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Congress Approves Significant Changes to PPP: What Borrowers Need to Know

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Update – June 19, 2020: In connection with the changes to the PPP discussed below, on June 16, the SBA released two new forms of forgiveness application, which we discuss in more detail in our alert on June 18, 2020.  As a result, we have updated our Loan Forgiveness Calculator.

On May 28, the House of Representatives passed legislation that amends certain provisions of the Paycheck Protection Program (PPP) largely in an effort to extend the period by which borrowers are permitted to use the proceeds and qualify for forgiveness. On June 3, the Senate, by unanimous consent, approved the House bill. We anticipate that this bill will be signed by the President shortly. In this advisory, we analyze material changes to the PPP and address important considerations for borrowers in light of these developments.

The material changes to the PPP include:

  • Extension of Maturity – PPP loans issued after the bill becomes law will have a maturity date of five years from the date of disbursement. PPP loans that are currently outstanding can be extended to five years with the consent of the lender.
  • Covered Period for Use of PPP Proceeds – The eight-week period previously provided in the PPP will be extended and will run from the date of disbursement until the earlier to occur of (i) 24 weeks from date of disbursement, or (ii) December 31, 2020. That said, borrowers can elect to use the eight-week period in which they have been operating. For those borrowers that have been able to largely maintain operations and use the proceeds, this may be a more appropriate option.
  • Revised Payroll/Non-Payroll Ratio – The required minimum percentage of proceeds used for payroll costs has been reduced from 75% to 60%. As a result, borrowers can now use 40% of their used proceeds on non-payroll costs such as rent and utilities. One note, however, the bill as written suggests that failure to hit the 60% threshold will result in total loss of forgiveness. Certain members of Congress have indicated that they will look to clarify this in “technical fixes” to the legislation to provide a calculation mechanism similar to the existing program, where a borrower only loses forgiveness for the applicable portion of the proceeds that falls outside of the 60/40 ratio.
  • Safe Harbor for Forgiveness – A few changes were made to expand the ability of borrowers to qualify for a safe harbor that would entitle them to forgiveness notwithstanding reductions in headcount:
    • Existing Safe Harbor Deadline Extended – The existing safe harbors to restore headcount and wages that were in effect on February 15, 2020 has been extended to December 31, 2020. This means that if you have a loss of forgiveness as a result of reduced headcount or reduced wages, so long as this is restored on or before December 31, 2020, you will have that loss of forgiveness restored.
    • Inability to Hire Employees – If a borrower has a reduction in headcount between February 15, 2020 and December 31, 2020 and can, in good faith, document that the borrower could not (i) rehire those employees who were employed on February 15, 2020, and (ii) hire similarly qualified employees by December 31, 2020 for unfilled positions, then the borrower will be entitled to full time equivalent exemptions for those employees. The good faith requirement will likely be the source of significant additional guidance from the SBA and Treasury. We anticipate that a borrower would need to show that actual efforts have been made to fill the positions, either through solicitations, interviews, or other documentable actions.
    • Inability to Restore Business Operations – If a borrower can document, in good faith, that the borrower was unable to return to the same level of business activity that the business was operating at on February 15, 2020 due to compliance with COVID-related safety regulations, then any loss of forgiveness as a result of reduction in headcount will be restored. Similar to the above, there will be a lot of discussion and speculation as to what constitutes a good faith determination of inability to return to February 15, 2020 levels of business. We anticipate that a simple financial statement test will not be sufficient, but until more guidance is given by the SBA, borrowers would be well advised to document the specific effects of compliance with COVID-related safety regulations on the business and the financial ramifications associated with such regulatory compliance.
  • Extension of Deferral – A borrower’s obligation to pay principal and interest on its outstanding PPP loan will be deferred until the date on which the SBA remits the amount of forgiveness to the borrower’s lender. That means that borrowers will not be in a situation where they are awaiting final approval of forgiveness but are obligated to make payments on the loan. Note, however, that a borrower is not permitted to extend the forgiveness process forever. A borrower must apply for forgiveness within 10 months of the last day of the covered period.
  • Payroll Tax Deferral – The provision in the CARES Act which made PPP borrowers ineligible for the deferral of payroll taxes is being deleted. As a result, PPP borrowers can defer the payment of employer payroll taxes that would be due from March 27, 2020-December 31, 2020. Half of the deferred amount must be paid by December 31, 2021 and the other half must be paid by December 31, 2022. Under prior guidance, PPP borrowers were eligible for the deferral until they received forgiveness on their PPP loan.

What Should Borrowers Do Now?

As noted above, while some of these changes are relatively straightforward, others will require additional guidance from the SBA. Any borrower that hopes to qualify for the safe harbors related to inability to hire qualified employees or inability to restore business should be prepared to show documentary evidence on why the borrower should qualify for either of these safe harbors.

For borrowers that have continued to operate, used the PPP proceeds as provided in the original version of the program, and will be shortly completing their initial eight-week covered period, it is likely that you will want to apply for forgiveness based on the initial period. If you extend for 24 weeks, your analysis related to loss of forgiveness due to reduction in headcount and/or reduction in wages will be based on this longer period. Borrowers will not be permitted to seek additional funding under this bill, so the amount of your loan is still based on the original eight-week calculation.

If you have questions about the effect of this legislation and what options you should consider, please do not hesitate to reach out.

This advisory was prepared by Josh French, Meghan Kelly, Ellie Myers, and Shannon Zollo in Nutter’s Corporate and Transactions Department. For more information, please contact Josh, Meghan, Ellie, Shannon, or your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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