Bruce Claassen

June 17, 2020

Yesterday, the SBA released some new guidance, as well as an updated forgiveness application and instructions.  While this answers some questions, there are still other burning questions that have not been addressed.  

 

The guidance, titled "Paycheck Protection Program Interim Final Rule on Revisions to the Third and Sixth Interim Final Rules" (government-speak at its best), can be found here.

 

In our last blog post, we discussed the changes enacted by the PPP Flexibility Act.  That post highlighted the main changes made by the Act, along with the concerns and questions remaining for each one.  Some of those items are mentioned in the new guidance, but only in reference to how they change the original interim final rule.  

 

The new guidance confirms the reduction from 75% to 60% payroll cost requirement and confirms what SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin said in an earlier joint statement.  If your total forgiveness expenses are not at least 60% payroll, your forgiveness will be reduced accordingly.  The language of the Flexibility Act led many to believe that if you didn't meet the 60% requirement, that you wouldn't get any forgiveness, at all.

 

The remaining focus of this new guidance relates to the extension of the covered period.  The period of time to use loan money has been extended from 8 to 24 weeks. 

• The new guidance clarifies a few questions regarding how the maximum wages will be calculated for the new 24-week covered period.  Employee compensation will be capped at $46,154 ($100,000 ÷ 52 * 24).

• Owner compensation, however, will be capped at a lower $20,833 ($100,000 ÷ 12 * 2.5).  The rules now limit owner's to the lesser of 2.5 months of 2020 or 2019 compensation.  The reasoning stated in the guidance for this limit is to prevent a "windfall" to owners, since the intention of the PPP is to ensure employee pay is maintained.  This is by far the most significant component of this guidance.

• The alternate covered period will also still apply in the 24-week extended period if you have a payroll frequency of bi-weekly, or more frequent.  The concept of the alternate covered period was not part of the original act and later willed into existence by SBA guidance.  Since the Flexibility Act didn't mention this, it was unclear whether the concept would carry over to the longer covered period.

• Borrowers with existing loans can elect the original 8-week covered/alternate covered period if they want.

• Unanswered questions that remain:

  • Will a borrower be able to apply for forgiveness before the 24 week period ends if they've already used all of their PPPL funds for qualifying expenses?  At this point, it appears that you will be required to wait until the end of your 24 week period, or December 31, 2020, whichever is sooner to submit your application for forgiveness.

  • How does the new extended period affect existing loans?  The law and new guidance are silent on this matter.  The law appears to assume that the extended covered period can be used by all borrowers, even with existing loans.  However, existing loan documents may have specific language that refers to the 8-week covered period or a date by which time the forgiveness application must be submitted.  Borrowers may want to consult with their bank, particularly if their original 8-week covered period is ending soon. 

 

Obviously, more guidance is needed to clarify these and lingering questions in other areas.   We will continue to monitor the situation and will release new information as it comes out from the SBA and Department of Treasury.

 

If you have questions or would like to discuss how the new rules under the Flexibility Act affect your loan and related forgiveness, please feel free to contact us.  Follow us on social media for notifications of updates, and check out our COVID-19 landing page for more information.