Congress passed the Paycheck Protection Program Flexibility Act of 2020 on June 3, 2020, and President Trump signed it into law on June 5, 2020. The Act made some key revisions to the Paycheck Protection Program (PPP) as well as provided further clarity for issues surrounding the forgiveness portion of the loan. Below are some of the significant amendments that businesses who applied and received PPP loans should now review and take into consideration.
1. While the CARES Act originally granted borrowers only eight weeks to spend the PPP Loan money, this new Act now gives borrowers 24 weeks from when the loan proceeds are received to use the funds and still qualify for forgiveness.
2. The CARES Act originally mandated that at least 75% of the PPP loan funds had to be used towards employee payroll in order for the loan to be forgiven. This new Act has reduced that to 60%. This means that businesses can now use 40% of the loan towards non-payroll expenses and still be eligible for forgiveness. This change was perhaps the most significant as it will make many more businesses (especially those who have not yet been able to hire back employees) eligible for loan forgiveness. Keep in mind, this means that businesses will now have 24 weeks to spend the funds on qualifying rent, utilities and mortgage payments on up to 40% of their PPP loan.
3. For loans that are not forgiven, borrowers now have a minimum of five years to repay the loan – up from the previous two years.
4. Borrowers now have until December 31, 2020 to get their “full-time equivalent” (FTE) employee count back to what it was in the reference period in order to avoid a reduction in the amount of the loan being forgiven. The original deadline was June 30, 2020.
5. The Act allows for two new exceptions for borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Borrowers were already allowed to exclude employees who turned down good-faith offers to be rehired at the same hours and wages as before the pandemic. The PPPFA adds that an employer can be exempt from the loan forgiveness reduction related to workforce restaffing if they can document that they:
- Are unable to find and hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
- Are unable to restore business operations to the levels they were at on Feb. 15, 2020, due to COVID-19-related operating restrictions.
6. Under the new law, businesses can defer payment of the employer portion of the Social Security taxes until 2022 (50 percent to be paid in 2021 and the remainder in 2022), regardless of when the loan is forgiven.
7. Payments under the previous guidelines were set to be due after 6 months. Now payments are no longer due until the forgiveness amount is determined and remitted to the lender.
Although many of these changes eased some of the burdens borrowers felt, there are also some major issues that are awaiting clarification. These include:
- Forgiveness Calculation: Will businesses still be eligible for loan forgiveness if their payroll costs fall under 60% of the loan? Under the previous rule, if a company’s payroll expenses were less than 75% of the loan, they could still receive loan forgiveness, but the amount forgiven would be prorated. The way the new law is written, it is unclear whether loan forgiveness would be available for anyone whose payroll costs fall below 60% of the total loan.
- Compensation Limitations: Under the previous law, there was a cap for compensation for any employee making over $100,000. (The cap was $15,384 for the 8-week covered period). The question now is if the provision that increases the covered period to 24 weeks also allows for the salary of employees over $100,000 to be calculated at the 24-week period as well.
ShuffieldLowman’s Corporate Law and Banking & Finance teams are continuing to monitor the changes to the Paycheck Protection Program, and how these new laws will affect Central Florida businesses, banks, and lenders. To speak to an attorney, fill out our contact form.
On May 15, 2020, the U.S. Small Business Administration (“SBA”) released its long-awaited guidance on the forgiveness of Paycheck Protection Program (“PPP”) Loans, in the form of the Paycheck Protection Program Loan Forgiveness Application (the “Application”). The Application contains four components – 1) the PPP Loan Forgiveness Calculation Form, 2) the PPP Schedule A, 3) the PPP Schedule A Worksheet, and 4) the PPP Borrower Demographic Information Form. In order to qualify for forgiveness, a Borrower must provide its Lender with a complete PPP Loan Forgiveness Calculation Form and the PPP Schedule A. The PPP Schedule A Worksheet, on which the Borrower must identify each employee employed during the covered period and allocate payroll costs incurred by each such employee (amongst other things), must be completed and maintained within the Borrower’s records for six years after forgiveness, but is not required to be submitted to the Lender at the time of application for forgiveness. The PPP Borrower Demographic Information Form is completely optional. Accompanying the Application are a set of very detailed instructions which highlight several new developments in the manner in which the forgiveness program will be interpreted and administered. The following are a few of those developments:
- Expansion of “Covered Period” –The CARES Act provides that forgiveness will apply to certain costs incurred and payments made (more on this later) during the “Covered Period”, which is defined as the 8-week period beginning on the date of the origination of the PPP Loan (i.e. the date the loan is disbursed to Borrower). The Application clarifies that Borrowers now have the option of designating an “Alternative Payroll Covered Period,” which will begin on the first day of the Borrower’s first pay period following the date of disbursement. This Alternative Payroll Covered Period may be used instead of the “Covered Period” for calculations related to payroll costs and forgiveness reductions, but not for the calculations related to non-payroll costs eligible for forgiveness, such as interest on mortgage debt, rent, and utilities.
