New SBA Rule Clarifies PPPFA Loan Forgiveness

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We previously posted about the Paycheck Protection Program Flexibility Act (“PPPFA”), which updated the Paycheck Protection Program (“PPP”) to provide loan recipients with more flexibility. When we posted, we noted that questions remained about how the important loan forgiveness aspect of the PPP would work under the new flexibility rules. The Small Business Association, in connection with the Treasury, has now issued further guidance that provides some greater clarity.

The PPPFA expanded the covered period, for all borrowers who received their PPP loans on or after June 5, 2020, from the original 8 weeks to 24 weeks (or December 31, 2020, whichever is earlier). Loan recipients who obtained PPP loans before June 5, 2020 could elect either the 8 or the 24 week covered period. The “covered period” refers to the time during which the borrower must use the loan for PPP’s allowed costs, notably payroll, rent and utilities.

The text of the U.S. Treasury Department’s earlier Interim Final Rule stated that a loan recipient must wait until the covered period ended before applying for loan forgiveness. The updated Interim Final Rule states that a loan recipient may apply for loan forgiveness anytime during its covered period as long as it has already expended the entirety of its PPP loan. For example, if a loan recipient elects the 24 week covered period and expends all of its PPP loan funds by week 10, it may apply for loan forgiveness immediately rather than wait until week 25. Remember, though, that the last day to file for loan forgiveness remains 10 months after the end of the loan recipient’s covered period.

While loan recipients have the ability to apply for loan forgiveness immediately after expending its PPP loan, the 10 month window provides flexibility to apply for loan forgiveness at the most opportune moment. The loan forgiveness application requires loan recipients to provide information about any decreases in workforce and reductions in wages/salary. Those changes in workforce will result in a corresponding decrease in the amount of loan forgiveness for which the loan recipient is eligible.

If a loan recipient believes that, within a few months, it will be able to hire or re-hire employees and return wages/salary to “pre-COVID-19” levels, then waiting to fill out the loan forgiveness application may be prudent. On the other hand, if the loan recipient anticipates future layoffs and compensation cuts, then applying sooner would be advantageous to avoid loan forgiveness reductions. But keep in mind that December 31, 2020 is the last day for a loan recipient to return its workforce to the requisite levels in order to receive full loan forgiveness.

Conkle, Kremer & Engel attorneys will continue to monitor the COVID-19 relief program landscape for updates to guide clients.

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PPP Flexibility Act’s Changed Timing and Terms of Loan Forgiveness

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We have previously posted about the Paycheck Protection Program (“PPP”) that was created by the U.S. Coronavirus Aid, Relief, and Economic Security (CARES) Act. Like many rushed legislative programs, PPP had issues from the outset. Enter the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”), signed on June 5, 2020 to amend some parts of the CARES Act that pertain to the PPP. UPDATE: As of July 4, 2020, the PPP program remains open to new applications through August 8, 2020, and there were $130 Billion in funds remaining to be claimed by employers of almost all sizes. (Read on for more on that.)

The Small Business Association, in conjunction with the Treasury, issued an Interim Final Rule conforming its previous rule to the PPPFA and attempting to clarify some key points. As described below, some important questions under the PPPFA remain unanswered even by the new Interim Final Rule.

The most obvious purpose of the PPPFA is to extend the “covered period” in which PPP funds can be expended on allowed costs, such as payroll, rent and utilities. Whereas the PPP loans were limited to an 8 week “covered period” of expenses, the PPPFA extends the covered period to 24 weeks, or until December 31, 2020, whichever comes first. This extension applies to all PPP loans that originated after June 5, 2020, but employers who took loans prior to that date have an option to maintain the original 8 week period or extend to the 24 week covered period.

The election between the 8 week covered period and the 24 week covered period will have significant ramifications for earlier loan recipients. The election between an 8 week covered period or a 24 week covered period is binary, and only funds spent during the elected covered period may be counted toward loan forgiveness. A loan recipient may not, for example, choose a 16 week covered period, but there does not appear to be anything restricting a loan recipient from electing a 24 week covered period but spending all the PPP funds in 16 weeks, for example.

