On June 8, 2020, the SBA Administrator and the Secretary of the Treasury issued a joint statement regarding changes effected by the recently-enacted Paycheck Protection Program Flexibility Act (PPPFA). In that statement, they offered some clarity to one issue surrounding loan forgiveness in instances where less than 60% of the PPP loan proceeds are used for payroll costs during the newly-extended covered period. You may recall that the SBA/Treasury interpretation of the CARES Act required that at least 75% of the PPP loan proceeds be used for payroll costs; the PPPFA lowered that to 60%, but its wording suggested that if less than 60% of the proceeds were used for payroll costs, then the borrower would be entitled to no forgiveness at all. The joint statement clarifies that if a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will be eligible for partial loan forgiveness subject to at least 60% of the loan forgiveness amount having been used for payroll costs during the covered period.
By way of example, if the PPP loan was in the amount of $1 million, and only $500,000 (or 50%) was used to defray payroll costs with the balance used for other allowable uses that can be applied toward forgiveness, all incurred and paid during the 24-week forgiveness covered period, then the maximum amount of loan forgiveness would be $833,333 (of which 60% is $500,000). With the lowering of the payroll costs threshold to 60% and the extension of the forgiveness covered period to 24 weeks, this will hopefully be little more than an academic issue for most PPP borrowers.
The joint statement also indicates that rules and interpretative guidance will be issued shortly (including a modified loan forgiveness application) after implementing the PPPFA. It should be noted that the joint statement is not law, but is a good indicator of what to expect from the forthcoming rules and interpretative guidance. PPP borrowers would be well advised to await the issuance of those rules and that guidance before taking any definitive steps in reliance on the joint statement.
At Schwabe, we're closely following the updates to the PPP loan rules so that we can help our clients in navigating the changes.
