On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “Act”). The Act makes many borrower-friendly changes to the paycheck protection program (the “PPP”) that impact both the amount of the loan that will be forgiven as well as the period of time borrowers have to repay their PPP loans. The Small Business Administration (the “SBA”) has subsequently released guidance interpreting various provisions of the Act, as well as a loan forgiveness application which we will discuss in a later article. This article summarizes the changes to PPP loan forgiveness that have been made by the Act, subject to subsequent guidance released by the SBA
Increased Loan Forgiveness
The Act increases, in dramatic fashion, the amount of the PPP loan that can be forgiven. The Act does this by increasing the “covered period” during which expenses are forgivable, and increasing the amount of forgivable expenses that can be spent on non-payroll costs.
Prior to the passage of the Act, the amount of expenses that could be forgiven was linked to an eight-week covered period that began when loans were first disbursed (for the purposes of calculating payroll costs, some borrowers also had the option of using an alternative eight-week period that began after the first pay period following loan disbursement). In recognition of the ongoing nature of the COVID-19 pandemic, the Act has extended the covered period to twenty-four weeks (or December 31, 2020, whichever comes first), potentially tripling the amount of the loan that can be forgiven
The Act has also changed the amount of the loan that could be used on non-payroll costs. Prior to the passage of the Act, PPP loans would only be forgivable to the extent that 75% of loan proceeds were spent on payroll costs, with up to 25% used on covered mortgage interest, lease and utility costs (“Non-Payroll Costs”). This was problematic for small businesses that had temporarily shut down or furloughed significant portions of their staff due to a lack of business, as these businesses still had ongoing Non-Payroll Costs they were obligated pay, but had significantly reduced payroll costs. It was also an issue for small businesses whose payroll costs made up a relatively small portion of their ongoing expenses. In recognition of these issues, the Act has reduced the payroll requirement so that PPP loans will be forgivable to the extent that 60% of loan proceeds are spent on payroll costs. This significantly increases the amount of forgivable loan proceeds that can be spent on Non-Payroll Costs.
Extended Timeline to Rehire or Reinstate Salaries
The Act also gives borrowers longer to rehire their employees or restore their salaries in order to retain eligibility for full loan forgiveness. Under the PPP, borrowers receive reduced loan forgiveness in accordance with certain formulas to the extent that such borrowers eliminate full-time equivalent positions or reduce their employees’ wages by more than 25%. Prior to the passage of the Act, borrowers would not be subject to this reduction if they brought back full-time equivalent positions or employee wages by June 30, 2020. The Act will instead give borrowers until December 31, 2020 to bring back full-time equivalent positions or employee wages.
Other Changes that Benefit Borrowers
The Act has also made a number of other borrower-friendly changes, such as increasing loan maturity and extending the loan deferral period.
Prior to the passage of the Act, the portion of the PPP loan that was not forgiven had a maturity of two years. Loans made on or after the date of the Act will have a maturity of five years, while loans made prior to the date of the Act can have their maturity extended from two to five years if the borrower and lender mutually agree to such an extension.
Another helpful change relates to deferring repayment of PPP loans. Prior to the passage of the Act, borrowers that had received PPP loans did not have to begin repayment until a deferral period of six months had elapsed (although interest would accrue during the deferral period). After the passage of the Act, payments can be deferred until the SBA has reimbursed the lender for the forgivable portion of the loan. If a borrower does not apply for loan forgiveness within 10 months after the end of the covered period, the deferral period will last until 10 months after the end of the covered period.
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There are many other specific requirements relating to loan forgiveness that may be applicable to your company. There are also many details of these programs that have not yet been clarified by the SBA. We, therefore, encourage you to review the detailed SBA requirements carefully or contact us if you have questions.
For additional information, please feel free to reach out to Robert Lawrence (at 212-519-5103, rlawrence@kanekessler.com), Steven Cohen (at 212-519-5115, scohen@kanekessler.com), Michael Wu (at 212-519-5165, mwu@kanekessler.com) or any partner in our Corporate Department