PPP Update: What The House’s Passage of the Flex Act Means for PPP Borrowers

Miles & Stockbridge P.C.

On May 28, 2020, the U.S. House of Representatives near-unanimously passed the Paycheck Protection Program Flexibility Act of 2020, H.R. 7010 (the “PPP Flex Act” or the “Flex Act”). The bipartisan PPP Flex Act now goes to the Senate as national leaders look to provide additional, more expansive support to small businesses impacted by COVID-19. This bill follows multiple rounds of guidance released by the Small Business Administration (the “SBA”), in consultation with the U.S. Department of the Treasury, since the passage of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which established the Paycheck Protection Program (the “PPP”).

The PPP Flex Act—which is still subject to approval by the Senate and the President—provides several amendments to the PPP:

  • Setting a minimum maturity of five years for PPP loans.
  • This would supersede the current SBA rule that borrowers must repay the loan in two years, and instead give borrowers five years to repay any portion of the loan that is not forgiven.
  • This change applies only to loans made on or after the date on which the PPP Flex Act becomes law. However, the Flex Act would not prohibit lenders and borrowers from amending maturity terms for preexisting loans.
  • Extending the time in which borrowers can obtain a PPP loan from June 30, 2020, to December 31, 2020.
  • This change could be useful for companies that have not yet needed a loan, but develop such a need throughout the remainder of the year.
  • It is unclear whether funding will last through the end of the year. SBA reports that as of May 23, 2020, $511 billion has been loaned out of the $659 billion in PPP appropriations. In recent weeks, the borrowing pace has slowed significantly versus the period immediately following passage of the CARES Act.
  • Extending the time period in which borrowers are allowed to use PPP funds and then seek forgiveness from eight weeks after loan origination to the earlier of 24 weeks after origination or December 31, 2020.
  • Borrowers who took out loans before passage of the Flex Act could still utilize their original eight-week covered period, if they so choose.
  • As the Flex Act would establish a cut-off date of December 31, 2020, borrowers who wait until later in the year to take out a loan will have to limit their loans to amounts they will be able to spend prior to the end of the year.
  • Changing the requirement that PPP loan recipients seeking loan forgiveness must use at least 75% of the covered loan amount for payroll costs to “at least 60% of the covered loan amount for payroll costs.”
  • Appears to clarify that the 60% use for payroll cost requirement is a gating issue for forgiveness eligibility, which is a significant change from the CARES Act.
  • Per this new language, any borrower spending less than 60% on payroll costs would be ineligible for any forgiveness.
  • Adding an exemption to loan forgiveness reduction based on full-time equivalent (FTE) calculation where employers are (1) unable to rehire individuals who were employed as of February 15, 2020, and unable to hire similarly qualified employees on or before December 31, 2020, or (2) unable to return to the same level of business activity as such business was operating at prior to February 15, 2020, due to government requirements or guidance related to sanitation standards, social distancing or other requirements related to COVID-19.
  • The borrower must be able to “document” the above conditions before enjoying the exemption to loan forgiveness reduction.
  • Future SBA guidance is anticipated so borrowers understand how to apply this exemption.
  • Prior guidance from SBA indicated that where an individual employee refused to return to work, despite a bona fide offer at his/her former salary, that individual would not count against the borrower’s FTE loan forgiveness calculation (see FAQ 40).
  • The Flex Act language appears to go further than this prior guidance: if the borrower is not able to “rehire individuals” or “similarly qualified” employees, the borrower would be wholly exempt from the FTE loan forgiveness calculation.
  • It is unclear how many “individuals” or “employees” must be affected before the blanket exemption is applicable.
  • It is similarly unclear the extent to which business activity must be affected by COVID-19-related operating restrictions to trigger blanket exemption applicability.
  • Deferring payment of principal, interest and fees until the date on which the amount of loan forgiveness is remitted to the lender.
  • For borrowers who do not apply for forgiveness, repayment would not begin until ten months after the last day of the covered period for loan utilization purposes (i.e., eight weeks after disbursement, 24 weeks after disbursement, or December 31, 2020, depending on the date of the loan and other factors).
  • Permitting small businesses that receive PPP loan forgiveness to defer certain payroll taxes.
  • Under the CARES Act, employers are permitted to defer payment of the employer portion of social security taxes. However, this deferral option is not available to businesses that received PPP loan forgiveness.
  • Under the Flex Act, borrowers who have PPP loans that are forgiven would be permitted to delay payment of the employer portion of social security taxes for all payroll paid from March 27, 2020, through the end of 2020.
  • Deferral still does not apply to employee income tax withholding, the employee or employer portion of the Medicare tax, or the employee portion of the Social Security tax.
  • The payment of the tax will be deferred, with 50% of the tax payable on December 31, 2021, and the remaining 50% of the tax payable on December 31, 2022.
  • As long as the employer portion of social security taxes subject to the deferral are timely deposited by the December 31, 2021, and December 31, 2022, dates, the taxes will be treated as timely deposited, thereby avoiding the significant failure to deposit penalties.
  • PPP Loan borrowers would be able to take advantage of this deferral to further alleviate some cash flow constraints.
  • Unfortunately, the Flex Act does not attempt to supersede the IRS determination that no deduction will be allowed for tax purposes for otherwise deductible expenses that result in forgiveness of PPP loans.

If passed by the Senate and enacted into law by the President, these changes would apply both to new borrowers and to businesses that already received PPP Loans, with the exception that the maturity period is mandatory only for new loans, as noted above. In any case, if passed into law, it will be important for both new and existing borrowers to become familiar with the PPP Flex Act.

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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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