Out of the jumble of bills and acronyms bubbling around Congress to modify the terms of the Paycheck Protection Program (PPP), one measure emerged on May 28 from the House of Representatives. HB 7010, the Paycheck Protection Program Flexibility Act of 2020 (PPPFA), is generally in line with the changes discussed in our previous article: 1) extending the period during which a PPP borrower can have qualifying costs forgiven, 2) extending the two-year cap on PPP loan repayment periods, 3) modifying the SBA-created cap limiting forgiveness of non-payroll costs to 25 percent of the forgivable amount, 4) ensuring forgiveness has no impact on deferring the employer’s portion of social security taxes, and 5) extending the deadline to rehire employees/restore compensation. PPPFA passed with a healthy 417-1 margin that signals it could be a serious contender for adoption.
Here are the details:
Extension of Period to Pay Forgivable Costs
The PPPFA changes the definition of “covered period” in Section 1106 of the CARES Act, which currently defines “covered period” as eight weeks from the origination date of the loan. PPPFA extends this period to the earlier of i) 24 weeks from the origination date or ii) origination date to December 31. As we discussed previously, this gives PPP loan recipients more time to reap the maximum benefit of the loan forgiveness provision.
As currently drafted, this change could have unintended consequences. The statutory reductions in forgiveness for reductions in full-time equivalents (FTEs) or compensation (assuming the borrower does not qualify for the restoration safe harbor) are each based on reductions during the “covered period”. Therefore, extending the covered period to incur forgivable costs appears to also extend the period in which FTE reductions compared to 2019 levels could reduce forgiveness. One unfortunate possibility would be where a borrower uses most (but not all) of the loan proceeds to maintain payroll and FTEs for the eight week period initially contemplated by the PPP. Under the original eight-week covered period, the borrower’s payroll and FTEs would be evaluated at the same time as the loan proceeds ran out. Under the covered period proposed by PPPFA, the borrower doesn’t receive any additional money, and now has to choose between 1) maintaining payroll and FTEs for 16 more weeks, or 2) jeopardizing the amount of forgiveness for which they are eligible.
Importantly, pre-PPPFA borrowers can elect out of this extension – i.e., existing borrowers could elect to have their applicable covered period stay at eight weeks. This election applies to all uses of the term “covered period” so that reductions in forgiveness also would be determined based on the unextended covered period.
Maturity Period Extension
The PPPFA establishes a five-year minimum maturity for PPP loans. As we discussed here, the SBA somewhat inexplicably promulgated rules capping loan maturity at two years, despite the CARES Act allowing up to 10 years. The PPPFA specifies that this amendment applies to loans made on or after the date the PPPFA is enacted, which means only a small portion of the PPP loans would be automatically entitled to the five year maturity. It is not clear what, if anything, happens to existing loans.
PPPFA also extends the period during which PPP lenders are required to defer repayment from the current six months out until the date on which the amount of forgiveness is determined. Unlike the minimum maturity provision, the deferral period extension appears to apply to all PPP loans. Existing PPP loans generally provide for a six month deferral period, and would likely have to be amended by regulatory fiat.
Increased Non-Payroll Cost Cap
PPPFA increases the forgivable portion of PPP loan proceeds that recipients may use for non-payroll expenses. As explained in the first interim final rule for PPP loans, the SBA determined that Congress intended that only 25 percent of the amount of PPP forgiveness could be attributable to non-payroll expenses (rent, mortgage interest and utilities). PPPFA would allow recipients to use 40 percent of loan proceeds for non-payroll expenses. Accordingly, one of the three caps of PPP loan forgiveness would change from payroll costs divided by 75 percent to payroll costs divided by 60 percent. Commercial and industrial landlords, as well as commercial mortgage lenders, will no doubt be pleased with this change.
Social Security Tax Deferral
PPPFA would allow borrowers who have had PPP loans forgiven in whole or in part to continue to avail themselves of the option to defer paying the employer portion of social security taxes. The CARES Act provides that this deferral is not available to borrowers who have had all or part of a PPP loan forgiven. As we discussed in this article, the SBA adopted a borrower-friendly interpretation that allowed new deferrals until the taxpayer received PPP loan forgiveness (amount deferred until then remain deferred). PPPFA entirely removes the statutory restriction.
Forgiveness Applications After October 31
Finally, PPPFA would require borrowers to apply for PPP loan forgiveness within 10 months after the end of the covered period, or start making payments on the loan. Note that this does not appear to be a deadline to apply for forgiveness. Rather, failure to apply within 10 months prevents a borrower from taking advantage of the amended deferral period discussed above. However, this would allow submitting the application for forgiveness beyond the October 31 expiration date listed on the application.
While consensus is never a certainty, the (almost) unanimous passage of the PPPFA by the House is an encouraging sign of bipartisan support for modifications to the PPP. The Senate has also shown indications of support for PPP changes, albeit changes of a significantly narrower scope in the form of the RESTART Act. PPPFA will face its next challenge in the Senate. At that time we hope that the world’s most deliberative body will address the potential unintended consequences noted above, such as whether the “covered period” for measuring reductions in FTEs or compensation should be extended.