New law untangles PPP loan forgiveness provisions

If you own or manage a business or not-for-profit, and you have a Paycheck Protection Program ( PPP ) loan, you are aware of the terms and conditions of the loan. As originally crafted, the program is a U.S. Small Business Administration loan where you have a 1% interest rate and a maturity date of June 30, 2020, where a portion or your entire loan will be forgiven.  Forgiveness is based on your spending most of your money (75%) on existing salaries and wages and keeping your employee count at a similar level during a defined covered period.  Any unforgiven portion is extended for two years.

On June 3, 2020, the Senate, through a unanimous consent vote, passed the Paycheck Protection Program Flexibility Act of 2020. The Act was signed into law by the president the following week on June 8, 2020.

Key provisions

The key provisions and my personal observations in italics about each follow:

1. The covered period would be extended from eight weeks to earlier of 24 weeks from date proceeds deposited or December 31, 2020.  Borrowers with existing loans could elect to retain the original 8 weeks. Observation: many loans will now be 100% forgiven.
2. The existing 75% requirement for minimum spend on payroll costs moves down to 60%. Observation: this allows many more businesses to qualify for the forgiveness provisions.
3. Any portion of the PPP loan that is not forgiven now has a five-year term instead of the previous two-year term. Borrowers and lenders with existing PPP loans can modify the terms of those loans to correspond to the terms of the Act.  
4. The so-called “safe harbor restoration deadline” provisions (FTE and Salary/Wage Reduction) would also be moved from June 30, 2020, to December 31, 2020. Observation: this provision allows businesses more time to get their workforce back to work to qualify for loan forgiveness.
5. The new law added another new safe harbor provision to remove the full-time equivalent (FTE) reduction in forgiveness. FTE reductions would not reduce forgiveness if the borrower can document in good faith the inability to rehire individuals who were employees on February 15, 2020, or the inability to hire similarly qualified employees for unfilled positions by December 31, 2020. Observation: this new safe harbor provision allows certain businesses an opportunity for forgiveness if their workforce is highly specialized and mobile.
6. Loan payments would now begin the earlier of 10 months after the last day of the covered period or when the SBA remits the loan forgiveness funds to the lender. This provision defers borrower payments on the PPP loan until such time as the final forgiveness amount is remitted to the lender by the SBA. Observation: hopefully, this reduces borrower and lender confusion about the amount of the remaining loan after forgiveness.
7. The PPP program’s term would be extended to December 31, 2020. Observation: businesses can still participate if funds are available.
8. Borrowers are required to request forgiveness within 10 months of the last day of their 24-week covered period (8-week covered period if making election to retain) or payments would be required to begin at that time. Observation: this is a reminder that you will need to ask your banker for forgiveness.
9. There is no longer a restriction on a borrower to defer payment of employer payroll taxes. Employers can now defer payment of FICA from the period of March 27, 2020, through December 31, 2020 – half to be paid in 2021 and the other half paid in 2022. Currently, employers can only defer until borrower receives forgiveness of PPP loan.

Some questions remain

This is all good news! As you can see, the law reduced the level of concern surrounding its forgiveness provisions, yet there are some unanswered questions:

1. At what date can a PPP loan borrower apply for forgiveness?
2. For PPP borrowers electing to use the 8-week covered period, does June 30, 2020, still apply for the safe harbor?
3. Will compensation limitations that were formerly prorated based on 8 weeks now be prorated based on 24 weeks?

There will undoubtedly be more guidance on forgiveness coming from SBA, but this new law gives many borrowers the breathing room needed.