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New SBA Guidance Clarifies Key PPP Provisions

Government Affairs
The U.S. Small Business Administration, in consultation with the Treasury Department, has issued new guidance providing important clarifications for those taking advantage of the Paycheck Protection Program.  
 
The Interim Final Rule released June 11 revises the SBA’s Interim Final Rule published April 15, 2020, to address changes included the Paycheck Protection Program Flexibility Act (PPPFA), signed into law by President Trump on June 5, that provided additional flexibility in relation to loan maturity, deferral of loan payments and forgiveness provisions.

One key provision in the PPPFA was a lowering of the requirement that 75% of a borrower’s loan proceeds must be used for payroll costs and that 75% of the loan forgiveness amount must have been spent on payroll costs during the 24-week loan forgiveness covered period. Both of these requirements were reduced to 60% under the PPPFA. 
 
When the PPPFA was under consideration in the Senate, concern was raised by Sens. Susan Collins (R-ME) and Marco Rubio (R-FL) that a technical glitch in the House-approved bill raising the non-payroll portion of a forgivable covered loan amount from 25% to 40% would result in a “cliff effect,” such that some borrowers would not be eligible for any loan forgiveness if they did not fully meet the 60% threshold for payroll costs. 
 
Under the Interim Final Rule, the new SBA guidance clarifies that if a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for “partial loan forgiveness,” subject to at least 60% of the loan forgiveness amount having been used for payroll costs.
 
The Interim Final Rule states that, “While the Flexibility Act provides that a borrower shall use at least 60 percent of the PPP loan for payroll costs to receive loan forgiveness, the Administrator, in consultation with the Secretary, interprets this requirement as a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness.”
 
The guidance further explains that this interpretation is consistent with the new safe harbor in the PPPFA (detailed below), which provides that if a borrower is unable to rehire previously employed individuals or similarly qualified employees, the borrower will not have its loan forgiveness amount reduced based on the reduction in full-time equivalent employees.
 
Additional Clarifications
 
The new guidance also implements the following changes that were enacted as part of the PPPFA:
 
  • Extends the covered period for loan forgiveness from eight weeks after the date of loan disbursement to 24 weeks after the date of loan disbursement. Borrowers who have already received PPP loans retain the option to use an eight-week covered period.
  • Provides a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees for borrowers that are unable to return to the same level of business activity the business was operating at before Feb. 15, 2020, due to compliance with requirements or guidance issued between March 1, 2020 and Dec. 31, 2020, 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, related to worker or customer safety requirements related to COVID–19.
  • Provides a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees, to provide protections for borrowers that are both unable to rehire individuals who were employees of the borrower on Feb. 15, 2020, and unable to hire similarly qualified employees for unfilled positions by Dec. 31, 2020.
  • Increases to five years the maturity of PPP loans that are approved by SBA—based on the date SBA assigns a loan number—on or after June 5, 2020.
  • Extends the deferral period for borrower payments of principal, interest and fees on PPP loans to the date that SBA remits the borrower’s loan forgiveness amount to the lender. If the borrower does not apply for loan forgiveness, the deferral payment period is 10 months after the end of the borrower’s loan forgiveness covered period.
In addition, the new rules confirm that June 30, 2020, remains the last date on which a PPP loan application can be approved. This was an issue that was also raised by senators during consideration of the PPPFA. 
 
As part of the new guidance, the SBA issued modified borrower and lender application forms and plans to soon issue a modified loan forgiveness application implementing these changes to the PPP.  
 
A separate Interim Final Rule released June 12 revises the SBA’s April Interim Final Rule by changing the eligibility requirement related to felony convictions of applicants or owners of the applicant. 
 
Tax Deductibility
 
While the PPPFA did not address the IRS’ interpretation denying deductions for otherwise deductible expenses under the loan forgiveness of the PPP, it appears that Congress does plan to clarify this issue. The chairmen of the congressional tax-writing committees have indicated as such, and there have been recent efforts in the Senate to approve by unanimous consent stand-alone legislation introduced by Sen. John Cornyn (R-TX). 
 
Additional Action?
 
Meanwhile, there also has been broad discussion among congressional leaders and the Trump administration regarding the need and timing for additional legislation addressing the economic impact of the COVID-19 pandemic. 
 
Appearing June 10 before the Senate Small Business Committee, Treasury Secretary Steve Mnuchin indicated that he believed another targeted, economic stimulus bill will be needed to help small businesses and certain industries that have been hit particularly hard, but suggested that lawmakers shouldn’t rush into another bill before having a better idea of what changes are needed. The administration reportedly is considering offering a package of up to $2 trillion, although even that number is subject to debate. 
 
The $3 trillion HEROES Act (Health and Economic Recovery Omnibus Emergency Solutions Act) passed the House of Representatives May 15 largely along party lines, but it has been sidelined in the Senate. 

For now, it appears that any future action will likely occur after the July 4 Independence Day recess and before Congress breaks for its August recess. In a June 5 statement, Sen. Majority Leader Mitch McConnell stated that, “As Senate Republicans have made clear for weeks, future efforts must be laser-focused on helping schools reopen safely in the fall, helping American workers continue to get back on the job, and helping employers reopen and grow.”