Significant Changes Coming To the Paycheck Protection Program
As of 6/3/20, over $100 billion in PPP funding was still available from SBA authorized participating lenders.
Today, President Trump signed HR7010, the Paycheck Protection Program Flexibility Act of 2020. The bill changes specific loan forgiveness provisions of the Paycheck Protection Program (PPP). PPP was a part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress to mitigate the effects of COVID-19. Companies or organizations who secured PPP loans are cautioned and advised to review the new legislation very carefully, as detailed below.
Under PPP, eligible businesses could apply for forgivable loans of 2.5 times their average monthly payroll or $10 million, whichever is the lesser amount. A recipient can have 100 percent of its PPP loan forgiven if it uses the proceeds of the loan on the following items during the eight weeks beginning on the date of loan origination:
- Payroll costs as defined by the CARES Act;
- Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation);
- Any payment on any covered rent obligation; and
- Any covered utility payment.
Loan recipients were also required to spend at least 75 percent of the loan proceeds on payroll costs.
The new law contains the following changes:
- Extends from eight weeks after loan origination to 24 weeks or December 31, 2020 the covered period during which a loan recipient may use such funds for certain expenses while remaining eligible for forgiveness.
- Clarifies that loan forgiveness will be determined without regard to a reduction in the number of employees if the loan recipient is (1) unable rehire former employees or to hire similarly qualified employees, or (2) unable to return to the same level of business activity due to compliance with federal requirements or guidance related to COVID-19. (The recipient must make this claim in “good faith.”)
- Extends the period in which an employer may rehire or eliminate a reduction in employment, salary, or wages that would otherwise reduce the forgivable amount of a paycheck protection loan.
- Changes the 75 percent test to a 60% cliff. To be eligible to receive loan forgiveness under this new legislation, an eligible recipient of a PPP loan will now be required to use at least 60 percent of the loan amount for payroll costs and may use up to 40 percent (non-payroll) for permitted rent, utilities, and interest on secured debt, as defined in the law.
- Extends the 2-year maturity of the loan to a 5-year maturity for new loans (made after the date of enactment of this Act). There is no retroactivity for loans already processed; however, the Act specifically provides that nothing prohibits borrowers and lenders from mutually agreeing to modify the maturity terms of a covered loan made before enactment of the Act.
- Revises the deferral period for paycheck protection loans, allowing recipients to defer payments until they receive compensation for forgiven amounts. (Recipients that do not apply for forgiveness will have ten months from the program’s expiration to begin making payments.)
The law also eliminates a provision in the CARES Act that makes a paycheck protection loan recipient that has been forgiven such indebtedness ineligible to defer payroll tax payments, and makes it retroactive to the date of passage of the original CARES Act.
With the extended nature of the COVID-19 pandemic, these changes to the PPP program are intended to give employers additional flexibility in maintaining operations that are still limited. We expect guidance from the Small Business Administration to address these significant changes to the PPP program.