The president today will sign legislation that modifies the Paycheck Protection Program (PPP) retroactively to the date of the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act as follows:
1. Extension of Loan Utilization Covered Period. Originally, the PPP required borrowers to spend loan amounts within eight weeks after the loan originated and designated this period the “Covered Period.” The new legislation changes the Covered Period from eight weeks to the earlier of (a) 24 weeks after loan origination or (b) Dec. 31, 2020. Nothing prevents a PPP borrower from spending all of its loan proceeds and requesting forgiveness prior to the end of its Covered Period. The extension will assist PPP borrowers with weathering the COVID-19 crisis by allowing them a longer period to utilize PPP loan proceeds on forgivable expenses. Restaurants, hotels and seasonal businesses will be greatly benefited by the extension of the Covered Period. Forgivable uses remain limited to payroll costs, rent, utilities, and interest on real property and personal property debt.
2. Payroll Cost Spend Requirement. Guidance issued by the Treasury Department and the Small Business Administration has required PPP borrowers to spend at least 75% of their PPP loan proceeds on payroll costs to obtain maximum forgiveness. The legislation reduces the minimum payroll cost spend threshold to 60% but requires all PPP borrowers to meet this threshold to receive any forgiveness of the PPP loan. Accordingly, PPP borrowers who do not spend at least 60% of their PPP loans on payroll costs will not have any of their loans forgiven. This is a significant change from the previous law.
Example: Corporation X operates as a restaurant and is required to operate at 25% capacity pursuant to a governmental order. Corporation X received a PPP loan of $1 million. Corporation X will need to spend $600,000 on payroll costs for any part of its loan to be forgiven.
3. Forgiveness Reduction Based on Full-Time Equivalent Employees. PPP loans are subject to a reduction calculated by multiplying a borrower’s forgivable loan amount by a fraction, the numerator of which is the average number of full-time equivalent employees (FTEs) during the borrower’s Covered Period, and the denominator of which is, at the election of the borrower, either (a) the average number of FTEs between Feb. 15, 2019, and June 30, 2019, or (b) the average number of FTEs between Jan. 1, 2020, and Feb. 29, 2020 (collectively, the Testing Periods). Employees terminated between Feb. 15, 2020, and April 26, 2020 (Terminated Employees) could be rehired prior to June 30, 2020, allowing the PPP borrower to include those rehired employees in the borrower’s numerator to ensure maximum loan forgiveness. The Paycheck Protection Program Flexibility Act does not change the rehire provision except to extend the rehire deadline date to Dec. 31, 2020. The new legislation also eliminates the forgiveness reduction test if the PPP borrower meets one of the two following conditions: (a) the borrower is unable to rehire a Terminated Employee and the borrower is unable to hire a similarly qualified employee to replace the Terminated Employee or (b) the borrower is unable to return business activity to a level commensurate with the business’s activity level as of Feb. 15, 2020, as a result of guidance issued by the Occupational Safety and Health Administration, the Centers for Disease Control and Prevention, or the Secretary of Health & Human Services. This elimination of the FTE reduction test will be particularly helpful to businesses that cannot return to full operation because of the COVID-19 crisis. The borrower, however, must expend at least 60% of the loan proceeds on payroll costs to obtain forgiveness of any portion of the loan.
4. Payroll Tax Deferral. The CARES Act provides that businesses may defer the employer portion of their 2020 Social Security payroll tax obligations so that one-half is payable on Dec. 31, 2021, and the remaining one-half is payable on Dec. 31, 2022. However, the CARES Act originally provided that any business receiving PPP loan forgiveness was not eligible to defer its Social Security payroll tax obligations. Recent guidance issued by the Treasury Department allowed PPP borrowers to defer their Social Security payroll tax obligations until forgiveness was determined. The new legislation allows PPP borrowers to defer their 2020 Social Security payroll tax obligations regardless of whether any amount is forgiven. The employer’s share of the Social Security payroll tax is not treated as a forgivable payroll expense.
The changes made to the PPP should be well received by PPP borrowers and potential borrowers, as it alleviates many borrowers’ criticisms of the PPP. However, certain borrowers may find troublesome the retroactive application of the 60% payroll costs requirement that must be satisfied to obtain any forgiveness if business demand does not allow those borrowers to ramp back up before the end of the extended Covered Period. Originally, the PPP required borrowers to spend 2.5 months of average payroll costs over an eight-week period. The new legislation requires borrowers to spend 1.5 months of average payroll costs over a six-month period to qualify for any forgiveness.
