The Small Business Administration (“SBA”) and the Department of the Treasury released guidance on June 11, 2020 in the form of “Paycheck Protection Program (“PPP”) – Revisions to First Interim Final Rule” with subsequent revisions through June 19, 2020 (collectively, the “Revised Rule”). The Revised Rule amends the SBA’s initial interim final rule posted on April 2, 2020, by changing provisions such as the forgiveness period, amount of proceeds for payroll costs, deferral of loan payments, and loan maturity, to conform with the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) that was enacted on June 5, 2020. With these revisions, the SBA is also making conforming amendments to the use of PPP loan proceeds for consistency with amendments made in the Flexibility Act. The Revised Rule is intended to give borrowers seeking forgiveness of their PPP loans a better understanding of the process.
The following are highlights of changes to the PPP program under the Flexibility Act and the Revised Rule:
I. Extension of Loan Forgiveness Covered Period
Although the deadline to apply for and receive an SBA PPP loan remains June 30, 2020, the deadline for spending PPP funds is 24 weeks for all loans received on or after June 5, 2020. Borrowers that received a PPP loan before June 5, 2020, have the option to keep the original 8-week spending period or elect the extended 24-week period. The restoration of workforce levels for full time employees and equivalents (“FTEs”) , along with restoration of salary/wages reductions, must be met by December 31, 2020, a change from the previous deadline of June 30, 2020.
II. Reduction of Amount of PPP Loan That Must Be Used for Payroll
Although the Flexibility Act provides that a borrower must use at least 60% (and not 75% as previously required) of the proceeds of the PPP loan for payroll costs to be eligible for loan forgiveness, the Revised Rule states that the SBA and Department of the Treasury interpret it as a proportional limit on non-payroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness. As a result, if a borrower does not spend 60% of the funds on payroll costs, the forgiveness request must be reduced so that the payroll costs are 60% of the forgiveness amount (but note that for purposes of determining the percentage of use of proceeds for payroll costs, the amount of any SBA Economic Injury Disaster Loan (EIDL) that has been refinanced will be included in the 60% payroll costs forgiveness amount). The balance (that is, non-payroll expenses) of the PPP funds must still be used for interest on mortgage obligations incurred before February 15, 2020; rent payments on leases dated before February 15, 2020; and utility (electricity, gas, water, transportation, telephone, and/or internet) payments under service agreements dated before February 15, 2020.
III. Calculation of Payroll Costs for Forgiveness
The actual amount of loan forgiveness will depend, in part, on total amount spent over the 24-week period beginning on the date your PPP loan is disbursed on payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for 24 weeks, a maximum of $46,154 per individual, or for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums). For self-employed owners, “compensation replacement” is calculated based on 2019 net profit, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period, or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period, but excluding any qualified sick leave equivalent amount for which a credit is claimed under Section 7002 of the Families First Coronavirus Response Act (“FFCRA”) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of the FFCRA.
IV. Extension of Loan Forgiveness Application Date
The Revised Rule requires borrowers to submit their loan forgiveness applications within 10 months of the 8 or 24-week period, as discussed above. If the application is not submitted by that deadline, borrowers will be required to begin payment of principal and interest on the loan.
V. Extension of Loan Payment Deferral Period
Under the PPP, to the extent the loan is not forgiven, loan payments (principal, interest, and fees) were deferred for a period of six months after receipt of the loan proceeds, with interest accruing during the deferment period. The Flexibility Act modifies this period so that the deferral now runs until the date the lender receives the forgiveness amount from the SBA (which shall not be more than 90 days after the forgiveness amount is determined); that is, until the lender is paid by the SBA all or a portion of the forgiveness amount, loan payments are not due (although interest shall accrue). Your lender must notify the borrower when (a) it receives the loan forgiveness amount from the SBA, or (b) SBA has determined that no full or partial loan forgiveness is allowed and the date the first loan payment is due.
VI. Extension of PPP Loan Maturity Dates
Under the Flexibility Act and the Revised Rule, loans made on or after June 5, 2020, and not forgiven, mature not less than five years from the date SBA assigns a loan number. For loans that were made prior to June 5, 2020, and not forgiven, borrowers and lenders may mutually agree to extend the maturity from two to five years.
VII. Revised Applications and Instructions
As a result of the Flexibility Act, SBA has issued revised versions of the (a) PPP loan application, (b) PPP forgiveness instructions, and (c) PPP forgiveness application. SBA also has issued a new “EZ” streamlined forgiveness application and EZ forgiveness application instructions that apply to (1) self-employed individual borrowers who had no other employees at the time of the PPP loan application, or (2) borrowers able to certify that they are not subject to loan forgiveness reductions.
The Revised Rule states that SBA will be issuing revisions to its interim final rules on loan forgiveness and loan review procedures to address amendments the Flexibility Act made to the loan forgiveness requirements, so stay tuned.
If you have questions regarding the changes to PPP loans or your business operations, please contact Emerson L. Dorsey, Jr., chair of the business, corporate, and tax department, or any other member of Tydings’ business department.
This information has been prepared by Tydings for informational purposes only and does not constitute legal advice.