PPP Flexibility Act: Initial Guidance Released
Just one week after the passage of the PPP Flexibility Act, the Small Business Administration released the first of what we hope will be many pieces of interpretive guidance. Readers that have been following the many iterations of the PPP program may not be surprised by the tongue-twisting title of the guidance: Interim Final Rule on Revisions to First Interim Final Rule (“the Rule”).
While the Rule primarily confirmed much of what we already knew, let’s take a look at a few items that were clarified.
Two Covered Periods Distinguished and Defined
The Rule distinguishes between the “covered period” that governs the PPP program and the “Covered Period” that is used to determine loan forgiveness.
For purposes of the PPP program, the “covered period” starts on February 15, 2020 and ends on December 31, 2020. That is, the PPP program that was introduced by the CARES Act has a finite life, and unless it is extended again, the program will end on December 31, 2020. For purposes of determining loan forgiveness, the “Covered Period” has been renamed the “loan forgiveness covered period”. This is the period during which borrowers track their payroll and non-payroll expenses, their salary and wage expense and their FTE counts so that they can compute how much of their loan is forgiven. Borrowers that receive PPP loans on or after June 5, 2020 have a 24-week loan forgiveness covered period; borrowers that received loans earlier can elect to use either an eight- or 24- week period.
Deferral of Principal and Interest Payments & Timing for Loan Forgiveness Application
Borrowers must submit their loan forgiveness applications within 10 months after the end of their loan forgiveness covered period to avoid the conversion of their PPP grant into a term loan. Payments of principal and interest are not required to be made during this 10 month window, and can continue to be deferred until the date the SBA either remits the loan forgiveness amount to the lender or notifies the lender that no forgiveness is allowed. Interest does continue to accrue during this time. For example, if a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020. If the borrower does not submit a loan forgiveness application to its lender by October 10, 2021, the borrower must begin making payments on or after October 10, 2021, including accrued interest.
60/40 Replaces 75/25 Requirement: Proportional Forgiveness Allowed
One of the favorable changes made by the PPP Flexibility Act was the reduction of the amount of the loan proceeds that must be spent on payroll costs in order to receive loan forgiveness from 75% to 60%. The exact reading of the statutory language of the Flexibility Act results in an “all or nothing” cliff provision, meaning that if a borrower did not spend at least 60% of their loan proceeds on payroll costs, none of their loan would be forgiven. Under the SBA’s authority to interpret the provisions, the Rule applies a more generous application that substitutes the 60% for the prior 75% requirement under its administrative procedure. Therefore, borrowers that spend less than 60% of their loan proceeds on payroll are eligible for proportional amount of loan forgiveness. For example, if a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in nonpayroll costs constituting 40 percent of the forgiveness amount).
We’ll be keeping our eye on future guidance. Stay tuned here for additional posts!