The Small Business Administration (“SBA”) has recently issued guidance regarding forgiveness of Paycheck Protection Program (“PPP”) loans authorized under the March 27, 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as amended by the Paycheck Protection Program Flexibility Act (“PPPFA”).
Enacted on June 5, 2020, the PPPFA makes significant changes to the CARES Act provisions governing loan forgiveness, as follows:
- Under the CARES Act, a PPP loan recipient was eligible for forgiveness of the portion of the loan used to cover payroll and certain other eligible costs during the 8-week “covered period” beginning on the date of the origination of the loan. The PPPFA extends the covered period for all PPP loans to December 31, 2020 (although an eligible loan recipient that received a covered loan before June 5, 2020 could elect to apply the 8-week covered period and begin repayment thereafter).
- The CARES Act provided that any balance remaining on a PPP loan after application of forgiveness had a maximum maturity of 2 years, and lenders were required to provide complete payment deferment for at least 6 months. The PPPFA extends the minimum maturity for a loan issued after June 5, 2020 to five years, and it provides that all loan recipients who seek forgiveness may defer any payments due until the forgiveness amount is received by the lender. Loan recipients who do not apply for forgiveness have 10 months from the end of the covered period to begin making payments.
- The CARES Act required that 75% of the forgiven loan amount be used for payroll costs. The PPPFA amends that requirement to provide that only 60% of a forgivable covered loan must be spent on payroll, meaning up to 40% could be used to cover approved non-payroll expenses (e.g., rent and utilities).
- The CARES Act stated that the amount of loan forgiveness would be reduced if the number of full-time equivalent employees employed by the loan recipient during the covered period was reduced as compared to the number of employees employed during a designated period before the onset coronavirus pandemic. The PPPFA amends this provision to state that loan forgiveness is determined without regard to a proportional reduction in a loan recipient’s number of full-time equivalent employees if, due to compliance with COVID-19 safety guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration between March 1, 2020 and December 31, 2020, the recipient was (a) unable to rehire individuals who were employees on February 15, 2020 and unable to hire similarly qualified employees for unfilled positions by December 31, 2020; or (b) unable to return to the same level of business activity as the recipient was operating at before February 15, 2020.
On October 13, 2020, the SBA released its Frequently Asked Questions (FAQs) on PPP Loan Forgiveness (the “FAQs”) which provides additional guidance regarding PPP loan forgiveness. Importantly, the FAQs:
- confirm that, as long as a borrower submits its loan forgiveness application within 10 months of the expiration of the covered period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for any payments.
- confirm that a borrower may submit a loan forgiveness application any time before the maturity date of the loan; if a borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, loan payments are no longer deferred and the borrower must begin making payments.
- clarify that, in addition to salaries or wages, payroll costs that qualify for loan forgiveness include all forms of cash compensation paid to an employee (including tips, commissions, bonuses, and hazard pay) up to a maximum of $100,000 on an annualized basis.
- state that payroll and eligible non-payroll costs that are (a) incurred during the covered period and paid after the covered period, or (b) incurred before the covered period but paid during the covered period, are all eligible for loan forgiveness.
- confirm that employer expenses for employee group health care benefits and employer contributions for employee retirement benefits that are paid or incurred by the borrower during the covered period are eligible for loan forgiveness.
You can read the full FAQs here. We expect the SBA to issue additional guidance as the December 31, 2020 end date for the covered period approaches.
– A. Benion