Congress Passes Legislation Extending PPP Forgiveness Period

Nelson Mullins Riley & Scarborough LLP

Last night the Senate passed the Paycheck Protection Program Flexibility Act of 2020 (the “Act”) that is expected to be signed into law by President Trump today. The Act was passed by the House of Representatives last week, and makes certain significant changes to the Paycheck Protection Program (“PPP”), including extending the “covered period” forgiveness period from 8 weeks to 24 weeks; reducing the forgiveness amount that must be spent on payroll costs from 75% to 60%; and expanding the availability of certain payroll tax deferrals for businesses that participated in the PPP. The Act also makes important changes to the formula for reducing the forgiveness amount based on reductions in workforce and wages/salaries and the available cure for such reductions.

For general information about the PPP, which was the cornerstone small business lending program under the Coronavirus Aid, Relief, and Economic Security Act stimulus package (the “CARES Act”), see SBA Paycheck Protection Program with Eligibility Questionnaire.

Extension of Forgiveness Period to 24 Weeks

Under the original terms of the PPP, the amount available for forgiveness was calculated based on the amount of payroll costs and other eligible expenses actually paid or incurred during the first 8 weeks after disbursement of the PPP loan (also known as the “covered period”). Many businesses have had trouble spending the entire PPP loan amount during those 8 weeks because of decreased payroll and operations due to the coronavirus outbreak and related shutdowns.

The Act extends the covered period to the earlier of (1) the date that is 24 weeks from the disbursement of the loan, or (2) December 31, 2020. This will give businesses longer to utilize the PPP funds and the ability to maximize the eligible forgiveness amount to ensure that the full loan is forgivable.

Reduction of the Amount that Must be Spent on Payroll Costs from 75% to 60%

The SBA had previously required that at least 75% of the forgiveness amount must be used to pay payroll costs. The Act provides that in order to receive forgiveness, at least 60% of the PPP loan must be used for payroll costs, and up to 40% may be used on eligible mortgage interest, rent and utility payments. As Senator Marco Rubio has noted, this language suggests that failing to meet the 60% test will disqualify the business from any forgiveness, while failure to meet the original 75% test only reduced the amount of forgiveness available.

Businesses who were in need of additional working capital support should benefit from the ability to have additional rent, mortgage and utility payments forgiven, but should still be careful to spend at least 60% on payroll expenses.

Deferral of Payroll Tax for PPP Borrowers

The CARES Act provided that businesses could defer their 2020 social security payroll tax obligations to pay 50% due December 31, 2021 and 50% due December 31, 2022, but that PPP recipients were ineligible for such deferral. Treasury later permitted PPP borrowers to defer their social security payroll tax until PPP forgiveness was determined. The Act permits PPP borrowers to defer the 2020 social security payroll tax obligations regardless of if any amount is forgiven. However, the employer portion of the social security payroll tax is not a forgivable expense under the PPP.

Changes in Reductions of Forgiveness Amounts Based on Reductions in Workforce

The Act also makes important changes to the part of the PPP that reduces the forgiveness available based on reductions in a business’ number of full-time employees (“FTEs”). Under the original PPP program, the amount available for forgiveness would be reduced by a proportion equal to any reductions in average monthly FTEs over the covered period, divided by the average monthly FTEs over a comparable pre-coronavirus period. Treasury had provided guidance that employees who were fired for cause, voluntarily resigned, or refused an offer to rehire would not be counted towards this reduction.

The Act provides that persons will not be counted towards the FTE reduction calculation if the business, in good faith, can document:

  1. an inability to rehire the individuals and an inability to hire similarly qualified positions on or before December 31, 2020; or
  2. an inability to return to the same level of business activity as before February 15, 2020, due to compliance with requirements or guidance by the Secretary of Health and Human Services, the CDC, or OSHA between March 1, 2020 and December 31, 2020 related to COVID-19.

Other Important Changes

The Act also:

  • Extends the minimum maturity of new PPP loans to 5 years. Previously, any unforgiven portion of the PPP was set to mature after 2 years.
  • Extends the deferral period on payments of PPP interest and principal from 6 months to 1 year (10 months if the borrower does not apply for forgiveness).
  • Changes the cure date for forgiveness amount reductions based on reductions in workforce, wages or salary from June 30, 2020 to December 31, 2020.
  • Extends the end date during which PPP loans may be made and PPP funds are permitted to be used from June 30, 2020 to December 31, 2020.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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