Last week, the House passed H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020 (“PFA”). Late Wednesday, the Senate approved the PFA unanimously, so it is now headed to the President’s desk to become law. Read the bill HERE.
The PFA proposes to significantly amend several critical provisions of the PPP, which include:
1. Loan Maturity is Extended (For New Loans) from Two Years to Five
Congress has now acted to extend the loan maturity term to five years, but only for new loans entered after the passage of the PFA. For already existing loans, Congress allowed that lenders and borrowers might mutually agree to modify the maturity term to conform to five years.
2. The Period of Deferred Payment is Modified – and a Forgiveness Deadline is Imposed
The PFA modifies the loan repayment deferral period so that deferral now runs until the date that the lender receives the forgiveness amount from the SBA. Because the eight week covered period is also extended (as is discussed further below), borrowers now have greater flexibility.
3. The Covered Period is Extended
The CARES Act established an eight week covered period for borrowers to incur payroll and non-payroll costs that were then eligible for loan forgiveness. The PFA now extends the covered period to the earlier of 24 weeks after the date of the loan’s origination or December 31, 2020, though the $100,000 cap on individual payroll eligibility remains unchanged.
4. The New 60% / 40% Hurdle Bars (Rather than Reduces) Loan Forgiveness
The PFA has now modified the SBA rule so that 60% (or more) of the forgiveness amount must be eligible payroll costs. This will enable some borrowers to benefit from increased eligibility for costs such as rent, transportation, utility costs, and mortgage interest. However, the PFA also changes the effect of the rule as the new ratio no longer simply causes a reduction of forgiven non-payroll costs. Now, it operates as a threshold bar for eligibility. As drafted in the PFA, a borrower seeking forgiveness of spent loan amounts that include less than 60% payroll costs will not receive any forgiveness. This may be a consequence of unintended drafting, and it will be interesting to see if Treasury and the SBA respond with regulations seeking to eliminate the threshold and restore the reduction.
5. Employee Count and Wage/Salary Safe Harbors Extended
The PPP requires reductions of the loan amount to be forgiven if (i) the borrower’s employee count of full-time equivalent (“FTE”) employees drops and/or (ii) if any employee suffers a reduction in his or her wages/salary that is greater than 25%. In both cases, the borrower can restore the full amount for forgiveness if it fully restores its FTE count or wages to its February 15, 2020, levels before June 30, 2020.
The dilemma for many borrowers is that their businesses are not yet fully operational, and in some cases, cannot be fully staffed pursuant to continuing government orders. To help resolve this predicament, the safe harbor deadlines are now extended to December 31, 2020. So long as the borrower fully restores its FTE count or wages to its February 15, 2020, levels before December 31, 2020, no reduction in forgiveness will be required.
6. New Exemption From Proportional Reduction of FTE Employees
Under the new PFA, during the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness shall be determined without regard to a proportional reduction in the number of FTE employees if an eligible recipient, in good faith—
a. is able to document—
i. an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and
ii.an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
b. is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance 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 during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
7. This bill does not address the deductibility of expenses in connection with the PPP loan. (Currently, the IRS has said in its guidance that while PPP loan forgiveness is not taxable, the expenses are not deductible, per Section 265 of the Tax Code.)
8. A new loan forgiveness application, guidance, and new FAQ’s will be issued.
9. PPP loan applications must be submitted by June 30, 2020.
As always, please consult your professional advisors about how these changes might impact you.