Senate passes PPP fix that lengthens covered period; adds flexibility

Jun 04, 2020
Jun 04, 2020
0 min. read

After a short-lived objection by Senator Ron Johnson (R-Wis.) the Senate passed by unanimous consent H.R. 7010, or the Paycheck Protection Program Flexibility Act of 2020. The targeted bill, only eight pages in length, provides fixes to the Small Business Administration (SBA) Paycheck Protection Program (PPP) that increase the minimum maturity of new loans to five years, extend the covered period for loan forgiveness to the earlier of 24 weeks after the date of loan origination or Dec. 31, 2020, modify the payroll test to require at least 60% versus 75% of the funds to be spent on payroll, extend the payment deferral period, and allow borrowers to fully defer payroll taxes under section 2302 of the CARES Act.

The pace of PPP disbursements has slowed and the program has approximately $149 billion remaining as of May 30, 2020. Whether the adjustments to the PPP terms and conditions increase the flow of funds is yet to be seen, but many current borrowers will welcome the fixes to the program, especially the loan forgiveness period extension and modifications to the requirement that 75% of loan forgiveness amounts must be spent on payroll. Retailers, restaurants and other industries that have had to close their doors or severely limit their operations as a result of COVID-19 should benefit from the change to 24 weeks versus 8 weeks to utilize the funding and have it be eligible for forgiveness.

While the extension of the loan forgiveness period and the reduction in the payroll spend requirement from 75% to 60% will dominate the headlines, the bill also contains two new exemptions to the full-time equivalent (FTE) employee loan forgiveness reduction:

  1. Borrowers that can document the inability to rehire individuals who were employees on Feb. 15, 2020 and cannot hire other qualified employees for unfilled positions on or before Dec. 31, 2020.
  2. Borrowers that can document an inability to return to the same levels of business activity as their businesses were operating before Feb. 15, 2020 due to compliance with certain governmental requirements related to social distancing, maintenance or any other work or customer safety standards related to COVID-19.

Also of significant importance is the striking of the language in the CARES Act that prohibits borrowers from claiming payroll deferrals once they receive notification of loan forgiveness. This bill now allows all taxpayers to defer certain payroll taxes through Dec. 31, 2020 and repay the deferral at Dec. 31, 2021 and Dec. 31, 2022.

However, as it seems with all PPP items, this bill generates several more questions that borrowers must consider. First, any borrower that received a PPP loan prior to the date of enactment of this bill may elect to use the original eight week covered loan period. Many borrowers are nearing the end of the original eight-week period and may have already increased worker pay or paid out bonuses to ensure compliance with the 75% payroll requirement and now must determine what period is more beneficial to them. In addition, the bill changes the original FTE reduction exemption date from not later than June 30, 2020 to not later than Dec. 31, 2020. The loan forgiveness application provided by the SBA requires borrowers to provide the FTEs as of June 30, 2020, which could indicate that FTE levels must be maintained through the pay period that includes June 30, 2020. Whether borrowers would need to maintain FTE levels now through Dec. 31, 2020 is uncertain. Also uncertain is the period of time now to apply for loan forgiveness. The exemptions added by this bill provide testing dates on or before Dec. 31, 2020 and ending Dec. 31, 2020. Guidance as to when borrowers can apply for loan forgiveness and how these new testing dates work is necessary.

As many outlets are picking up, the statutory requirement that at least 60% of the funds must be used for payroll can be interpreted as a cliff that requires borrowers to reach that level before any loan forgiveness is granted. With the extension of time to utilize the funds to 24 weeks though, most borrowers should not have an issue reaching this threshold. 

Finally, the bill does not provide express Congressional authority to allow a Federal income tax deduction for expenses paid with forgiven funds. However, the end date of Dec. 31, 2020 also creates a question on whether a borrower can deduct PPP paid costs in a calendar year 2020 tax return if loan forgiveness is not determined until after the close of the 2020 tax year. Presumably, the loan forgiveness determination for many loans is more than a ministerial act, especially for those loans in excess of $2 million that the SBA has stated it will review prior to forgiveness.

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