The text of the PPPFA does not prevent a loan recipient from applying for loan forgiveness at any time that its PPP funds have been exhausted on covered expenses, or alternatively waiting up to 10 months after the expiration of the coverage period. However, the language of the Treasury Department’s Interim Final Rule implies that a loan recipient must wait until its covered period has ended before applying for loan forgiveness. Hopefully, the Treasury Department will clarify this soon, particularly because the date of the employer’s Loan Forgiveness Application can be important.

Employers should recall from our earlier post that if employees or wages are too drastically cut, there will be a reduction of the amount of loan forgiveness the employer will receive under PPP. So the date on which that measurement is made may be very significant if the employer’s workforce or salaries have changed. At present it appears that the SBA will measure workforce and salary levels as of the date of the Loan Forgiveness Application or December 31, 2020, whichever comes first, and will compare that against the employer’s average payroll during the original measurement period of February 15 to April 26, 2020. There remains some possibility that the SBA will require that the same level of employees and wages also be maintained as of December 31, 2020, but if so exactly how that might work is not clear and should be the subject of further Treasury Department rulings.

If the employer has had layoffs or wage cuts, PPPFA extends the date by which loan recipients must rehire full time equivalent employees and eliminate salary/wage cuts from the previous deadline of June 30, 2020 to December 31, 2020. Failure to rehire and restore wages will result in a decrease of the amount of loan forgiveness for the employer. But if a loan recipient can show in good faith (a) an inability to rehire individuals who were employees of the eligible recipient, and (b) an inability to hire similarly situated qualified employees, by the December 31, 2020 deadline, there will be no corresponding reduction in loan forgiveness for failure hire/re-hire such employees. It is not yet clear whether this same exception may apply to salary/wage cuts. Whether the deadline has any impact if a loan forgiveness application was made prior to this last day has yet to be explained by the Treasury Department.

Loan recipients now have up to 10 months from the date the covered period ends to apply for loan forgiveness. Failure to do so within the 10 months allowed will result in denial of loan forgiveness and the loan recipient must repay principal, interest and fees on the loan. If the loan is not forgiven, its term is now 5 years for all loans originating on or after June 5, 2020. Earlier loans retain a 2 year term, but lenders and loan recipients are free to agree to amend the duration to 5 years.

Another prominent feature of the PPPFA is that loan recipients must use 60% of the loan amount for payroll in order to be eligible for loan forgiveness, whereas the original PPP required 75% of the proceeds to be used for payroll. The PPPFA appears to make this 60% standard absolute – if it is not met, then there will be no loan forgiveness. But the U.S. Treasury Department’s Interim Final Rule, and the revised Loan Forgiveness Application, appears to disagree and instead provides that if a loan recipient does not use at least 60% of the loan amount for payroll, then the loan forgiveness will be decreased proportionately with the shortfall of expenditures on payroll. This interpretation is more in line with the original PPP’s standard, but it remains uncertain whether the U.S. Treasury Department can effectively impose this standard over statutory language that appears to say otherwise.

As the name of the Paycheck Protection Program Flexibility Act suggests, and as the Interim Final Rule explicitly states, the goal of the PPPFA is to provide employers with more flexibility when using PPP loan funds. Because $130 Billion in allotted loan funds went unclaimed at the end of the original and once-extended application period, on July 4, 2020 President Trump signed Congress’ unanimously-approved amendment to extend the last day to apply for any PPP loan to August 8, 2020.

The updated and revised PPP loan application can be found here. Conkle, Kremer & Engel attorneys stay current on the latest amendments in order to help business clients navigate the maze and maximize the benefits available to them under PPP loans and other government COVID-19 relief programs.

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U.S. CARES Act: PPP Loans Provide Gifts for Careful Employers

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The U.S. Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed on March 27, 2020, and signed into law by President Trump on March 28, 2020, aims to address some of the economic impact of the COVID-19 crisis. The entire act is a $2 Trillion economic stimulus package – the largest ever. Aside from the well-publicized $1,200 per person payments, the CARES Act provides hundreds of billions of dollars for large and small businesses, state and local governments and public health.

