On May 28 the House of Representatives passed H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020 (PPPFA). The legislation passed 417-1 with overwhelming bipartisan support. Senate Majority Leader Mitch McConnell will attempt to expedite passage in the Senate by seeking unanimous consent, he announced June 1.
The PPPFA focuses on easing the requirements that PPP loan recipients must meet in order to obtain loan forgiveness. Specifically, the PPPFA would:
- Extend the PPP loan forgiveness “covered period” from eight weeks after the loan’s origination date to the earlier of 24 weeks after the loan’s origination date or December 31, 2020; however borrowers who received a PPP loan prior to enactment of the PPPFA have the option to use a covered period beginning eight weeks after the loan’s origination date;
- Replace the 75% payroll/25% other eligible costs rule on the use of PPP loan proceeds for loan forgiveness purposes with a rule that allows at least 60% for payroll costs, and up to 40% for non-payroll costs that include covered mortgage interest, rent, and utility payments;
- Provide borrowers a “safe harbor” from the loan forgiveness rehiring requirement, for situations where the borrower is unable to rehire an individual who was employed on or before February 15, 2020, or where the borrower can demonstrate an inability to hire similarly qualified employees on or before December 31, 2020;
- For loan amounts not forgiven, establishes a minimum loan maturity of five years (increased from two years) for loans made on or after the date that the PPPFA is enacted; and
- Eliminate a rule that prevents taxpayers who receive PPP loan forgiveness from taking advantage of the payroll tax holiday for the employer’s share of social security taxes.
The net effect of these provisions is that more borrowers would qualify for full forgiveness, and those that did not would have more time to repay, resulting in lower payments. The PPPFA’s payroll tax provisions help implement the overarching purpose of the series of recent relief Acts to provide businesses access to quick cash.
The most important change is likely the reduction in the payroll threshold (to qualify for loan forgiveness) from 75% to 60%. The current 75% rule is a barrier to full forgiveness for many employers, as the method for calculating payroll often results in a percentage that is slightly lower than the 75% threshold. And for a self-employed individual with no employees, there is currently no mechanism to achieve full forgiveness. Under the PPPFA, this issue would be resolved if the current formulas for calculating the payroll amount are left in place.
It is unclear how the current SBA guidance would be affected by a reduction in the threshold. However, the PPPFA should provide much more flexibility over the quantum of business expenses eligible for loan forgiveness, with the possibility that an employer could reduce headcount and still achieve full forgiveness.
The PPPFA stands in contrast to the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act), summarized here last week, which passed along party lines and is not likely to be considered in the Senate.
The Senate’s resistance to more spending reflected in the HEROES Act is less of a hurdle for the PPPFA, as it does not require additional funds. Nevertheless, it would increase the costs of the Government’s backing of the PPP and the impact of the expanded payroll tax holiday.
In the end, the PPPFA seems likely to pass in the coming days, absent strong opposition; however, Senate Small Business chairman Marco Rubio has already publicly expressed concerns over wording in the PPPFA.
For more information about the proposals under the PPPFA and how they might benefit your PPP loans, please contact us.
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