For those of you who have been avidly following the increasingly complicated evolution of the Small Business Administration’s CARES Act Paycheck Protection Program (PPP), it will come as no surprise that additional changes have just been announced.

The good news is that these changes should have positive impact on borrowers.

Last week we shared that the House of Representatives passed a bill to address some of the largest obstacles presented by the forgiveness terms for PPP and Wednesday (June 3), as anticipated, the Senate also unanimously approved a Bill (H.R. 7010) that will smooth the rocky road for borrowers who are seeking PPP loan forgiveness. The next stop for the Bill is President Trump’s desk.

Once signed it will be enacted into law, significantly altering some of the key characteristics of the original plan. As a reminder, PPP was designed to provide business owners with financial support to keep their employees on the payroll and cover other critical expenses until the economy had a chance to restart. Unfortunately, no one could have anticipated how long the process would take. From the current vantage point, it is all too obvious that businesses must have more time to comply with the forgiveness process.

It seems like there are major alterations made every week to PPP.   Now what’s new?

  • For starters, the two-year maturity date that applied to the portion of any PPP loan that was not forgiven will now be extended to a period of five years.
  • Next, lenders and borrowers are free to renegotiate the terms of any existing PPP loan to match the permitted five-year period.
  • And finally, while the CARES Act required lenders to defer the payment of principal and interest for six months, the new bill extends the deferral until the date the lender receives the forgiveness amount from the SBA.

In addition to extending the maturity date for the loan to come due, there is also an increased likelihood that at a large portion of the borrower’s PPP loan will be forgiven.

Here is how that will work:

  • The “covered period” will be extended from eight weeks to 24 weeks from the date of the loan’s origination, or December 31, 2020, whichever comes first. Note though, that the one thing that has not changed is that the maximum amount paid to any one employee that will be forgiven is capped at an annualized salary of $100,000; as a result, for a 24-week covered period, this limit will be reached once an employee receives $46,153 in cash compensation.
  • As a result of the newly expanded covered period, four months of non-payroll related forgivable expenses, including mortgage interest, rent and utility costs, will be incorporated into the forgiveness calculations. With this change, the new Bill provides that the original 25% cap for non-payroll costs is now raised to 40%. 

The pitfall to this change is that the language in the new Bill stipulates that “to receive loan forgiveness under this section, an eligible recipient shall use at least 60 % of the covered loan amount for payroll costs....” and if a borrower fails to spend 60% of the loan proceeds on payroll costs, none of the loan will be forgivable. The result is that borrowers are gaining a longer covered period but they are compromising on the requirement that 60% of the proceeds be spent during that time to maintain payroll.

  • Borrowers will have more time to replace FTEs and restore salaries. Interestingly, they can spend every last penny of the PPP loan on payroll costs, and still will not have the entire loan forgiven under two specific scenarios. These are:
    • The borrower lost full-time equivalent employees (FTEs) during the covered period relative to one of several base periods
    • The borrower significantly reduced the average annual salary or hourly wage of certain employees during the covered period relative to the first quarter of 2020

However the remedy is that the borrower could restore any reduction in the forgiveness amount if he/she either fully restored FTEs or salary/hourly wage to their February 15th, 2020 levels before June 30, 2020.

This would be a difficult hurdle. With so many businesses not yet up and running, they are far from being staffed at levels existing on February 15, 2020. The new Bill extends the June 30th deadline to December 31, 2020. Thus, as long as the FTEs or salary/hourly wages are restored to February 15th levels any time prior to the end of 2020, no reduction in forgiveness will be required.

  • For those borrowers who remain partially or fully closed, beginning on February 15, 2020, and ending on December 31, 2020, the new Bill allows that the amount of loan forgiveness will not be reduced when a borrower experiences a loss of FTEs. But this exception will occur only if the borrower, in good faith, is able to document that they had an inability to:
    • Rehire individuals who were employees of the eligible recipient on February 15th
    • Hire similarly qualified employees for unfilled positions on or before December 31, 2020
    • Return to the same level of business activity as such business was operating at before February 15th due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning in March and through December, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID– 19.

It means that if, for example, the company is unable to fully open due to government orders (although state orders are not mentioned in the Bill) any loss in FTEs resulting from such restrictions should not be taken into account in computing a required reduction in the forgivable amount.

What else has changed with the new Bill?

  • Even though the new Bill, once signed, will extend the eight week covered period to 24 weeks, borrowers are not required to adopt the longer period even though it is available for them. The additional 16 weeks may not present an attractive alternative in every case. It is anticipated that businesses that have spent their PPP disbursement and qualify for full forgiveness will probably not want to wait until the end of the year to apply.
  • Certain payroll taxes can be deferred even if the business applied for, and received, a PPP loan. This is a departure from the original language in the CARES Act, which stated that employers could defer their 6.2% share of 2020 Social Security tax until the end of 2021 (50%) and 2022 (50%) - but that if they received a PPP loan, the deferral was only available until the moment the loan is forgiven. Now, however, a borrower of a PPP loan may now also defer all of its 2020 Social Security tax burden into 2021 and 2022, even if the PPP loan is forgiven prior to December 31, 2020.

Even though the Bill H.R. 7010 hasn’t even been signed yet, the need for greater clarification is already being put forth. Some confusing language has created further questions that remain unanswered. While it is very apparent that the new bill will be great news for borrowers, we will all continue to play the waiting game as we expect further guidance to emerge.

As always, we will keep you informed as we become aware of anything new regarding PPP and other related issues.