The Paycheck Protection Program Flexibility Act (PPPFA), here, was signed into law last week. The PPPFA is intended to fix problems with the Paycheck Protection Program (PPP), the keystone of the Coronavirus Aid, Relief, and Economic Security (CARES) Act adopted on March 27, 2020. Our earlier summary of the PPPFA is here.
The PPP remains a hot mess, and the Small Business Administration (SBA) has its work cut out for it to communicate coherent guidance to borrowers, something it certainly has not done well to date.
Most commentary on the PPPFA focuses on the extension of the loan forgiveness period – borrowers now may take 24 weeks to spend the PPP loan and potentially have it forgiven – and the reduction of the percentage of the loan that must be spent on payroll costs from 75% to 60%. For our money, the most significant change (potentially, depending on SBA rule-making) is that reductions to forgivable amounts need not be made if a borrower can show “an inability to return to the same level of business activity as such business was operating at prior to February 15, 2020, due to compliance with [federal COVID-19 guidance].”
In a joint statement published June 8, 2020, here, Treasury Secretary Mnuchin and SBA Administrator Carranza summarize the provisions of the PPPFA and promise that rules, guidance and a modified loan forgiveness application will be issued “promptly.” The SBA’s first new interim final rule, published on June 11, 2020, here, largely makes obvious PPPFA-required conforming amendments to its earlier rules. As we wait for the SBA to tackle more thorny interpretive issues, a few thoughts:
- The joint statement says that the SBA won’t guarantee loans after June 30, 2020. That position reflects the statement of Congressional intent, here, but contradicts the unambiguous words in the PPPFA. But, well, there you go.
- The new interim rule makes clear, as predicted, that if a borrower uses less than 60% of the PPP loan for payroll costs, a portion of the loan will still qualify for forgiveness. (The PPPFA language suggested that none of the loan would be forgiven if less than 60% were spent on payroll costs.)
- The SBA still hasn’t said whether PPP loan proceeds may be spent (albeit not forgiven) after the end of the covered period, which for this purpose is December 31, 2020. This is not as pressing as it was when the covered period ended on June 30, 2020, but it also is not difficult to give guidance. For example: “PPP loan proceeds must not be spent after December 31, 2020; unused proceeds must be retained in a cash account until repaid to the lender.” JUST. TELL. US.
- The SBA still hasn’t said what “eliminated the reduction” in FTEs and salaries means for purposes of the rehire exceptions to loan forgiveness reductions. Its existing guidance conflates averages over specified periods and numbers at specified points. Providing guidance here also would not be difficult. For example: “For purposes of Section 1106(d)(5)(B)(i), ‘eliminated the reduction’ means that average FTEs in the payroll period that includes December 31, 2020 (or, if the eight-week covered period applies, June 30, 2020) are at least equal to the average FTEs calculated under Section 1106(d)(2)(A)(ii).” This is the most important part of the PPP for many, and the SBA’s failure to provide guidance is abject. JUST. TELL. US.
- We hope, but are not confident, that the SBA will be generous and clear in its rule-making about the exception to FTE and salary reductions if a borrower can’t return to pre-COVID-19 operating levels due to federal requirements or guidance. (It’s fair to assume for most borrowers that the inability to operate at pre-COVID-19 levels is due to COVID-19. If the SBA loosely ties federal regulation to operating reductions, this exception might swallow the reduction rule. Congress could have cut the Gordian knot of its own unwieldy loan forgiveness provisions by simply eliminating the cutbacks, which would have left a law that simply said: take this loan if it’s necessary, and amounts you spend in a specified period for specified purposes will be forgiven. The SBA isn’t going to go that far, but we hope it takes the opportunity to sever at least several loops in the knot.)
- Unless an borrower is confident most of its loan will be forgiven, likely the smart play is to delay applying for loan forgiveness at least until SBA guidance is published and possibly until January 1, 2021. At that point, a borrower might better determine whether the eight- or 24-week covered period will result in more loan forgiveness and waiting gives more time to qualify for the rehire exception to forgiveness cutbacks. (There is no deadline by which a borrower must apply for loan forgiveness, and even for those who stick with the eight-week covered period, the rehire deadline is December 31, 2020.)