What You Need to Know About the PPP Flexibility Act of 2020
Louis Lehot, business lawyer and partner at Foley & Lardner LLP in Silicon Valley, and formerly the founder of L2 Counsel, P.C.
By Louis Lehot & Co-Author Kate Mamyko-Golomb
On June 3, 2020, the United States House and Senate passed The Paycheck Protection Program Flexibility Act of 2020, or PPPFA, and on June 5, 2020, culminating a strong bipartisan effort, the President of the United States signed it into law. This new legislation is aimed at fixing several of the biggest problems created by the Small Business Administration and the United States Treasury in their guidance regarding the PPP and makes important changes to the program itself. Under the PPPFA, the timeline of availability for PPP loans will be lengthened, more flexibility will be provided for loan forgiveness, and the borrowers will be able to defer payroll taxes for employees whose payroll costs are covered by the loan. In addition, loan maturities and repayment timing can be extended. Following are important details about the PPPFA that small businesses should know.
Availability of the PPP loans
The PPPFA extends the timeline for availability of PPP loans until December 31, 2020. Formerly, the SBA could only provide loans until June 30, 2020. This solved the biggest problem that business had with complying with PPP, namely, to spend the money, just when employees needed to stay at home.
Another obstacle for American businesses to leverage the Paycheck Protection Program loan program was that it required businesses to spend at least 75% of the loan proceeds on payroll. For those “non-essential” businesses shut down due to government orders to prevent the spread of the deadly coronavirus, this meant that American businesses had to play the role of unemployment officer and paying workers to stay home and do no work. The PPPFA reduces the amount of the loan needed to be spent on payroll from 75% to 60%, thus increasing the amount of funds available for other expenses from 25% to 40%.
Advocates for American businesses had hoped to have flexibility to use up to 50% of the loan proceeds on non-payroll items, and to have more freedoms to spend on more items to remain eligible for forgiveness, such as personal protection equipment, expenses around remote working, inventory and other critical business needs. The PPPFA fails to address these other critical needs.
The new Act also provides borrowers with an opportunity to apply for loan forgiveness for up to 10 months from the date the covered period ends.
The Act also extends the PPP covered period from eight weeks to 24 weeks (or until December 31, 2020, whichever is earlier). For those who already received a loan under the PPP, the new Act provides an opportunity to elect an eight-week covered period.
Borrowers can use the 24-week period to restore their workforce and wages to pre-pandemic levels, a condition which is required for full forgiveness.
Loan Maturity Date
Previously, the SBA had set the loan maturity term at two years. The new Act extends the maturity date of the PPP loans for up to five years. This provision will only affect those borrowers whose loans will be disbursed after its enactment. However, the Act allows existing borrowers and lenders to mutually agree to modify the terms of PPP loans that have already been distributed with a two-year maturity term.
The new Act allows deferment of payments of principal, interest and fees until the date on which the amount of the loan forgiven is remitted to the lender by the SBA. The CARES Act previously required that lenders provide a deferment on those payments for at least six months and not more than one year.
Safe Harbor for Rehiring Employees
The PPPFA extends the safe harbor period for restoring average full-time equivalent employees and salaries/wages from June 30, 2020 (as previously provided in the CARES Act), to December 31, 2020.
Under the PPPFA, loan forgiveness will not be allowed to be reduced, unless the borrower can establish in good faith:
(i) an inability to rehire individuals who were employees of the eligible recipient on Feb 15, 2020; and
(ii) an inability to hire similarly qualified employees for unfilled positions on or before Dec 31, 2020; or
(iii) an inability to return to the same level of business activity at which the business was operating before February 15, 2020, due to compliance with operating restrictions related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
The new Act removes restrictions previously imposed by the CARES Act upon employers wishing to take advantage of the payroll tax deferral after a PPP loan is forgiven. Now, PPP borrowers may defer the payroll tax from March 27, 2020, to December 31, 2020.
The PPPFA contains significant accommodations for small businesses. Many burdens on businesses that applied for and received PPP loans have been lessened. Certain businesses that previously rejected the opportunity to avail themselves of PPP funds may now reconsider under more favorable conditions.
The PPPFA also represents a rare bipartisan moment in what will be remembered as a very polarizing time.
As to the future, we will be on the lookout for the SBA to issue further guidance on application of the PPPFA in the coming days.
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