Changes to Law Ease Restrictions on Use of PPP Funds

June 8, 2020

By: Kimberly Klein and Benjamin Danieli

Employers received some much needed relief in the administration of loans received through the Paycheck Protection Program (“PPP”) when the PPP Flexibility Act (the “Act”) was enacted Friday, June 5, 2020, increasing the likelihood that the loan amounts will be forgiven.  The Act amends the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), giving borrowers more time to qualify for forgiveness and easing certain restrictions as follows:  

  • Expands the Forgiveness Period. The Act extends the previous 8-week covered period during which loan proceeds must be spent to qualify for forgiveness, to the earlier of: (1) 24 weeks from the origination of the loan; or (2) December 31, 2020 (the “Covered Period”).  Borrowers who received a loan prior to the Act’s effective date, will retain the option of calculating the Covered Period as the original 8 week period.  The expansion does not extend the deadline to apply for a loan, which currently is June 30, 2020.
  • Redistributes allocation of Forgivable Expenses. The Act lowers the percentage of the loan amount that must be used for payroll costs to qualify for forgiveness from 75 percent to 60 percent, and correspondingly increases the portion that may be used for non-payroll costs from 25 percent to 40 percent.  Although the Act provides that no portion of a PPP loan will be forgiven unless at least 60 percent of the loan proceeds are used for payroll costs, forthcoming guidance is expected to allow proportional forgiveness below this threshold.
  • Extends Deadline to Restore Workforce.  The timeframe to rehire Full Time Equivalent (“FTE”) employees or restore workers’ wages and hours equal to business operations at or before February 15, 2020, is extended from June 30, 2020 to December 31, 2020.
  • Adds Additional Exemptions to Forgiveness Reductions. The amount of loan forgiveness is reduced proportionally to a borrower’s failure to rehire its workforce or restore worker’s wages and hours, subject to certain exemptions.  See our prior article. [1] The Act introduces two additional exemptions.  Now, a borrower will not be penalized for failure to rehire FTE employees to pre-quarantine levels if the loan recipient is able to document in good faith that it was:
  1. unable to rehire individuals who were employees as of February 15, 2020 and similarly qualified employees were unavailable for the unfilled positions on or before December 31, 2020; and
  2. unable to restore its workforce to the level of business activity “as before February 15, 2020,” due to compliance with COVID–19 health and safety guidance issued by certain federal agencies during the period beginning on March 1, 2020, and ending December 31, 2020, such as social distancing and sanitation mandates issued 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.
  • Clarifies the Deadline for Submission of Forgiveness Applications. The Act provides much needed guidance concerning submission of the forgiveness application. Borrowers must submit the application within 10 months after the expiration of the Covered Period (i.e. the earlier of 24 weeks after the origination of the loan or December 31, 2020).  Borrowers who fail to submit a forgiveness application within the 10 month time period must begin to make payments on the loan on the date their Covered Period expires.
  • Extends the Deferral Period. The deferral period to start repaying unforgiven loan amounts is extended from 6 months to either: (1) the date on which the amount of forgiveness determined by the SBA is remitted to a borrower’s individual lender, if the borrower applied for forgiveness; or (2) 10 months after the last day of the Covered Period, if the borrower has not applied for forgiveness.
  • Increases the Maturity Term.  The maturity date for loan amounts that are not forgiven will increase from 2 years to 5 years on loans that originate after the effective date of Act.  Borrowers with loans that originated prior to the effective date of the Act, will retain the 2 year maturity term; however, a borrower and lender may mutually agree to change the maturity terms of the PPP loan.
  • Permits Borrowers to Delay Payment of Employer Payroll Taxes. The Act also strikes a section of the CARES Act which prohibited delays in the payment of certain employer payroll taxes for those borrowers who received forgiveness.  As such, borrowers with forgiven expenses are now eligible for delayed payment of those specific employer payroll taxes listed under § 2302 of the CARES Act. [2]

The Small Business Administration (“SBA”) and/or U.S. Department of Treasury are expected to issue guidance further interpreting the Act and its implementation. 

Please contact Kimberly Klein at (212) 554-7853/kklein@mosessinger.com, Benjamin Danieli at (212) 554-7848/bdanieli@mosessinger.com or Allan Grauberd at (212) 554-7883/agrauberd@mosessinger.com, if you have any questions regarding the most recent changes.

 

[1] Kimberly Klein, The SBA Issues PPP Loan Forgiveness Rules, (May 26, 2020).

[2] Section 2302(d)(1)(A)-(C) of the CARES Act, defines the “applicable employment taxes,” to include: “(A) The taxes imposed under section 3111(a) of the Internal Revenue Code of 1986; (B) So much of the taxes imposed under section 3211(a) of such Code as are attributable to the rate in effect under section 3111(a) of such Code; (C) So much of the taxes imposed under section 3221(a) of such Code as are attributable to the rate in effect under section 3111(a) of such Code.”  Section 2302 also permits delayed payments through “December 31, 2021, with respect to 50 percent of the amounts” of the applicable employment taxes and “December 31, 2022, with respect to the remaining such amounts.”