SBA Updates Guidance Under the PPP Flexibility Act
On June 11, 2020, the Small Business Administration (the “SBA”) issued a new Interim Final Rule (the “Update IFR”) that updates its original Interim Final Rule on the Paycheck Protection Program (“PPP”) loans to coordinate with the changes made by the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”) that was signed into law on June 5, 2020. In most ways, the Update IFR tracks the language of the PPP Flexibility Act. There were two items, however, that we believe should be noted.
Expect More Guidance and a New Loan Forgiveness Application
The SBA made clear that additional guidance, including additional interim final rules and an updated Loan Forgiveness Application, will be forthcoming (although no timetable was given). Thus, for those borrowers who are nearing the end of the initial eight-week forgiveness covered period and considering whether electing the eight-week period will be beneficial, the borrower will need to wait until the SBA issues its additional guidance and Loan Forgiveness Application before making a final decision.
Remember, the extension of the loan forgiveness covered period to 24 weeks is now the default covered period – it applies automatically to all PPP loans regardless of whether funded before, on or after June 5, 2020. A borrower may elect, however, to substitute the original eight-week covered period. For example, if a borrower is finishing the original eight-week period and has already used the full PPP loan proceeds to fund payroll and non-payroll eligible costs, then it might be beneficial to file the forgiveness application and complete the process before the rush of other borrowers commences. Even if this is the case, the borrower will still need to wait until the updated Loan Forgiveness Application (and additional interim final rule) is published to be sure that the borrower is doing everything properly.
Clarification of the “60/40” Rule
In our June 5 Client Alert, we stated that the PPP Flexibility Act removed the SBA’s “75%/25%” rule (which provided that at least 75% of the eligible costs incurred needed to be used for payroll costs, or the forgiveness would be limited) and replaced that with a new “60%/40%” rule. The language of the PPP Flexibility Act appeared to make this change an “all or nothing” proposition. In other words, if a borrower did not use at least 60% of the total PPP loan proceeds for payroll costs, then such borrower would not be eligible for any loan forgiveness at all. This interpretation flowed from the specific language included in the PPP Flexibility Act.
We are pleased to report that the SBA is construing the language differently. The Update IFR states:
“While the [PPP] Flexibility Act provides that a borrower shall use at least 60 percent of the PPP loan for payroll costs to receive loan forgiveness, the [SBA] Administrator, in consultation with the Secretary [of the Treasury], 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.”
It is not yet clear exactly what the SBA means by “proportional limit,” but this interpretation is certainly a “win” for borrowers, because it eliminates the “all or nothing” aspect that the PPP Flexibility Act seemed to include. We will have to wait for additional SBA guidance to see whether “proportional limit” is construed to be the same as the original “75%/25%” rule that the SBA imposed (i.e., limiting total forgiveness to an amount equal to “payroll costs ÷ .60”) or whether it means a proportional reduction (i.e., reducing the total forgiveness amount by the percentage by which the borrower was below 60%, so that if the borrower only used 55% of the PPP loan proceeds for payroll costs, then its overall forgiveness amount would be reduced by 5/60, or 8.33%).
Stay tuned until we hear more.
If you have any questions regarding how the PPP Flexibility Act or the Update IFR impacts your PPP loan planning, please feel free to contact any member of Trenam Law’s COVID-19 Relief Programs Team.