- Loans greater than $2 million, affiliates included – The Application contains a check-box which must be checked off by Borrowers who, together with their affiliates, have received PPP loans in excess of $2 million. The FAQ for Lenders and Borrowers (the “FAQ”) published and periodically updated by the SBA, in questions 39 and 46, had already made clear that such Borrowers would be subject to a review of their loan file by the SBA and Department of Treasury, so it should be no mystery why this check-box is included in the Application. However, the significance of this inclusion is that Borrowers must now actively confirm whether their loan amount combined with their affiliate’s loan amount(s) exceeds the $2 million threshold in order to provide the accurate information on the Application. This will require such Borrowers to interpret the affiliation rules contained in the regulations concerning the Small Business Act and the prior regulations released regarding the CARES Act in order to accurately check the box.
- Payroll Costs incurred but not paid may be forgiven– According to the instructions for the PPP Loan Forgiveness Calculation Form, payroll costs fall within the Covered Period or Alternative Covered Period, and are therefore eligible for forgiveness, when they are either 1) paid, meaning a paycheck has been distributed or an ACH credit transaction has been originated, or 2) not paid, but incurred during the last pay period of the Covered Period or Alternative Payroll Covered Period, as applicable, and paid on or before the next regular payroll date. This clarifies the meaning of the phrase “costs incurred and payments made during the covered period,” as used in the CARES Act with respect to payroll costs eligible for forgiveness.
- Payroll costs forgiveness capped at $15,385.00 per employee – the CARES Act has always specified that “payroll costs” do not include “the compensation of an employee in excess of an annual salary of $100,000.00, as prorated for the covered period.” Now, that exclusion has been condensed to a specific number – $15,385.00. In the PPP Schedule A Worksheet, Borrowers must not allocate more than this amount to any single employee.
- FTE calculation revealed – Under the CARES Act, a Borrower’s forgiveness amount will be reduced by a factor based on a reduction in the average “full-time equivalent employees” (“FTE”) during the covered period. After much speculation as to whether FTE’s would be calculated in accordance with I.R.S. standards or otherwise, the Application has revealed two ways in which FTE’s may be calculated for purposes of determining the reduction factor – 1) for each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth, capped at 1.0 or 2) employees who work 40 hours or more per week are assigned 1.0 FTE, and all other employees are assigned a .50 FTE (the “simplified” method). Under the first method, for example, if an employee Is paid an average of 35 hours per week, he or she will count as .9 FTE (.875 rounded to the nearest tenth).
- New exceptions to reductions in forgiveness – Now, the reductions in the forgiveness amount due to reduction in FTE will not apply 1) for any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or Alternative Covered Period which the employee rejects, and 2) for any employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours, during the Covered Period or Alternative Covered Period. The exception will not apply to either if these categories if a new employee is hired to replace the one lost. One thing to note is that these exceptions are limited to events occurring in the 8-week Covered Period or Alternative Covered Period. This may be significant since some of these events may have occurred outside the 8-week period but may nonetheless factor into the reduction calculation. For example, if any employees voluntarily resigned after February 15, 2020 (the date which a Borrowers FTE numbers during the Covered Period or Alternative Covered Period are compared against) but before the Covered Period or Alternative Covered Period begins, then they will presumably factor into the reduction in FTE’s per the calculation in the Act, even though they were not terminated by the Borrower.
Here is a link to the Application, in its entirety – https://www.sba.gov/sites/default/files/2020-05/3245-0407%20SBA%20Form%203508%20PPP%20Forgiveness%20Application.pdf
For the latest updates on PPP Loan Forgiveness Guidance, contact our corporate law or banking and finance teams for more information. To see other legal updates that are occurring from COVID-19, visit our resources page HERE.