borrowers’ forgiveness periods for eligible expenses such that the forgiveness period begins on the PPP loan disbursement date and ends on the earlier of (i) 24 weeks after disbursement (extended from eight weeks) or (ii) December 31, 2020. However, PPP borrowers that received a loan before the Act was signed into law may opt for their covered forgiveness period to end on the date that is eight weeks after the date of their loan origination. In other words, existing PPP borrowers may “opt-out” of the Act’s extension of the forgiveness period. Opting-out of this extension may be the right choice for some PPP borrowers that are approaching the end of their original eight-week forgiveness period and have already spent all or most of their PPP loan proceeds without instituting meaningful FTE or compensation reductions.
- Minimum Payroll Cost Percentage: The Act reduces the minimum payroll cost spending percentage from 75% to 60%. Before the Act was signed into law, PPP interim final rules dictated that borrowers use at least 75% of their loan proceeds on payroll costs. PPP borrowers failing to satisfy this requirement would have their loan forgiveness amount reduced based on the actual amount they spent on payroll costs. Under the Act, this threshold has been reduced to 60%, allowing up to 40% percent of loan proceeds to be used for non-payroll costs (e.g., mortgage interest, rent and utilities). However, while prior SBA guidance provided for a proportionate reduction in forgiveness for failure to comply with the 75% payroll cost percentage requirement, the Act seems to instead create a “cliff” scenario in which borrowers who do not comply with the reduced 60% payroll cost requirement would be entirely ineligible for loan forgiveness. Further guidance will be necessary from SBA and the Treasury to clarify the new approach.
- FTE / Compensation Restoration Deadline: Under the Act, PPP borrowers now have until December 31, 2020 (extended from June 30, 2020) to restore any reductions in the number of full-time equivalent (FTE) employees and/or compensation or wage levels without being subject to a reduction in their loan forgiveness percentage.
- Expanded FTE “Re-Hire” Exceptions: The Act also expands the safe harbor for FTE reductions that SBA previously included in its interim final rules and FAQs. Under the Act, a borrower is now exempt from a reduction in its loan forgiveness percentage due to its inability to restore FTE levels by December 31, 2020 if, in good faith, the borrower is able to document (i) its inability to rehire former employees or similarly qualified persons and/or (ii) its inability to return to the same level of business activity as before February 15, 2020, as a result of COVID-19 regulatory requirements implemented by the Department of Health and Human Services, the Centers for Disease Control and Prevention or the Occupational Safety and Health Administration between March 1, 2020 and December 31, 2020.
- Extension of Loan Repayment Deferral Period: Under the existing PPP interim final rules, lenders have been required to provide deferral of all loan payments to borrowers for six months from the date of initial loan disbursement. The Act now extends the required deferral period until the date on which the loan forgiveness amount is remitted to the applicable lender. However, since loan forgiveness must be requested by the borrower, the Act also provides that if a borrower does not seek forgiveness within ten months after the last day of their forgiveness period, the borrower must then begin making payments of principal, interest and fees to its lender.
- Extension of Loan Maturity Period: New PPP loans made following the enactment of the Act (to the extent there is a remaining balance after loan forgiveness) will have a minimum maturity of five years and a maximum maturity of 10 years. Prior to the passage of the Act, all PPP loans had a uniform two-year maturity period based on SBA rulemaking. Existing PPP borrowers and lenders may, but are not required to, mutually agree to modify maturity terms on their already existing PPP loan notes.
- Payroll Tax Deferral: The CARES Act permitted employers to delay the deposit of the employer-portion of the social security tax. However, the CARES Act also prohibited PPP borrower employers from utilizing this payroll tax deferral following the forgiveness of any portion of their PPP loan. The Act eliminates this restriction and now allows all PPP borrowers, including those receiving PPP loan forgiveness, to take full advantage of the payroll tax deferral under the CARES Act.
While the Act does provide borrowers with additional flexibility with respect to the points summarized above, the Act does not amend, modify or address the following issues:
- Eligible PPP Borrowers: The Act does not expand the types of borrowers that would be eligible for PPP loans. For example, Section 501(c)(6) entities remain ineligible.
- PPP Loan Amount: Although the Act generally extends borrowers’ forgiveness periods to up to 24 weeks, the Act does not change the maximum loan amount available to a borrower nor allow an existing PPP borrower to obtain a second PPP loan.
- Forgivable Uses: Again, while the Act generally extends borrowers’ forgiveness periods to up to 24 weeks, the Act does not create any new categories of forgivable uses for PPP loans. So, forgivable uses remain limited to payroll costs, mortgage interest, rent and utilities.
- Appropriations: The Act does not appropriate any additional funds for PPP loans. However, as of this writing, approximately $148 billion in previously approved PPP loan appropriations remain available to eligible borrowers.
- Interest Rate: The Act does not change the 1% per annum interest rate for PPP loans.
- Tax Deductibility of PPP-Funded Expenses: The IRS previously issued Notice 2020-32, which took the position that borrower expenses for which forgiveness is obtained under the PPP would not be deductible for federal tax purposes. The Act does not address or change the IRS position on the tax deductibility of PPP-funded expenses.
- “Need” Certification: The Act does not provide any further clarity or guidance on assessing the so-called “need” certification required of all PPP borrowers.
SBA and Treasury must now revisit virtually all of their previous guidance, FAQs, rulemakings, applications and related PPP materials in order to bring them into conformity with the amended terms of the PPP. There will also undoubtedly be unexpected or unintended issues that SBA and Treasury will need to address as they update their guidance and published program terms (e.g., is the $15,385 forgivable cash compensation cap impacted by the extended forgiveness period?). This will be no small task, and the Miller Johnson interdisciplinary PPP team will continue to monitor these and other PPP-related developments.
In addition, as the complexity of the PPP and related compliance challenges evolve, we encourage PPP borrowers to reach out to their Miller Johnson contacts to learn more about our flat-fee PPP Audit and Compliance Preparedness Program. This program offers clients a strategic solution to identify, gather and organize relevant documents and performance data to ensure their business is best positioned to comply with the ever-changing rules governing the PPP. The program will also involve identifying key legal arguments so that clients are prepared for any potential enforcement action or inquiry. Additional details regarding this program are available here.