All the PPP Updates You Should Know, Including the New EZ and Revised Full Loan Forgiveness Applications
By Ara Babaian, Esq. and Durdana Karim, Esq.
As many of you know, Congress created the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) nearly three months ago, assisting many companies in tiding the coronavirus pandemic. The Small Business Administration (SBA) administers the PPP, which provides a federally guaranteed loan to a small business (a business with 500 or fewer employees) for the purposes of paying payroll, rent, mortgage interest and utilities, among other costs. While the PPP in fact has helped many businesses, many companies have criticized the program’s complicated requirements to qualify for loan forgiveness, its failure to provide sufficient details as to its requirements, and the SBA’s resulting mixed messages about its requirements. Also, some of the program’s requirements do not reflect the realities of many businesses in this present economy given the ongoing status of the public health crisis, particularly for restaurants and other public-facing businesses.
To address some of these issues, on June 5, 2020, Congress passed the Paycheck Protection Flexibility Act (the Flexibility Act), which amends key provisions of the PPP. The Flexibility Act offers greater flexibility to borrowers under the PPP with respect to loan terms and forgiveness, as described below.
Following the enactment of the Flexibility Act, the SBA and the U.S. Treasury Secretary issued a joint statement on June 8, 2020, which provided further guidance about the amendments. According to the press release, the SBA will provide modified loan and loan forgiveness applications along with further guidance implementing the amendments to the PPP.
On June 17, 2020, the SBA posted a new EZ loan forgiveness application for eligible borrowers, as well as a revised full loan forgiveness application for borrowers who are not eligible to use the EZ version.
Finally, to further assist companies during these difficult times, the SBA has reopened its Economic Injury Disaster Loan (EIDL) and grant programs, which provide payroll and non-payroll specific assistance to companies, as further discussed below.
For a description of the PPP prior to the enactment of the Flexibility Act, please watch Ara Babaian’s Zoom presentation available HERE and his slides available HERE.
New EZ and Revised Full Loan Forgiveness Applications
On June 17, 2020, the SBA posted a revised, more borrower-friendly PPP loan forgiveness application (available HERE). In addition, the SBA posted a new EZ loan forgiveness application (available HERE) for eligible borrowers that:
- Are self-employed and have no employees;
- Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; or
- Experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.
The two-page EZ loan forgiveness application requires the borrower perform fewer calculations and provide less documentation.
The “Covered Period” is the period of time during which a borrower must use the PPP loan proceeds in order to be eligible for loan forgiveness. The EZ loan forgiveness application gives borrowers the option of using the original 8-week Covered Period (if their loan was made before June 5, 2020) or an extended 24-week Covered Period. The Covered Period has also been extended for the PPP loan forgiveness application, as we discuss below.
Along with the changes to the rules and guidance summarized below, the EZ and the revised full loan forgiveness applications will make it more efficient and faster for borrowers to obtain full forgiveness of their PPP loans.
New Rules under the Flexibility Act
Before we begin, we emphasize that the Flexibility Act does not change the deadline for applying for a PPP loan. The deadline is still June 30, 2020. With that said, the Flexibility Act changes the following:
A. Extends the PPP to December 31, 2020, but the Deadline to Apply Remains June 30, 2020
Originally, the PPP (as summarized below) expired on June 30, 2020. However, many states have been slow to re-open, so the Flexibility Act extends the PPP to December 31, 2020.
B. Extends the “Covered Period” of Time to Use PPP Loan Proceeds
Previously, the Covered Period was eight weeks starting from the first day the borrower receives the loan proceeds. The Flexibility Act expands the Covered Period and changes how it is calculated. The Covered Period now begins on the date the loan proceeds are funded to the earlier of (a) 24 weeks thereafter or (b) December 31, 2020. However, a borrower who received the loan proceeds prior to the enactment of the Flexibility Act may choose the shorter eight-week Covered Period. If a borrower is unable to use the entire amount of the loan within the Covered Period, then the borrower may still be eligible for partial loan forgiveness.
This extension of the Covered Period provides a borrower more time to expend the loan proceeds on eligible payroll and non-payroll expenses in order to have the entire loan forgiven. However, proceeds used after 2020 will not be eligible for forgiveness.
C. Reduces the Spending Requirement for Payroll Costs from 75% to 60%
Originally, the PPP required the borrower to use at least 75% of the loan proceeds on eligible payroll costs during the Covered Period to qualify for loan forgiveness. These payroll expenses include employee wages, state and local taxes on the gross wages, employer-paid health benefits and any employer-paid retirement benefits. Up to 25% of the loan proceeds may be used for non-payroll expenses (rent, mortgage interest and utilities). If the borrower used less than 75% of the loan proceeds on eligible payroll costs, the loan forgiveness was reduced proportionately such that only a portion of the loan was forgiven. The Flexibility Act lowers this requirement and at least 60% of the loan proceeds must be used for eligible payroll costs and up to 40% of the loan proceeds can be used for non-payroll expenses during the borrower’s elected Covered Period.
