Flexibility Act Guidance and Modified PPP Applications to Retain Partial Forgiveness
U.S. Treasury Secretary Mnuchin and Small Business Administration (“SBA”) Administrator Carranza issued a joint statement yesterday following passage of Paycheck Protection Program (“PPP”) Flexibility Act (the “Act”) last Friday. The Act is intended to provide businesses with more time and flexibility to implement the PPP, thereby keeping employees on the payroll and fostering continued operations.
Significantly, the statement confirms that partial forgiveness will remain available even if a borrower does not spend at least 60% of its forgiveness amount on payroll costs. While the original PPP rules allowed for partial loan forgiveness if less than 75% of the loan forgiveness amount included payroll costs, critics thought this threshold was too high and had the effect of disallowing forgiveness for necessary non-payroll costs. Under the Flexibility Act, the threshold was dropped to 60% but the Act’s language also suggested that if the borrower did not spend at least 60% of the PPP funds on payroll costs, none of the loan would be forgiven.
Yesterday’s joint statement provides, “If a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60% of the loan forgiveness amount having been used for payroll costs.” According to the statement, the SBA will “promptly” issue rules, guidance and modified application forms to implement this change and the Act’s other important modifications of the PPP, which include:
- Extending the covered period for loan forgiveness from eight weeks after the date of loan disbursement to 24 weeks after the date of loan disbursement, providing substantially greater flexibility for borrowers to qualify for loan forgiveness. Borrowers who have already received PPP loans retain the option to use an eight-week covered period;
- Providing a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees for borrowers that are unable to return to the same level of business activity the business was operating at before February 15, 2020, due to compliance with requirements or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to worker or customer safety requirements related to COVID–19;
- Providing a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees, to provide protections for borrowers that are both unable to rehire individuals who were employees of the borrower on February 15, 2020, and unable to hire similarly qualified employees for unfilled positions by December 31, 2020;
- Increasing to five years the maturity of PPP loans that are approved by SBA (based on the date SBA assigns a loan number) on or after June 5, 2020; and
- Extending the deferral period for borrower payments of principal, interest, and fees on PPP loans to the date that SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period).
Finally, for borrowers who resisted the PPP but now may be contemplating a PPP loan under the Flexibility Act, the statement confirms that June 30, 2020, remains the last date on which a PPP loan application can be approved. Many small businesses expressed concern about the PPP’s utility and loan forgiveness prior to the Act, but with the Act’s new amendments, loan funds remain available to small businesses that were in operation on Feb. 15 with 500 or fewer employees, including most tax-exempt not-for-profits, veterans’ organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors.