New Law Provides Better Opportunity for Full Forgiveness of PPP Loans

On June 5, 2020, the Paycheck Protection Program Flexibility Act (“PPP Flex”) was signed into law by the President after receiving only one “no” vote from any member of either house of Congress.  The wide bi-partisan support for this law clearly indicates that there was consensus the popular Paycheck Protection Program (“PPP”), established in the Coronavirus Aid and Relief Economic Stimulus Act (“CARES Act”) had several problems. Perhaps it was inevitable that a program that was slated to distribute more than $4 trillion in a little over 3 months could not take into account the vast array of circumstances, arrangements, and situations that were facing America’s small businesses. Many of those studying the program (including this author) had noted the various issues and, fortunately, Congress has sought to address at least some of the most glaring.

The increased “flexibility” included in the title of the new law primarily refers to the greater allowances being provided to PPP borrowers to enhance their ability to obtain “forgiveness” of the borrowed amount – probably the most attractive feature of the PPP. The new law allows employers/borrowers manners in which to increase the amount forgiven in several key ways:

Significant Expansion of the Period During Which the Loan Proceeds May Be Used

Under the original PPP structure, employers were required to expend the proceeds of their PPP loan within (8) weeks of receiving the distribution of the loan amount.  With PPP Flex, this time period has been tripled, so that borrowers may now have up to (24) weeks in which to distribute the proceeds.

This will provide a great deal of help especially for businesses that received their PPP loans while they were still not able to open for business or were (and are) restricted from opening at full capacity (for e.g., restaurants that in Texas have only recently been given permission to have in-room dining for up to 50% capacity). Employer/borrowers will have a greater ability to use their loan proceeds to match what their expected business activity will be.

Decrease in Amount that Must be Paid as Payroll

PPP Flex also lowered the percentage of the loan proceeds that must be used for payroll expenses to obtain forgiveness of the full loan amount, for 75% to 60%. The CARES Act had not created a minimum threshold for what percentage of the loan proceeds were required to be spent on payroll; however, Treasury and IRS regulations that were issued subsequently set the 75% standard, as the objective of the law was seen to primarily provide a means to help business owners keep their employees on their payroll.  It quickly became evident, however, that the financial benefit of this program was still not going to be enough for many small business owners to stay open if they were not allowed to use the proceeds in larger proportion for the other allowable expenses, i.e., rent, mortgage, utilities, and interest.

PPP Flex will provide relief to many small business owners who will now be allowed to apply their loan proceeds in a manner that makes better sense for their situation without having to jeopardize the possibility of losing forgiveness eligibility for all or a portion of their loan proceeds.

New Allowances for Not Maintaining Same Number of Employees

The new law also creates new exceptions for employers who are not able to meet the requirements of maintaining required head count numbers or payroll levels.  The PPP program provides that the amount of the PPP loan that an employer/borrower could be forgiven would be reduced proportionately in relation to reductions in their headcount or payroll figures made between February 15, 2020 and April 30, 2020.  While employer/borrowers were previously given the chance to restore such reductions to their previous levels by June 30th to avoid being subject to the reductions in the amounts eligible for forgiveness, for many small business owners the ability to re-establish such levels by June 30th was not practical.

PPP Flex addresses these limitations in two ways. Initially, the date by which the employer can re-establish headcount and payroll levels has been pushed back from June 30th to December 31st, which gives business owners significantly more time to hopefully have their businesses recover to allow them to feasibly sustain their pre-pandemic headcounts and/or payroll levels.

In addition, the law provides two new exceptions by which an employer can justify their inability to restore reductions made to their headcounts, namely:

1- If the employer is able to document both

(a)  an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and

(b)  an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020;

OR

2- If the employer is able to document an inability to return to the same level of business activity from before February 15, 2020, due to compliance with requirements established or guidance issued related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19 by Health and Human Services, CDC, or OSHA during the period beginning of March 1 through December 31, 2020.

If the employer/borrower is able to establish one of these conditions, the amount of their loan eligible for forgiveness will not be proportionately reduced by the reduction of their head count. Given that there is still a great deal of uncertainty about possible resurgence of COVID-19 and corresponding needs to re-impose stay-at-home orders, these allowances should provide small business employers with some relief from worrying about trying to restore their head counts too soon, if at all.

While PPP Flex has addressed a number of important shortcomings in the PPP Loan program, there are still many issues that are still pending, so there will still be some ongoing evolution of this program  Most observers are expecting that Treasury, the IRS, and/or the Department of Labor will issue further regulations that will address some of these.  It also may be that a PPP Flexibility Act II may be necessary. I will continue to try to monitor and pass on my insights and analysis as they occur.

Here to work with you,

David Quan

DISCLAIMER: The Law Office of David J. Quan provides this communication for general information only. This communication does not, nor does it intend to, provide legal advice or create an attorney-client relationship. Each legal problem is unique, and past performance does not guarantee future results. Persons with legal issues should consult their attorney for specific advice regarding their individual situations