Congress Considers Changes to Address PPP Forgiveness Issues
Recent guidance from the Small Business Administration (SBA) and Department of Treasury on May 22, 2020 answered some questions as to how loan forgiveness, a key feature under the Paycheck Protection Program (PPP) created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), will work. Unfortunately, this guidance did not address more significant issues relating to the PPP. However, pending legislation in both houses of Congress may address those bigger concerns in the near future.
The guidance issued on May 22 nd provided necessary clarity to lingering loan forgiveness questions under the PPP. In particular, two new interim final rules (IFRs) provide, among other things, additional guidance that expand upon the loan forgiveness application and instructions released on May 15, 2020. The IFRs also provide much needed clarity on the general review process for forgiveness applications and responsibilities for both lenders and borrowers. Unfortunately, however, the IFRs fail to address the two main issues that have arguably generated most of the concerns among PPP borrowers. First, the IFRs do not address, or make changes to, the length of the covered period in which a borrower must spend PPP funds to qualify for forgiveness, which currently sits at eight weeks starting on the loan disbursement date or, if so elected by the borrower, the first day of the first payroll period after the loan disbursement date. Second, the IFRs fail to provide any relief surrounding the mandate that at least 75% of the PPP funds be spent on payroll costs to qualify for full loan forgiveness.
These two issues have been an ongoing source of frustration for many PPP borrowers. Many businesses argue that the eight-week covered period is too short to provide flexibility to deal with mandatory local and state stay-at-home orders that, by definition, keep their businesses closed or operating at a significantly reduced capacity. Many businesses also argue that the 75% rule does not accommodate businesses whose employees have not been able to come back to work due to those same mandatory stay-at-home orders.
On May 28, 2020, the House passed the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) by a vote of 417-1, evidencing bipartisan support for a resolution of these issues. It is expected to be taken up by the Senate as early as next week. HR 7010:
-
Extends the loan term to 5 years for all new loans. Existing loans retain their 2-year term, though the bill permits lenders and borrowers to negotiate a longer term.
-
Extends the last date of the period during which PPP loans can be applied for and disbursed from June 30, 2020 to December 31, 2020.
-
Extends the period borrowers have to use the proceeds of a PPP loan from 8 weeks after the loan disbursement date to the earlier of (i) 24 weeks after the loan disbursement date and (ii) December 31, 2020 (the “use and forgiveness covered period”).
-
Lowers the requirement that 75% of the loan be used for payroll costs to 60% in order to qualify for loan forgiveness.
-
Expands the exemptions related to reduction of employees based on employee availability. Specifically, the forgiveness amount will not be affected by a reduction in employees if the borrower is able to document an inability to rehire individuals, to hire similarly qualified employees, or to return to the same level of business activity as it was operating at before February 15, 2020 due to compliance with regulatory requirements or guidance established by the Department of Health and Human Services, the Center for Disease Control and Prevention, or the Occupational Safety and Health Administration between March 15, 2020 and December 31, 2020 related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
-
Requires borrowers to apply for loan forgiveness within 10 months after the end of borrower’s use and forgiveness period if forgiveness is to be sought.
-
Ensures full access to payroll tax deferment for businesses that take PPP loans.
-
Extends the rehiring and restoration of salary and wage reductions deadline to December 31, 2020 to offset the effect of enhanced Unemployment Insurance.
-
Extends payment deferrals to the date that the forgiveness amount is remitted to the lender or 10 months after the use and forgiveness covered period.
-
Bill text can be found at this link.
The House bill now needs to be reconciled in the Senate with Senator Marco Rubio’s Paycheck Protection Program Extension Act (S. 3833) (Sen. Marco Rubio and Sen. Ben Cardin), which was introduced late last week. S. 3833:
-
Extends the covered period from June 30, 2020 to December 31, 2020.
-
Extends the 8-week loan forgiveness period to 16 weeks.
-
For purposes of calculating whether number of employees or employee pay was reduced from the prior year period, it allows the employer to select any contiguous eight-week period during the covered period. This gives loan recipients more time to re-hire furloughed employees.
-
It expands the allowable uses of loan funds to include employee protection expenditures, specifically:
-
Creating or expanding drive-through window facilities;
-
Creating or expanding ventilation or air filtration systems;
-
Acquiring sneeze guards;
-
Creating health screening capabilities; and
-
Acquiring face masks, respirators and other PPE.
The list above does not include residential real property or intangible property.
- Draft bill text as of May 22, 2020 can be found at this link.
The primary differences in the Rubio-Cardin bill compared to the House passed bill are as follows:
-
It does not eliminate or relax the 75%/25% rule;
-
It does not extend the two-year repayment period for unforgiven amounts; and
-
It does not extend the eight-week period for as long as the House bill does (16 weeks compared to 24 weeks).
Key Takeaway
There clearly seems to be momentum and bipartisan support for an extension of the covered period beyond the initial 8-weeks provided in the CARES Act. PPP borrowers who can file for forgiveness should delay such filings (there is no time limit for when forgiveness applications must be filed) until Congress has addressed these two issues.