This reduction in the usage ratio from 75-25 to 60-40 allows a borrow to use a greater amount of the proceeds on non-payroll items (rent, mortgage interest and utilities). SBA’s recent joint statement with the U.S. Secretary of Treasury has clarified that if a borrower uses less than 60% of the loan amount for payroll costs during the Covered Period, the borrower will continue to be eligible for partial loan forgiveness with the forgiveness amount to be reduced proportionately, so long as at least 60% of the loan forgiveness amount has been used for payroll costs.
D. Extends Safe Harbors for Rehiring Employees or Raising Salaries to Previous Levels
Prior to the enactment of the Flexibility Act, the PPP required a borrower to restore full-time employee (FTE) and wage levels by June 30, 2020, for the loan to be eligible for forgiveness. With the enactment of the Flexibility Act, a borrower now has until the earlier of (a) six months after the date of loan disbursement, or (b) December 31, 2020 to rehire workers and to restore salaries which have been reduced by more than 25% for individuals earning less than an annualized $100,000, as required by the PPP in order to be eligible for loan forgiveness.
The Flexibility Act also provides new exemptions (“safe harbors”) that excuse a borrower from restoring the required employee and compensation levels by December 31, 2020. It provides safe harbors as follows:
- Inability to Rehire: A borrower will be excused from rehiring the required number of FTE employees if the borrower in good faith is able to document its inability to rehire individuals who were employees of the borrower on February 15, 2020, and similarly qualified employees for unfilled positions on or before December 31, 2020.
- Inability to Return to Same Level of Business: A borrower will also be excused if the borrower in good faith is able to document its inability to return to the same level of business activity as it conducted on February 15, 2020, due to the requirements or guidance issued by government agencies for sanitation, social distancing, or worker and customer safety requirements in response to COVID-19.
E. Permits Deferral of Federal Payroll Taxes
Previously, payment of the employer’s portion of federal payroll taxes (i.e., Social Security taxes and railroad retirement taxes) were due March 27, 2020. The Flexibility Act allows borrowers to defer these payments through December 31, 2020, without incurring a penalty or interest charges. If a borrower elects this deferment, it must pay 50% of the deferred amount by December 31, 2021, and the remainder by December 31, 2021.
A borrower may elect to defer these federal payroll taxes even if the borrower receives a decision from its lender that its PPP loan is forgiven. That was not the case prior to the enactment of the Flexibility Act.
F. Extends Maturity Date on Unforgiven PPP Loans
The maturity date for an unforgiven PPP loan was two years from the funding date with 1% interest. Under the Flexibility Act, a PPP loan that originates on after the enactment of the Flexibility Act, to the extent that it is not forgiven, must be repaid within five years from funding at 1% interest. For a PPP loan that originated before the enactment of the Flexibility Act, the borrower and the lender may, but neither is required to, agree to extend the maturity from two years to five years.
G. Extends Date for Repaying a PPP Loan
Originally, the PPP provided that interest and principal payments on the loan were due six months after funding. Under the Flexibility Act, a borrower may defer interest and principal payments on a PPP loan from six months after funding to either (a) the date on which the amount of forgiveness is determined and paid by the SBA to the lender or (b) 10 months after the last day of the Covered Period if the borrower fails to apply for forgiveness within 10 months.
H. Amends Eligibility for Business Owners with Felony Criminal Histories
In furtherance of the criminal justice reforms by state and federal governments as a result of ongoing nationwide protests, the SBA released another guidance on June 12, 2020, to allow greater access to the PPP for businesses whose owners of 20% or more of the equity of the applicant have been convicted of a felony (not involving fraud, bribery, embezzlement or a false statement). Previously, the SBA limited access to PPP loans to those owners holding 20% or more interest in the business who do not have a felony record in the past five years. This restriction has now been revised to look back to only one year.
Further Assistance from the SBA’s EIDL and EIDL Advance Programs
The SBA has reopened applications for EIDL and EIDL Advance programs, which provide emergency assistance for physical and economic injury to small businesses and non-profits affected by the COVID-19 pandemic through low-interest loans and emergency grants. EIDL can be used to cover payroll, inventory, debt and fund other expenses that are not already covered by a PPP loan. The current interest rate for a small business loan through EIDL is 3.75% and 2.75% for non-profits.
The SBA has provided further guidance in its June 15, 2020 press release stating that the loan terms for EIDL will remain for a maximum of 30 years and allow repayments to be deferrable for one year, which benefits the borrower by keeping repayments low.
Additionally, the EIDL Advance program provides up to $10,000 in emergency grants to businesses that currently are experiencing temporary economic struggle resulting from the COVID-19 pandemic. Grants may be used to pay sick leave to employees, maintain payroll, pay potentially increased costs to obtain materials, and pay rent or mortgage. Grants from the EIDL Advance program do not have to be repaid.
A borrower may apply for the PPP loan, EIDL, and the EIDL Advance, but a borrower who receives funding from two or all three of these programs is prohibited from using the funds from the different programs for the same expenses. Therefore, it is vital for recipients of these funds to keep accurate track and documentation of all expenses used to prevent commingling of the funds.
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The Flexibility Act eased some of the requirements of the PPP and answered some questions, but it also left other questions unanswered and raised even more questions. Stay tuned and check in with us for further updates as the SBA issues more guidance.
To discuss the above topic, please contact Ara Babaian at ara@encorelaw.com or Durdana Karim at durdana@encorelaw.com, or any other Encore Law attorney.