On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), which amends the CARES Act, and, in particular, the key provisions of the Paycheck Protection Program (“PPP”). The Flexibility Act provides borrowers with greater flexibility in the use of PPP funds: gives borrowers more time to utilize their loan proceeds in full, permits the use of the proceeds on a broader category of expenses, while still qualifying for the ultimate forgiveness of their loan.
The 19th Interim Final Rule by the Small Business Administration (“SBA”), scheduled to be published on June 19, 2020, focuses on revisions made by the Flexibility Act.
Below is a summary of the most notable amendments:
- Loan Maturity Date: The Flexibility Act extends the maturity date for the funds borrowed that are not eligible for forgiveness from two years to five years at the annual rate of 1%. The new maturity date only applies to loans made on or after June 5, 2020, the date the Flexibility Act was signed into law.
- Deadline to Rehire Employees Extended: The Flexibility Act extends the deadline for the borrowers to rehire employees in order for salaries to qualify for loan forgiveness from June 30, 2020 to December 31, 2020.
- Covered Period of Loan: The Flexibility Act extends the time period during which a borrower can use PPP loan proceeds and still qualify for loan forgiveness from 8 weeks, as originally required under the CARES Act, to the earlier of 24 weeks after the loan disbursements or December 31, 2020. This intends to benefit the business which have not yet been able to reopen or had to substantially limit their operations.
- Deferral of Payroll Taxes: The Flexibility Act allows borrowers to defer the payment of up to 50% of employer payroll taxes until December 31, 2020.
- Uses of Loan Proceeds: The new law grants borrowers additional flexibility by reducing the threshold of the loan proceeds required to be spent on payroll in order to qualify for full loan forgiveness from 75% to 60%, which provides more flexibility to businesses to pay for other overhead expenses such as rent, mortgage interest, and/or utilities. The new 60% threshold rule was initially interpreted to operate as a “cliff”, i.e., meaning that a borrower will not qualify for loan forgiveness if it fails to meet the 60% requirement. However, the SBA and U.S. Department of Treasury later clarified that even if the 60% threshold has not been met, a partial forgiveness can be obtained.
- Exemption from Loan Forgiveness Reduction: The Flexibility Act provides a new exemption from loan forgiveness reduction if the borrower can document its inability to return to the same level of business activity as before February 15, 2020 due to enforcement of social distancing or other COVID-19 related measured required 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 issued between March 1, 2020, and December 31, 2020.
- No Extension of Application Deadline: The deadline to apply for the PPP loan remains June 30, 2020 and will not be extended.
The PPP loans have been very desirable and after the initial concerns that all the funds will be exhausted instantaneously, there are around $150 billion still to be used from the PPP fund. Data from the SBA shows net weekly PPP lending has actually been negative since mid-May, as fewer firms applied for loans, and some borrowers returned funds.
According to the SBA, it had approved $512.2 billion in PPP loans as of May 21, which is nearly US$150 billion less than the $660 billion allocated to the program. Thus, it is still not too late for companies to apply for a PPP loan; but time is of the essence. The deadline to apply for PPP funds is June 30, 2020.