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A Better Partnership


Jun 2020
June 24, 2020

SBA Issues Interim Final Rule Implementing Flexibility Act Changes to PPP Loan Forgiveness Rules

On Monday, June 22, 2020, the Small Business Administration (SBA) and Department of Treasury issued a new Interim Final Rule (IFR) implementing changes to the Paycheck Protection Program (PPP) contained in the PPP Flexibility Act of 2020 (Flexibility Act). These changes include an extended 24-week covered period in which funds may be utilized, extended five-year loan maturity date, a decrease in the percentage of loan proceeds that must be used for payroll costs to 60%, additional exemptions and safe harbors from reductions in loan forgiveness, and updated timing of when borrowers must apply for forgiveness. Our prior analyses of those portions of the Flexibility Act and the revised forgiveness applications can be found HERE, HERE and HERE.

The IFR has clarified that borrowers can apply for forgiveness prior to the end of the covered period. The Flexibility Act extends the length of the covered period in which loans may be used from eight weeks to 24 weeks. Borrowers that received PPP loans before June 5, 2020, may elect to use the original eight-week covered period. The IFR states that borrowers may submit loan forgiveness applications after they have used the PPP funds, even if it is before the end of the covered period. However, the IFR also states that if the borrower has reduced any employee’s salary or wage by more than 25%, the borrower is required to apply that salary reduction for the full eight-week or 24-week period. The IFR provides an example of how this would work. 

Critically, the IFR does not address situations in which a borrower reduces its full time equivalent (FTE) employees during the covered period, but desires to submit its loan forgiveness application prior to the end of the covered period. Thus, until the SBA issues additional clarification on this point, FTE employees will presumably still be measured over the entire eight‑week or 24-week covered period. This lack of clarification may be attributable to an assumption by the SBA that the majority of borrowers will qualify for an exemption or safe harbor from reductions in loan forgiveness amounts based on FTE reductions. Our prior discussion on those safe harbors and exemptions is HERE

Lastly, the IFR clarifies that a borrower is exempt from loan forgiveness reductions arising from a reduction in FTE employees if the borrower can document in good faith that it experienced a reduction in business activity stemming directly or indirectly from compliance with federal regulations or guidance related to sanitation, social distancing and worker or customer safety requirements. Many state and local shut-down orders are based on such federal regulations. Accordingly, a reduction in business activity stemming from compliance with a state or local shut-down order would likely allow a borrower to rely on this safe harbor.

The rules surrounding PPP loans are complex and business specific. If you have concerns about the rules, please contact Ford Turrell, Timothy Hillegonds, Rob Davies, Matthew Crowe, Charlie Goode, Jeffrey Ott or your Warner attorney.

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