Since the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was enacted on March 27, 2020 and the Paycheck Protection Program (PPP) launched, the Small Business Administration (SBA) has approved over $511 billion in PPP loans to eligible portfolio companies.¹ As PPP loans have been disbursed and businesses are slowly starting to reopen pursuant to federal and state guidance, the focus has turned from PPP loan disbursement to PPP loan forgiveness.

This alert provides information on recent government legislation and SBA regulations, as well as SBA guidance on PPP loan forgiveness.

PPP Flexibility Act

On Friday, June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the PPP Flexibility Act), available here, which amends the CARES Act. The relief package triples the time allotted for PPP loan recipients to qualify for forgiveness from 8 weeks to 24 weeks. The legislation also lowers the required payroll spending threshold for PPP funds to 60%, gives new businesses five years to repay a PPP loan and allows businesses that have received a PPP loan to delay payment of payroll taxes.

Late on June 10, 2020, the SBA and the Treasury Department issued initial regulations to implement the PPP Flexibility Act (the Regulations), available here, providing initial guidance and clarifying certain requirements of the PPP Flexibility Act.

Through the CARES Act, the PPP expanded the existing SBA Section 7(a) loan program until June 30, 2020 to provide 100% federally-backed loans to eligible businesses. For more information, please see the prior Eversheds Sutherland legal alerts on the PPP and related guidance (the Prior Alerts).²

Highlights of the PPP Flexibility Act and Regulations thereunder include:

Extension of loan utilization covered period

The PPP originally required portfolio companies to spend loan amounts within eight weeks after the loan origination date (the Covered Period). The PPP Flexibility Act extends the Covered Period for loans disbursed after June 5, 2020 from eight weeks after loan origination to the earlier of: (a) 24 weeks after loan origination or (b) December 31, 2020. The Regulations confirm that a portfolio company that received a PPP loan prior to June 5, 2020 may opt to keep the forgiveness period at eight weeks. Forgivable uses for PPP loan amounts remain limited to payroll costs, rent, utilities and interest on real property and personal property debt.

Payroll cost spending requirement

Guidance issued by the Treasury Department and the SBA had previously required portfolio companies to spend at least 75% of their PPP loan proceeds on payroll costs to obtain maximum loan forgiveness. The PPP Flexibility Act reduces the minimum payroll cost spend threshold to 60%, but requires all portfolio companies to meet this threshold to receive forgiveness of any portion of a PPP loan. Accordingly, portfolio companies who do not spend at least 60% of their PPP loans on payroll costs will not have any portion of their loans forgiven. For example, if a portfolio company receives a $1,000,000 loan, then it must spend $600,000 of the loan on payroll costs in order for any portion of the loan to be forgiven. Note that the 60% threshold is a minimum – i.e., a portfolio company can use more than 60% of its PPP loan to cover payroll costs and be eligible for the same loan forgiveness options. In the Regulations, the Treasury Department and the SBA confirmed the new 60% minimum threshold from the PPP Flexibility Act.

Forgiveness reduction based on full-time equivalent employees

The PPP requires that portfolio companies retain or rehire a certain amount of full-time employees to obtain maximum loan forgiveness. The PPP Flexibility Act extends the rehire deadline date for full-time employees to December 31, 2020. The PPP Flexibility Act also includes an exception allowing portfolio companies to achieve full PPP loan forgiveness even if they do not fully restore their workforce. To use the exception, the portfolio company must meet one of the two following conditions: (a) the portfolio company is unable to rehire a former employee and the portfolio company is unable to hire a similarly qualified employee to replace the former employee or (b) as a result of federal or state government guidance on reopening, the portfolio company is unable to return business activity to a level commensurate with its activity level as of February 15, 2020. The portfolio company, however, still must expend at least 60% of the loan proceeds on payroll costs to obtain forgiveness of any portion of the loan as described above.

Repayment deadline extension

Congress has extended the maturity of all PPP loans made after June 5, 2020 from two years to a minimum of five years. While this provision is not effective for PPP loans extended prior to June 5, 2020, the PPP Flexibility Act specifically permits existing PPP loans to be amended to reflect the longer maturity period at the “mutual agreement” of the lender and the portfolio company.

