Better Late Than Never? New Law Expands Loan Forgiveness Provisions of the Paycheck Protection Program and Provides Other Desperately Needed Relief
On Friday, June 5, 2020, bipartisan legislation aimed at addressing many of the issues and difficulties that have arisen with respect to the loan forgiveness provisions of the Paycheck Protection Program (PPP) became law. The Paycheck Protection Program Flexibility Act of 2020 amends several provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the PPP, originally enacted as part of the CARES Act, that have created uncertainty and were viewed as stumbling blocks for many potential PPP borrowers. The following are some of the most significant changes to the PPP as a result of the new law:
- Forgiveness Period. The CARES Act and rules promulgated thereunder originally provided that PPP loan proceeds used in accordance with applicable rules during an eight-week period following the date of disbursement of the loan are eligible for forgiveness. As reported in our recent advisory, the concept of an Alternative Payroll Covered Period was introduced when the Small Business Administration (SBA) and the Treasury Department released a loan forgiveness application and instructions. The new law extends the eight-week period to 24 weeks following the date of disbursement of the loan (or December 31, 2020, if earlier). It is unclear whether the Alternative Payroll Covered Period concept will continue to be offered. We would expect to see this addressed in a new forgiveness application and instructions that will undoubtedly need to be provided in light of the significant changes made by this new law.
- 75 Percent Payroll Costs. Rules and guidance from the SBA and Treasury provided that at least 75 percent of the amount forgiven under the PPP had to be used for payroll costs. This provided little benefit to employers forced to dramatically reduce their headcount but who remained stuck with certain other overhead costs. The new law reduces this threshold to 60 percent and provides that 40 percent (up from 25 percent) of the loan forgiveness amount can now be used for eligible non-payroll costs (such as covered business mortgage interest payments, covered rent obligations and covered utility payments).
- Reduction of Forgiven Amount. Under the original PPP provisions of the CARES Act, the amount of potential loan forgiveness could be reduced as a result of headcount and/or salary/hourly wage reductions. To the extent those reductions were eliminated by June 30, 2020, this “penalty” of reduced loan forgiveness would not apply. The deadline for this relief is extended under the new law to December 31, 2020 and a new potential exemption has been added pursuant to which a headcount reduction might not result in a reduction of forgiveness where an employer is unable to rehire or replace employees.
- Terms of PPP Loans. Initially, the term of a PPP loan (for amounts not forgiven) was two years. The new law extends the term to five years. In addition, the deferral period for the payment of interest (one percent) and principal has been significantly extended to, in general, the date the lender receives a payment from the SBA of that portion of the loan that is forgiven.
- Payroll Tax Deferral. Under the CARES Act, employers are permitted to defer the deposit of the employer portion of Social Security taxes (6.2 percent of wages up to the $137,700 2020 taxable wage base), and 50 percent of self-employment taxes, due on or after March 27, 2020 and through December 31, 2020. (A series of FAQs on this provision are available on the IRS website.) Fifty percent of the deferred deposit is due on December 31, 2021 and the remaining 50 percent is due on December 31, 2022. As originally enacted, deferral ended with respect to future deposits once the employer received notice of the amount of PPP loan forgiveness. Under the new law, PPP loan forgiveness no longer has any effect on the availability to employers of this deferral opportunity.
While these changes are certain to be helpful to many PPP loan participants, many significant questions are not addressed by the new law including, for example, the breadth of the “payroll costs” concept, issues relating to taxation and issues relating to business eligibility and affiliation. No doubt, the new law itself will also spawn new questions for which additional guidance will be needed.
Nevertheless, we expect that the new law will cause many smaller businesses that had previously refrained from applying for a PPP loan to now do so, which means that unallocated funds under the PPP (approximately $148 billion as of June 4, 2020) may be allocated quickly.
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