PPP Flexibility Act Becomes Law

Extension of Covered Period

The PPP Flexibility Act allows current borrowers to extend the covered period during which they must expend PPP funds and have those expenditures qualify for forgiveness from eight weeks to 24 weeks. While all new PPP borrowers will be subject to the 24 week covered period, existing borrowers may elect to retain an eight week covered period. In no event will a borrower’s covered period be permitted to extend beyond December 31.

Increased Forgiveness of Expenditures for Non-Payroll Costs

Under the PPP Flexibility Act, the eligible Payroll Costs expenditure requirement is reduced from 75% to 60%. As a result, borrowers are now permitted to spend up to 40% of PPP funds on eligible Non-Payroll Costs, such as rent, utilities, and qualifying lease payments and mortgage interest. Borrowers are urged to exercise caution, however, as the current language of the PPP Flexibility Act states that a borrower’s failure to spend 60% of PPP funds on payroll will negate their eligibility for any loan forgiveness. On June 8th, the SBA and U.S. Treasury Department clarified that the 60% threshold is not a cliff and that if a borrower spends less than 60% of the PPP funds on Payroll Costs, partial forgiveness is available.

More Time to Restore Reductions in FTE and/or Salary

Borrowers now have until December 31, 2020 (as opposed to June 30) to restore any reduction in salary or full-time equivalency (FTE) that would have otherwise resulted in a reduction in the amount of loan forgiveness. Prior guidance indicated that laid-off employees who refused a good-faith offer of re-employment would not be counted against a borrower’s FTE count. The PPP Flexibility Act now adds that the forgivable amount will not be subject to reduction if the borrower is unable to hire similarly qualified employees to fill open positions on or before December 31.

New Relief for Businesses that Cannot Return to Pre-COVID Operating Levels

If a borrower experiences a loss of FTEs between February 15 and December 31, 2020 that cannot be cured, the amount of loan forgiveness will not be reduced if the borrower can demonstrate that its inability to return to its pre-February 15th level of business activity was due to its compliance with federal requirements and/or guidelines established between March 21 and December 31, 2020 related to COVID-19, including standards set for sanitation, social distancing or worker or customer safety.

Deferral of PPP Loan Payments and Additional Time to Repay Any Unforgiven Amount

The PPP Flexibility Act allows a borrower to defer payments of interest, principal and fees until the forgiveness review process is completed and its lender receives the forgiveness amount from the U.S. Small Business Administration (SBA) provided that the borrower submits its application for forgiveness within 10 months after the last day of the covered period. Prior to the PPP Flexibility Act, interest and principal payments were only deferred for six months from the disbursement date. This change will apply to all PPP loans, including those made prior to the effective date of the PPP Flexibility Act.

The PPP Flexibility Act also extends the minimum maturity date of any portion of a PPP loan that is not forgiven from two years to five years. While the extended maturity date only applies to PPP loans made after the PPP Flexibility Act becomes law, borrowers may renegotiate the terms of their PPP loan with their lender to reflect this extension.

Deferral of Social Security Taxes

A borrower may now defer all of its 2020 Social Security Tax obligations into 2021 and 2022 (split equally between each year). Previously, the CARES Act had authorized a borrower to defer payment of its Social Security Tax obligations only until its PPP loan was forgiven.

Additional Guidance Expected

In connection with the implementation of the changes made by the PPP Flexibility Act, we expect that the SBA and US Treasury Department will be issuing additional interim regulations and FAQs. Borrowers should continue to monitor these developments closely.