Rather than try to summarize the entire CARES Act, we’d like to focus on what many of our clients should pay attention to first: The $349 billion loan fund for small businesses called the “Paycheck Protection Program” (“PPP”) administered by the Small Business Administration. The PPP is designed to be a huge tax-free gift to employers, provided that the employers are careful about how they use it.

The basic points for PPP loans under the CARES Act are:

  1. PPP loans are available to businesses with fewer than 500 employees, as well as 501(c)(3) non-profits, sole-proprietors, independent contractors and other self-employed individuals, so long as the business was operational and had paid employees on February 15, 2020. Some businesses with multiple locations, each having less than 500 employees, may also qualify (but generally, this is limited to hospitality businesses with a primary NAICS code starting with “72” – Accommodation and Food Service).
  2. Borrowers must make a good faith certification that the PPP loan is necessary due to the uncertainty of the current economic conditions caused by COVID-19.
  3. PPP loans will be issued through regular lenders who already handle SBA loans, in addition to new lenders electing to provide PPP loans. Your regular bank is likely to offer PPP loans.
  4. The amount of the PPP loan is at the borrower’s choice, but the maximum amount of a PPP loan is 2.5 times the business’ average monthly payroll expenses for the past year, up to $10 million.
  5. Most of the usual “red tape” for SBA loans has been waived, including determinations of borrower eligibility and creditworthiness. PPP loans are non-recourse, and require no personal guarantees. There are no fees, a maximum interest rate of 4%, and all payments are deferred for 6-12 months.
  6. PPP loans can be used for:
    a. “Payroll Costs” including salaries, vacation and sick leave, health insurance, retirement benefits, and state and local payroll taxes. But “Payroll Costs” does not include compensation for an employee’s annual salary in excess of $100,000. There is some uncertainty about this limitation, but indications are that for highly compensated individuals the first $100,000 in salary can be paid with PPP loan funds.
    b. Rent.
    c. Utilities.
    d. Interest on any debt obligations incurred before February 15, 2020.
  7. The total amount of the PPP loan funds that are used for these approved categories within the eight-week period following loan origination would be forgiven, and the forgiven amount is not taxable. In effect, the PPP loan turns into a tax free grant to the extent that it was used for the approved purposes.
  8. Businesses may elect to use PPP loan funds for other purposes not within the approved categories, but funds spent for “non-approved” uses will not be forgiven and the loan must be repaid with interest.
  9. There is an additional important condition that the PPP borrower must maintain the same number of full time employees, and cannot reduce salaries more than 25%, through June 2020. Otherwise portions of the PPP loan may not be forgiven. If the borrower terminated employees or made salary reductions greater than 25% between February 15, 2020 and April 26, 2020, as long as the employer hires back the same number of employees and restores salaries to sufficient levels by June 30, 2020, the PPP loan funds used for approved purposes will still be forgiven.
  10. One further cautionary note is that borrowers receiving a PPP loan are not be eligible for several of the other tax credits, refunds or deferrals available under the CARES Act, so consulting a tax professional about the value of those benefits to particular businesses would be advisable.

The PPP loan portion of the CARES Act is plainly designed to stem the layoffs and furloughs that have been rampant in the wake of the economic seizure that has been imposed by federal, state and local governments’ “stay at home” guidelines and orders intended to stem the COVID-19 outbreak. This can benefit both employees and employers who need to adapt their businesses to the unsettled conditions in which we find ourselves.

Business owners – from sole proprietors to employers of 499 employees (and some with more) should explore very seriously, very quickly, the virtual giveaway that the PPP loan program represents. If taken, PPP loans demand some care in documenting use of funds to assure compliance with the terms required to be granted forgiveness of the loan and receive the tax-free gift from the U.S. government.

Conkle, Kremer & Engel attorneys stay attuned to legal developments and the opportunities they create for our business clients. The CARES Act is a big opportunity that should be carefully considered and acted upon promptly.

June 18, 2020 Update: PPP funds remain undistributed, and PPP Loan Applications are currently due by June 30, 2020. See our updated blog posts concerning further developments in the PPP program:

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