Implementing and interpreting the Payroll Protection Program Flexibility Act

June 12, 2020

Written by Paul M. Polito CPA

On the heels of a joint announcement that Treasury Dept and SBA issued on June 9, the SBA published this final rule on June 11, 2020.

Here are the highlights from our perspective:

  1. Effective date is 3-27-2020 for most provisions related to loan forgiveness meaning that all loan forgiveness calculations will be able to use the Flexibility Act provisions.
  2. The “covered period” is changed from a period beginning February 15, 2020 ending on June 30, 2020 to February 15, 2020 ending on December 31, 2020.
  3. Maturity date: for loans made prior to June 5, 2020, maturity is still 2 years, however, borrower and lender may mutually agree to extend maturity to 5 years.  For loans made on or after June 5, 2020, the term is 5 years.
  4. Deferral period: if you submit your lender a loan forgiveness application within 10 months after the end of the loan forgiveness covered period, no payments are required before SBA remits the forgiveness amount to lender or notifies lender that no forgiveness is allowed.
  5. Loan forgiveness covered period: 24 week period beginning on the date the PPP loan is disbursed; however if your PPP loan was made before June 5, 2020, borrowers can elect to have the forgiveness period to be the 8 week period beginning on the date of loan disbursement.
  6. Payment deferral period: If Forgiveness applications are not submitted within 10 months after the end of the loan forgiveness covered period, payments are required after that period. The original rule required a 60 day processing time for the loan forgiveness application.  This provision seems to accommodate variable loan forgiveness periods based on the covered period selected.
  7. Loan Forgiveness—75%/60% payroll requirements: There are some interesting subtle differences hidden in this provision.  Borrower’s forgiveness amount must be 60% qualified payroll costs (down from 75% previously)    SBA will be issuing revisions to its interim final rules on loan forgiveness and loan review procedures to address amendments made in the Flexibility Act. There is no change in the uses that are eligible for forgiveness except it appears that now “any debt obligations that were incurred before February 15, 2020” are now included in “valid uses”.  A welcome surprise consistent with our previous interpretation was this:   “While the Act provides that PPP loan proceeds may be used for purposes listed above and for other allowable uses described in Section 7(a) of the Small Business Act,……..” This language was absent in the previous interim final rule.  Essentially it means that using the funds for acquiring plant and equipment, etc. are not “illegal uses” as was implied previously.    See our article published on 5/26/2020 “Are other uses of PPP loan permitted?” for a complete discussion.
  8. Safe harbors relating to forgiveness: If a borrower is unable to hire previously employed or similarly qualified employees an exception to the forgiveness reduction is met.  Similarly, if restrictions mandated by local government or other institutions limit the enterprise’s ability to return to previously normal activity, a safe harbor is met and forgiveness will not be reduced.

Questions that were not addressed or answered:

  1. If you do not need the 24-week period (say you only need 16 weeks) are you still bound by the 24-week covered period? Or can you use the 16-week covered period?
  2. When will the revised PPP loan forgiveness application be published?

The PPP Loan program continues to evolve as the economy continues its mandated economic pause.

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