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Following the enactment of the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), the Small Business Administration updated its Interim Final Rules on June 10, particularly the first Rule posted on April 2.
1. The Rule reminds us that while the definition of “covered period” for a PPP loan was changed from June 30 to December 31, this is different from the “covered period” relating to loan forgiveness, which is changed from 8 weeks to 24 weeks. We have been asked about whether a loan forgiveness application can be submitted for a period greater than 8 weeks but less than 24 weeks to take advantage of employee numbers, but there currently is no guidance on this issue.
2. The Flexibility Act extended the minimum maturity for PPP loans to 5 years. The Rule clarifies that this applies to PPP loans made on or after June 5 and that “made” means the date that the SBA assigns a loan number to the loan, thus affecting some loans in process as of June 5, rather than only those applied for on or after that date.
3. The Rule recaps the purposes for which PPP loans may be used (payroll and health benefits, mortgage interest, interest on other pre-existing debt obligations, rent and utilities) and adds that this includes refinancing an SBA Economic Injury Disaster Loan made between January 31 and April 3. If a borrower refinances a EIDL with a PPP loan, then the use of proceeds for eligible payroll must be carefully documented for purposes of forgiveness. An open issue on the use of PPP loan proceeds and forgiveness is the extent to which leases of personal property may be paid with PPP loan proceeds and be forgiven; the plain language of the statute does not seem to permit it, but the Interim Final Rule on loan forgiveness and the loan forgiveness application reference personal property, so perhaps this will be clarified in future Rules. This Rule states that the SBA will be issuing revisions to its Interim Final Rules on loan forgiveness and loan review procedures based on the Flexibility Act.
4. The Rule reiterates the change in the use of PPP loan proceeds for payroll from 75% to 60%, but explains that this threshold is not a hurdle to loan forgiveness but merely a proportional limit on non-payroll costs as a share of forgiveness. If PPP loan proceeds are used 40% for payroll, then the maximum that may be forgiven (before taking into account other rules such as employee numbers) is 66.67% of the loan amount [40% divided by 60%].
The new Rule reiterates that some of the changes in the Flexibility Act are retroactive to March 27, such as provisions relating to loan forgiveness and deferral periods for payments on PPP loans. The effectiveness of the provision relating to the new 5-year maturity date is June 5. The remaining provisions will be effective as of the future date that the Rule is published in the Federal Register
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