COVID-19 and small business UPDATE: Critical changes to PPP passed by senate
On Wednesday, June 3, the Senate passed the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), which was passed by the House on May 28. The Flexibility Act includes key changes to the Paycheck Protection Program (PPP), created by the CARES Act, that will allow small businesses more flexibility in the use of PPP funds, including an extension of the PPP loan covered period. The Flexibility Act will not become law until signed by the President, but commentators have suggested that the President is expected to sign.
Critical Changes for Small Businesses:
- The PPP loan covered period has been extended from eight weeks to the earlier of 24 weeks after loan origination or December 31, 2020. Borrowers who received loans before the date the Flexibility Act is enacted (as signed by the President) may elect to continue using the eight-week covered period.
- PPP loans may be made through December 31, 2020. Under the CARES Act, PPP loans could not be made after June 30, 2020. Importantly, June 30 will remain the deadline for applying for PPP loans even under the new guidelines afforded by the Flexibility Act.
- Of particular significance to small businesses, the previous threshold requiring borrowers to use 75% of loan proceeds for payroll costs in order to qualify for forgiveness has been reduced to 60%. Borrowers will receive forgiveness if at least 60% of the loan proceeds are used for payroll costs, and they may receive forgiveness for up to 40% of the loan spent on non-payroll costs (e.g., rent, mortgage interest, and utilities). Importantly, because of odd wording in the Flexibility Act, borrowers are now required to use 60% of the loan proceeds on payroll costs, or they will not receive forgiveness for any amounts spent. This issue was heavily debated and may be subject to further changes.
- Loan forgiveness will not be determined based on a reduction in full-time equivalent (FTE) employees for the period of February 15, 2020 – December 31, 2020, if the borrower “in good faith”:
- Documents an inability to rehire employees who were employed as of February 15, 2020, and documents an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
- Documents an inability to return to the same level of business activity as of February 15, 2020, in compliance with governmental requirements or guidance issued between March 1, 2020, and December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
- PPP loan maturity would be set at a minimum of five years. This is an important development as the Treasury Department’s earlier guidance set PPP loan maturity at two years. This provision of the Flexibility Act applies only to loans made on or after the date of its enactment.
- The deferral period for interest on PPP loans is extended from six months to one year.
- The prohibition on deferral of employer payroll taxes for borrowers who have PPP loans forgiven is deleted. This means that PPP loan borrowers may defer 2020 payroll taxes in accordance with the CARES Act, repaying 50% on or before December 31, 2021, and 50% on or before December 31, 2022.
- The Flexibility Act requires borrowers to begin repaying principal, interest, and fees on the PPP loan if they do not apply for forgiveness within 10 months after the last day of the covered period applicable (i.e., eight weeks if maintained or 24 weeks).
Robinson Gray will continue to monitor this legislation and other legal impacts of the COVID-19 pandemic and provide important updates for small business concerns as they develop.
For more information, developments, and resources, please visit: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
To view the various PPP Loan calculators, please visit: https://www.aicpa.org/interestareas/privatecompaniespracticesection/qualityservicesdelivery/sba-paycheck-protection-program-resources-for-cpas.html
To review the most recent PPP loan application and/or apply for a PPP Loan (this site will be updated with the latest version), please visit: https://www.sba.gov/document/sba-form–paycheck-protection-program-borrower-application-form
This post has been prepared by Robinson Gray Stepp & Laffitte, LLC for informational purposes only and does not constitute legal advice. For more information, contact attorney Tim Thompson.