On Wednesday night (June 3rd), the Senate passed the Paycheck Protection Flexibility Act of 2020, which amends certain provisions of the Paycheck Protection Program section of the CARES Act. There is plenty of good news in the six-page bill, but not surprisingly, it also raises some new questions. Here are the highlights:
- PPP borrowers who have already received their loan proceeds can choose to extend their eight-week covered period to 24 weeks. New PPP borrowers will be required to follow the 24-week covered period, but the covered period cannot extend beyond December 31, 2020. This extension will allow more borrowers to reach full forgiveness.
- Current SBA guidance requires that a minimum of 75% of the amount eligible for forgiveness be used for payroll. Under the new rule, that threshold drops to 60%.
- The existing FTE safe harbor rule stated that any reduction in forgiveness can be waived if the borrower can demonstrate that their workforce has been restored to February 15th levels by June 30th. Under this new legislation, the June 30th deadline is extended to December 31, 2020.
- The new legislation offers borrowers two new “escape clauses” to avoid a reduction in loan forgiveness. The first says that loan forgiveness can be restored if the borrower was not able to find qualified employees for their open position(s). The second says that loan forgiveness can be repaired if the borrower is unable to restore its business operations to pre-pandemic levels because the business is following federal workplace requirements or guidelines related to COVID-19, such as social distancing and customer safety needs.
- The maturity date for new loans will be five years rather than two years. The law also allows existing loans to be amended to reflect the five-year term under a “mutual agreement” between the lender and borrower. In addition, the deferment period is extended from six months to the date that the amount of loan forgiveness is determined.
- PPP borrowers are now allowed to delay payment of their payroll taxes, which had been prohibited under the CARES Act.
As for the questions raised by this bill, I have two:
- If the borrower elects to extend the covered period beyond eight weeks, can the borrower apply for forgiveness once the funds are exhausted at any time prior to the end of the 24-week period, or does the borrower need to wait until the 24-week period is over?
- Also, if the borrower chooses to extend their covered period beyond eight weeks, then does the FTE reduction in forgiveness rule apply to the entire 24-week period or just the period in which the PPP funds were used?
Given these open questions, I would recommend that anyone who is on track to spend the entire loan proceeds within the original eight-week covered period stick with the original covered period. Everyone else will likely benefit from electing the extended 24-week period. In either case, other factors should be considered, such as where the borrower stands in regard to loan forgiveness.
We will continue to keep you posted as new information becomes available.