by Christopher Hanewald
The roll-out of guidance related to the Paycheck Protection Program (PPP) continues to trickle out as business owners and their advisors desperately work to understand the ever-evolving landscape. Late on June 22, the Small Business Administration (SBA), in consultation with the Treasury, released a 34-page interim final rule (IFR) which seeks to clarify elements of the PPP in light of the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) which was enacted on June 5.
Notable changes stemming from the PPPFA’s passage included:
- An expansion of the “Covered Period”—the time in which PPP loan amounts must be spent in order to be eligible for forgiveness—from the original 8 weeks to 24 weeks. The 24-week period automatically applies to all loans originated before June 5th unless a borrower affirmatively elects for the shorter 8-week period.
- A decrease in the percentage of loan proceeds required to be utilized in order to receive full forgiveness. Originally, the PPP required that 75% of funds be expended on payroll costs; however, the PPPFA reduced that threshold to 60%.
- Extension of the term of loans issued after June 5 from 2 years to 5 years. For borrowers who received PPP loans prior to June 5, they may negotiate with their lender to see if the initial term can be expanded.
Generally, the PPPFA was very favorable for PPP recipients; however, like much of the legislation and guidance issued relating to this program, inconsistencies and uncertainty remained. In the wake of the PPPFA, perhaps the greatest source of uncertainty—given the expanded 24-week Covered Period—was whether recipients could apply for forgiveness prior to the conclusion of the Covered Period.
Due to the expansion of the Covered Period, a loan recipient who calculated their initial PPP loan application based off of 2.5x monthly payroll would now be able to expend the entirety of the loan on payroll costs by week 10 of the Covered Period. Accordingly, business owners were left wondering whether at the time their PPP funds are depleted, but prior to the conclusion of the 24-week Covered Period, could they submit their application for forgiveness? This most recent IFR states unequivocally that:
“A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.” (emphasis added)
Thus, this IFR allows for a borrower to apply for forgiveness as soon as funds are depleted. While this provision is useful, it is not without its own separate caveat as it relates to reductions in employees’ salaries or wages—an exception from the original PPP. This IFR clarifies that if a borrower applies for loan forgiveness prior to the end of the Covered Period and has reduced any employees’ salaries or wages by more than the 25%, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period, whichever one applies to its loan. Relatedly, a borrower that applies early for forgiveness necessarily must forfeit a safe-harbor provision allowing them to restore salaries or wages by December 31 and avoid reductions in the loan forgiveness. For example, if a borrower has a 24-week period that ends in October but wants to apply in September, any wage reduction in excess of 25% as of September would be calculated for the entire 24-week period even if the borrower restores salaries by December 31.
Finally, what still remains unclear for business owners and their advisers is whether there are any further strings attached upon the determination of forgiveness by the bank that originated the PPP loan. Specifically, if a borrower applies for forgiveness in week 13 of the Covered Period and receives the determination of full forgiveness in week 15 from the bank—an ambitious hypothetical timeline given the bank has up to 60 days to make such determination—could the business owner thereafter layoff their entire workforce in week 16 with impunity? While the IFR does not directly address this issue, the implication appears to be that upon a determination of forgiveness, all PPP related restrictions cease.
Business owners who may have already received PPP loans should review documentation and consult with their lenders to determine whether loans issued prior to the PPPFA may be negotiated to incorporate the more favorable terms that became standard with the passage of the PPPFA.
Like the pages of guidance that preceded this most recent IFR, while some pressing questions have been answered, new issues have been uncovered and the wait for the next round of guidance begins.