The Paycheck Protection Program (PPP), created by the CARES Act to provide forgivable, low-interest loans to small businesses struggling to meet payroll and other basic costs in the wake of the COVID-19 crisis, has distributed more than $500 billion in funds. While a critical lifeline for beleaguered businesses, borrowers and industry groups have complained about the compressed time frame to use the funds and other restrictions imposed by the Small Business Administration (SBA) in implementing the program. In response, Congress adopted legislative changes on June 3, 2020 that will add flexibility to the time frames and uses of PPP funds, as well as provide revisions to tax aspects of the program. These changes will enhance borrowers' ability to maximize the benefits of the loan program, but, as with other revisions that have been necessary in the short history of the PPP program, they are likely to create new issues that will require careful review and management.

Paycheck Protection Program Changes

The bill, which is likely to be signed by the President on June 4, does the following:

  • Extends the minimum maturity date of the loans under the PPP from the two years established by the SBA and Treasury Department in its initial PPP rulemaking to five years. This provision is applicable to loans made after the effective date of the new legislation.
  • Extends the covered period within which borrowers must use the funds to qualify for loan forgiveness from eight weeks to 24 weeks after the loan is disbursed, or December 31, 2020, whichever date is earlier. However, a borrower that received a loan prior to the date the new legislation was enacted can choose an 8-week covered period.
  • Creates additional exemptions to loan forgiveness reduction should the borrower be unable to rehire employees, if the borrower in good faith shows that it (1) was both unable (a) to rehire employees who were employees of the borrower prior to February 15, 2020, and (b) to hire similarly qualified employees on or before December 31, 2020 (safe-harbor date); or (2) is able to document an inability to return to its same level of business activity that it was operating at before February 15, 2020 because of compliance with guidance issued by federal health officials during the period between March 1, 2020 and December 31, 2020.
  • Changes the proportion of PPP funds subject to loan forgiveness that can be used for payroll and non-payroll costs from 75/25 to 60/40. This provision will benefit those borrowers who, for example, have high rent costs but relatively fewer employees because it will allow them to use a greater percentage of the PPP funds for non-payroll costs.
  • Extends the loan deferral period until the date on which the amount of loan forgiveness as determined by the SBA is provided to the lender. Previously, the deferral period was for a period up to one year after the date of the loan disbursement. This extended deferral period will allow borrowers to take advantage of the December 31 safe-harbor (above) without having to make loan payments.
  • Creates a separate deferral period of ten months after the date on which the covered period ends for borrowers that do not apply for loan forgiveness.
  • Removes the CARES Act's prohibition against deferring payroll taxes if a PPP loan is forgiven. Borrowers no longer need to choose between the benefits of having a PPP loan forgiven and the tax benefits of deferring federal employment taxes.

Unless otherwise stated, all of these provisions are to be effective as if originally included in the CARES Act and will apply to all PPP loans, whenever made.

Issues Raised

Several of these new provisions potentially create conflicts with existing provisions in the PPP and SBA rulemaking. A non-exhaustive list of issues includes:

  • Whether the 24-week covered period will affect the current June 30, 2020 safe-harbor for employee headcount and salary true up (see previous alert, "CARES Act Provides Immediate Lifeline for Small Business," from March 27)
  • Whether borrowers will be required to pay employees for the entirety of the 24-week covered period, or instead can choose an 8-week period within those 24 weeks.
  • Whether the reference periods for measuring employee headcount remain the same - or whether they will be adjusted to reflect the revised covered periods.

These changes will require additional action by the SBA, which will impact all PPP borrowers and could have significant financial implications. As the PPP continues to evolve, borrowers will need to know how the changes affect them. Lewis Brisbois has a team of advisors available to assist on these issues.

Visit our COVID-19 Response Resource Center for more alerts and information on the many areas of law impacted by the pandemic.


Article originally published on 4 June 2020

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