The  Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was enacted on March 27, 2020 to provide immediate assistance to individuals, families, and businesses affected by the COVID-19 pandemic.

One of the provisions of the CARES Act included a loan program authorizing the Small Business Administration to temporarily guarantee loans under a new 7(a)
loan program titled the Paycheck Protection Program (PPP).   Loans guaranteed under the Paycheck Protection Program (PPP) are  100 percent guaranteed by SBA, and the full principal amount of the loans may qualify for loan forgiveness. 

The forgiveness component is what attracted massive interest in the program as business owners across the country are faced with government shut down orders that have caused significant declines in economic activity.

The PPP was made available to borrowers as early as April 3 and the initial funding tranche was quickly depleted.  The SBA stopped accepting applications on April 16th,  2020.  Additional funding for the program was made available April 24th and applications resumed shortly thereafter.

As additional details and provisions of the PPP became available, many borrowers became concerned by the lack of flexibility available if borrowers hoped to attain maximum forgiveness of the loan. 

Further frustrating borrowers, the application for forgiveness came a month after it’s legislative due date.  At that point, many borrowers realized they would likely be incurring a loan they could not afford and did not plan for.  The rules required borrowers to rehire employees even if the business was 100% shut down or faced with significant reductions to the forgivable amount of the loan. 

Many borrowers indicated making spending decisions similar to that of Montgomery Brewster in Brewster’s millions.  The spending was directed towards meeting criteria for forgiveness rather than addressing critical financial needs of the business that were necessary to remain viable post pandemic.

To address these changes, Congress passed H.R. 7010 – The Paycheck Protection Program Flexibility Act  of 2020 (PPPFA) and President Trump signed the legislation into law on June 5th, 2020.

The PPPFA modified key provisions of the PPP including the maturity of PPP loans, deferrals of PPP payments, and the way forgiveness of the loans would be calculated.

The interim final rule released June 10, 2020 was issued to amend the April 2, 2020 interim final rule to reconcile those changes enacted to the program with the passage of the PPPFA.

The last day a lender can obtain a loan number or that a borrower can apply for a PPP loan is June 30, 2020.  These clarifications and information should help lenders and borrowers make decisions about applying for and the usage of the PPP loans.

The first interim final rule (4/2/20), as amended by this interim final rule, should be interpreted consistent with the frequently asked questions (FAQs) regarding the PPP that are posted on SBA’s website and the other interim final rules issued regarding the PPP.

Changes to the First Interim Final Rule as a result of the PPPFA are outlined below:

  1. Covered period referenced in section 1102 of the CARES Act governing use, loan eligibility, and related requirements changes from 2/15/20 through 6/30/20 to 2/15/20 through 12/31/20.
  2. Maturity Date for PPP Loans:
    1. The PPPFA amended the CARES Act to provide a minimum maturity of five years for all PPP loans made on or after the date of enactment of the PPPFA (6/5/20).
    2. The IFR indicates that the date a PPP loan “is made” is when the SBA assigns a loan number to the PPP loan
    3. Lenders / borrowers can mutually agree to extend terms to 5 years for loans made before 6/5/20.
  3. Deferral Period for PPP Loans:
    1. If you submit a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you will not have to make any payments of principal or interest on your loan before the date on which the SBA remits the loan forgiveness amount to your lender.
    2. “Loan forgiveness covered period” is the 24 week period beginning on the date your PPP loan is disbursed.  
      1. If your loan was made before 6/5/20; borrowers can elect to have the period be the 8 week period beginning on the date the PPP loan was disbursed.
    3. Lenders must notify borrowers of remittance by the SBA of the forgiveness amount and the date your first payment is due.
    4. If you do not submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you must begin paying principal and interest after that period.
  4. Loan Forgiveness:
    1. The PPPFA provides that a borrower shall use at least 60 percent of the PPP loan for payroll costs to receive loan forgiveness.  There was confusion because this language reads as a “cliff” prohibiting any forgiveness if a borrower does not meet the 60% minimum threshold.  This IFR 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.
    2. New FTE Safe Harbor
      1.  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.
  5. Use of PPP Loan Proceeds
    1. The use of section mostly remains unchanged relative to the 4/2/20 IFR.
    2. At least 60 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.
  6. Borrower Certifications (reference to original IFR subsection indicator):
    1. Borrower certifications in the revised IFR list only those that have changed.  The text in bold below represents the modified language relative to the 4/2/20 IFR.
      1. (iii) The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; I understand that if the funds are knowingly used for unauthorized purposes, the Federal Government may hold me legally liable such as for charges of fraud. As explained above, not more than 40 percent of loan proceeds may be used for nonpayroll costs.
      2. (iv)Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the loan forgiveness covered period for the loan will be provided to the lender.
      3. (v) Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and
        covered utility payments. As explained above, not more than 40 percent of the forgiven amount may be used for nonpayroll costs. 

The interim final rule indicated that the SBA will be issuing revisions to its interim final rules on loan forgiveness and loan review procedures to address amendments the Flexibility Act made to the loan forgiveness requirements.

We will be monitoring their website and communications and will keep you updated as we learn more.

Please reach out to cares@brinkersimpson.com with questions.

We are in this together,

Brinker Simpson & Company, LLC

Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice & cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).