- Two new Interim Final Rules from the U.S. Small Business Administration (SBA) provide technical amendments to implement the Paycheck Protection Program Flexibility Act of 2020 as well as some substantive clarifications.
- SBA also published a revised Loan Forgiveness Application with a new EZ version of the application (Form 3508EZ).
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) created the U.S. Small Business Administration's (SBA) Paycheck Protection Program (PPP) to provide relief to small businesses affected by COVID-19 and to encourage employers to retain their employees during the pandemic. The Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act), passed by Congress on June 3, 2020, made several key changes to the program, including extending the covered period from eight to 24 weeks and reducing the requirement that 75 percent of the loan be spent on payroll to 60 percent, as well as extending the maturity date of new PPP loans from two to five years. (See Holland & Knight's previous alert, "Congress Makes PPP Loans More Flexible for Borrowers," June 4, 2020.)
The Flexibility Act necessitated a number of revisions to the SBA's already published Interim Final Rules (IFRs) and Loan Forgiveness Application as well as instructions, which have been largely addressed by two new IFRs released by the SBA.
EZ Version of Loan Forgiveness Application
Although many of the revisions are technical in nature, the SBA also published a new EZ version of the Loan Forgiveness Application form (Form 3508EZ). This version of the form may be used by certain self-employed individuals, independent contractors or sole proprietors who had no employees and did not include any employee salaries in their payroll computations. The EZ version may also be used by borrowers that did not reduce salaries or wages by more than 25 percent during the applicable covered period compared with the period between Jan. 1, 2020 and March 31, 2020, and either:
- did not reduce the number of employees or the average paid hours of employees between Jan. 1, 2020, and the end of the applicable covered period, or
- was unable to operate during the applicable covered period at the same level of business activity as before Feb. 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and Dec. 31, 2020, by the U.S. Department of Health and Human Services (HHS), the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA) related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19
Implementing the 24-Week Covered Period
The Flexibility Act allows borrowers to use a 24-week covered period to spend PPP loan proceeds and be forgiven in lieu of the eight-week period previously included in the CARES Act. Borrowers who received PPP loans prior to June 5, 2020, may still elect to use the eight-week period. The initial passage of the Flexibility Act left some wondering whether the ability to use the 24-week period would prohibit a borrower from using an "alternative covered period" that commenced on the first day of the first payroll cycle in the covered period, rather than the date of disbursement of the loan. However, the amendments to the initial forgiveness IFRs implemented by the new IFR make it clear that the alternative covered period is available for all cover periods.
Applying for Forgiveness
A PPP borrower must apply for forgiveness within 10 months of the end of the covered period to avoid amortization payments on the loan. Importantly, the IFR provides that a borrower may apply for forgiveness at any time on or before the maturity date of the loan, including before the end of the covered period, if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. However, if the borrower applies for forgiveness early and has reduced any employee's salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full eight-week or 24-week covered period. Additionally, the 10-month window will allow borrowers that have the option of electing between an eight-week and 24-week covered period the time needed to determine which period will maximize their loan forgiveness calculation.
Accounting for Reductions in Business Activity Due to Government Guidance
The Flexibility Act also provided that a PPP borrower will not have its loan forgiveness reduced if the borrower can establish in good faith that it was unable to return to the same level of business activity it was at before Feb. 15, 2020, due to compliance with HHS, CDC or OSHA guidance. Importantly, the SBA has interpreted this exemption to include both direct and indirect compliance because a significant amount in the reduction of business activity has been a result of state and local shutdown orders based in part on the guidance of the HHS, CDC and OSHA. This is a meaningful clarification to many businesses affected by various state and local orders that may vary significantly according to a PPP borrower's business geography.
Spending on Payroll Costs
The IFR amends the SBA's prior IFR to incorporate the Flexibility Act's statutory change from 75 percent of PPP proceeds being required to be used for payroll costs to 60 percent. With the enactment of the Flexibility Act, it was unclear whether the reduction to 60 percent would apply only in the forgiveness context or also to the use of the balance of the loan proceeds. The revised IFR makes clear that 60 percent of both the forgiveness amount and the balance of the loan proceeds must be used for payroll costs.
Although the SBA's two new IFRs are largely technical in nature, they also include some new substantive guidance as well as a new EZ form that will benefit some PPP borrowers.