• 24 Week Covered Period – The most significant provision in the Flexibility Act is the lengthening of the “covered period” (i.e. the period to make forgivable expenditures) to 24 weeks from the 8 weeks provided by the CARES Act. This helps to relieve the most acute challenges faced by PPP borrowers. As has been widely reported, shut-down orders have made it difficult for many businesses to bring people back to work. To gain forgiveness, such businesses were faced with the prospect of placing people on payroll during the covered period, even though the employees’ services weren’t needed. Further, many workers fare better under the enhanced unemployment benefits of the CARES Act, as compared to being brought back on payroll, such that employers would hurt employees by putting them back on payroll. This made it difficult for borrowers/employers to obtain forgiveness; and arguably would make it harder for many hard-hit businesses to withstand any continued economic contraction.
The earliest the new 24-week period will end will be in late October and early November (i.e., those businesses that received PPP funds in the early stages). Congress’ expectation is that this period will provide sufficient time for shut-downs to slowly lift, such that small businesses will be able to get people back to work and take full advantage of the loan forgiveness.
It should also be noted that the Flexibility Act allows borrowers to nonetheless “elect” to use the 8-week period. Also, the Flexibility Act does not address the “alternate” covered period that was included in the SBA’s guidance; so presumably the alternate covered period (i.e., tied to payroll periods rather than date of loan funding) is available under the new 24-month covered period.
• 60% Payroll Costs Requirement – The Flexibility Act requires that at least 60% of the PPP loan proceeds be applied to payroll costs, or else no forgiveness can occur. The CARES Act did not have any threshold to qualify for forgiveness, but the SBA provided subsequent guidance (of questionable authority) that 75% of the PPP loan proceeds needed to be applied toward payroll costs in order to get forgiveness. The SBA later softened its position. In any event, the 60% threshold is certainly easier, but it’s an all-or-nothing threshold. There has been some indication that a “fix” will later be enacted to remove the all-or-nothing approach, and instead adopt a proportional reduction approach.
• PPP Application Deadline Extended to Dec. 31, 2020 – The CARES Act provided that PPP loan applications would need to be submitted on or before June 30th, and the Flexibility Act extends that deadline to December 31st.
• Easing of Hiring/Rehiring Requirements – The Flexibility Act lowers the employment thresholds that factor into the forgiveness determinations, which will help small businesses that are not able to rehire employees, hire new employees, or otherwise get back to the same level of payroll.
• Payroll Tax Deferral Allowed – Under the new law, PPP borrowers with loan forgiveness may qualify for the COVID-19 related tax credit to defer payroll taxes, which was previously prohibited.
• 5-year Minimum Repayment Period – To the extent any portion of the PPP loans are not forgiven, the Flexibility Act extends the repayment period from two years to five years, at 1% interest; but this provision is applicable only to loans originated after the passage of the Flexibility Act.
• Changes to Deferral Period – Except for those who elect to use the original 8-week period, the new law effectively extends the deferral of principal and interest by allowing deferral until such time as the forgiveness determination is remitted to the lending bank (which would be more than 6 months by reason of the new 24-week period). Borrowers that do not apply for forgiveness would have a deferral until 10 months following the end of the covered period.
These changes provide significant relief to small businesses who have been struggling to figure out how to deploy PPP funds within the original 8-week period. In our estimation, these new rules should alleviate most of the significant problems presented by the CARES Act’s original 8-week period and the SBA’s restrictive guidance relative thereto.