Loan deferral period

The PPP Flexibility Act extended the deferral period on PPP loans. The Regulations clarify that so long as a portfolio company submits its loan forgiveness application to its PPP lender within 10 months of the end of the loan forgiveness period, the portfolio company will not have to make any payments of principal or interest on its PPP loan before the date the SBA remits the forgiven amount of the loan to the PPP lender.

Payroll tax deferral

The CARES Act provides that businesses may defer the employer portion of their 2020 Social Security payroll tax obligations so that half is payable in 2021, and the remaining half is payable in 2022. However, the CARES Act originally provided that this tax deferral option was not available to any portfolio company receiving PPP loan forgiveness. Similar to recent guidance issued by the Treasury Department, the PPP Flexibility Act now allows portfolio companies to defer their 2020 Social Security payroll tax obligations regardless of whether any loan amount is forgiven. The employer’s share of the Social Security payroll tax is not treated as a forgivable payroll expense.

Time expiring for new lenders

The Regulations reiterate that the last day for a new lender to obtain an SBA loan number for a PPP loan is June 30, 2020.

Portfolio company certifications

When applying for a PPP loan, portfolio companies will continue to be required to make certifications including, among other things, that PPP funds received will be used to “retain workers and maintain payroll.” The Regulations also require portfolio companies to certify that they understand that “knowingly” using funds for unauthorized purposes may mean the federal government may hold the portfolio company liable “such as for charges of fraud.”

SBA Loan Forgiveness Application

On May 17, 2020, the SBA issued Form 3508, the Paycheck Protection Program Loan Forgiveness Application, which is available here (the Application). The application has four components: (1) the PPP Loan Forgiveness Calculation Form; (2) PPP Schedule A; (3) the PPP Schedule A Worksheet; and (4) an (optional) PPP Borrower Demographic Information Form. Portfolio companies are required to submit items (1) and (2) to their PPP lender. The Application covers the mathematical computations required to apply for loan forgiveness as well as specifics on the loan forgiveness process.

Notable guidance in the Application includes:

$2+ million PPP loans

The application requires that a portfolio company who, along with its affiliates, received aggregate PPP funds over $2 million, check a box alerting the SBA to the size of the aggregate loan. This provision flags PPP loans that the Treasury Department has already warned it will audit. To calculate whether to check the $2+ million box, the form’s instructions require aggregation of loans pursuant to the PPP affiliation rules.³

Costs eligible for forgiveness

The SBA’s guidance provides for four broad categories of costs that are eligible for forgiveness: (1) payroll costs; (2) business mortgage interest payments; (3) business rent or lease payments; and (4) business utility payments. Subject to some exceptions, forgiveness is generally available for costs incurred with respect to these items during the portfolio company’s Covered Period, which is the eight-week period that begins on the date the PPP loan was disbursed (or the 24-week extended period pursuant to the PPP Flexibility Act, as described above).

Cash vs. non-cash compensation

The SBA’s guidance distinguishes between cash compensation payroll costs and non-cash compensation payroll costs that are eligible for forgiveness. Cash compensation eligibility is limited at $100,000 per employee, pro-rated for the Covered Period applicable to the PPP loan. Non-cash compensation is not limited. Non-cash compensation payroll costs include items such as contributions to employee health insurance, contributions to employee retirement plans or amounts paid for state and local taxes assessed on employee compensation.

Eligible non-payroll costs

Non-payroll costs eligible for forgiveness include mortgage obligations, rent obligations or utility payments incurred before February 15, 2020. Non-payroll costs cannot constitute more than 25% of the total forgiveness amount.

Full-time employee safe harbor

The CARES Act provided that a portfolio company’s forgiveness relief is limited where there is a reduction in the average number of full-time equivalent employees during the Covered Period as compared to a past reference period. The new guidance, however, provides that a portfolio company can be exempt from this reduction if a new safe harbor applies. Under this safe harbor, a portfolio company is exempt from the reduction in loan forgiveness if both of the following conditions are met: (1) the portfolio company reduced its full-time employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the portfolio company, by no later than June 30, 2020, restored its full-time employee level to the full-time employee level that existed during the portfolio company’s pay period that included February 15, 2020. As described above, the PPP Flexibility Act provides additional exceptions from the loan forgiveness reduction periods for portfolio companies that are able to meet certain hardship conditions.

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