Senate Passes PPFA

As you’ve probably heard, the Senate passedthe Paycheck Protection Program Flexibility Act(HR 7010) without any changes.  Attached is a “conformed copy” of the sections of the CARES Act that are modified by the PPFA bill, which now heads to the President for signature. 

Let’s start perhaps counter-intuitively with discussing three key tax consequences of taking a PPP loan, of which the PPPFA fixes exactly one:

·         One of the most common questions we are dealing with now relates to acquisitions of PPP borrowers.  You’ll see that the attached includes Section 2302 of the CARES Act relating to the employee retention tax credit (ERTC), which was NOT modified by the PPFA.  PPP borrowers and all employers who must be aggregated with the borrower are not eligible to claim the ERTC.  This aggregation provision is causing significant headaches for buyers looking to acquire targets who have a PPP loan.  If a buyer acquires a PPP borrower in a stock deal, then the buyer loses the ability to claim the ERTC for itself and all of its aggregated (essentially affiliated) employers entities.  Even worse, the CARES Act directs the IRS to draft regulations to recapture any ERTC claimed for prior periods.  These have not been published yet, so the intended scope of that recapture is unclear.    As a result, buyers of PPP targets are now generally forced to compare the tax and other costs of using an asset deal vs. the impact of losing its ERTC in a stock deal.  

·         The PPFA does not also address the hoped-for change to the IRS’s determination that amounts paid with the proceeds of a forgiven PPP are not deductible by the borrower.

·         It does however eliminate the prohibition on PPP borrowers deferring payroll taxes.  Previously PPP borrowers were eligible to defer such taxes until the loan was forgiven.  Now, they are able to continue such deferral even if their PPP  loan is forgiven.

Turning to what the PPPFA actually does re the PPP loans themselves, it:

·         Extends the PPP “covered period” during which loans may be made through December 31, 2020

o   It will be interesting to see if SBA further modifies and extends some of the provisions relating to seasonal employers, who are permitted to use any 12-week period between May 15 and September 15, 2019 as their base period for calculations. 

o   Who would have thought that this would have mattered given the initial rush of demand, but there is still more than $100B available in the PPP 2.0 fund.  Some commentators are now suggesting that these fixes will create a surge in PPP demand that will exhaust the balance, while others are saying that the fix comes too late for many businesses.


·         Creates a minimum term of 5 years for allNEW PPP loans made after the date PPFA becomes law, up from the two-year term created by SBA in IFR 1.  

o   The PPFA does NOT require PPP lenders and borrowers to extend existing PPP notes to 5 years, but appears to presumptively permit them to do so.  Many, if not most PPP notes, may need to be amended to provide for the extended deferral period below, so this may be a discussion point for borrowers and lenders.  

o   Note that the Loan Forgiveness IFR requires borrowers to maintain PPP records for 6 years after the loan is forgiven or repaid, so borrowers may now need to keep such records for 11 years. Hopefully, SBA will consider shortening that period to tie to the date of a forgiveness decision or perhaps loan origination for borrowers who do not apply for forgiveness.

·         Defers all P&I payments on each PPP loan until the forgiveness amount is remitted to the lender by SBA. 

o   This means that such forgiveness amount must have first been finally determined, which may not happen for nearly 11 months after the loan was disbursed (24 weeks of forgiveness = 168 days, plus 60-day lender review plus 90-day SBA review), and this can be extended if the borrower waits to apply for forgiveness.

o   As noted above, this may require modification of most, if not all, PPP notes, which provide for the 6-month period mandated by SBA.

·         Provides any borrowers who fails to apply for forgiveness within 10 monthsafter the expiration of its forgiveness period must start making payments of principal, interest and fees on its PPP loan on “the day” that is not earlier thansuch 10-month anniversary.

o   The CARES Act waived all borrower fees on the PPP loans, so it’s not clear to what fees the PPFA is referring here. 

o   It is not clear whether the use of “the day” above allows lenders to select a payment commencement date that is later than such 10-month anniversary, or whether the intent is that such date is “the” required payment commencement day. (Perhaps SBA will clarify this?)

o   Note that the PPFA does not prohibit a borrower from later applying for forgiveness, even after it has started making payments.  (I wouldn’t be surprised to see SBA regulations impose some absolute outside date on such applications.)

·         Eliminates the 75-25 split created by SBA and instead provides that in order to receiveany forgiveness, the PPP proceeds must be used at least 60% on payroll costs

o   Unfortunately, this creates what many commentators have referred to as a forgiveness “cliff,” such that a borrower will not be eligible for ANY forgiveness if it uses less than 60% (even up to 59% )of its loan proceeds on payroll costs. 

§  Under the prior rules, if a borrower has a $1M PPP loan and uses $590k (59%) on payroll costs during the forgiveness period, it would be eligible for up to ~$787k ($590k * 4/3) of forgiveness, so long as it (a) spent up to that $197k delta on permissible non-payroll costs during the forgiveness period and (b) spent at least $160k on payroll costs after the forgiveness period to get to $750k of payroll costs (i.e., 75% of its loan amount). 

§  Under the PPFA, such borrowerwould not be entitled to ANYforgiveness.

o   That same section of the PPFA also provides that in order for a borrower to receive loan forgiveness it “mayuse up to” 40% of its loan amount for covered mortgage interest (but not prepayments thereof), covered utilities and covered rent. 

§  The CARES Act also allows borrowers to use PPP proceeds to pay interest on other pre-existing non-mortgage debt.   Because the drafting is permissive (“may use”), it is not perfectly clear, but by not including permission for such non-mortgage interest payments in this section, the PPFA could potentially disqualify from forgiveness any borrower who uses PPP proceeds on any non-mortgage interest.  Again, the drafting there is not clear, so this may not be the intent.

§  SBA could make this easy on everyone by saying that a “mortgage on real orpersonal property” simply means traditional secured debt, including that secured by UCC filings, etc.  


·         Extends the forgiveness period until the earlier of 24 weeks from origination or December 31, 2020, but also allows borrowers who already have PPP loans today to elect to use the original statutory 8-week period.

o   This does NOT expressly allow borrowers to use the 8-week“alternative” forgiveness period created by SBA that starts on the first payroll date after loan disbursement.  Thus, it is not clear whether that alternative period would remain available as a third option for such borrowers.  It seems harsh to pull that away from borrowers who are already well underway in working through such an alternative period, so perhaps SBA will issue guidance allowing it.

o   This extension is intended to be beneficial by allowing borrowers a significantly longer period in which to use proceeds and thus achieve more forgiveness.  HOWEVER, (C’mon, you knew there would be a catch, right?) it does so by extending the defined “covered period” to mean that 24-week period.  This means that theforgiveness reduction tests are also applied throughout that entire longer period. Thus, borrowers wishing to use the longer forgiveness period, must also maintain FTE levels and base salaries and hourly wages for that full 24-week covered period, or fall within the applicable rehire or restoration safe harbor which is now measured as of December 31 (instead of June 30).

o   As noted above, this significantly extends the period during which PPP loans will be outstanding, because borrowers will not be able to apply for forgiveness until the end of that forgiveness period (because they must demonstrate compliance with the FTE and salary/wage maintenance requirements as of the end of such period)

o   This means that M&A and financing deals involving PPP borrowers will face an extended period in which the forgiveness amount will not be known.  Thus, the parties will need to reach some agreement on who bears the economic risk of the loan being unforgiven.  As to who deserves to bear such risk … as Clint said,deserve’s got nothing to do with it.  It will likely come down to bargaining power and the desire or need to get a deal done before such forgiveness amount is known vs the ability to wait it out.

o   We believe that this means that the current references in the rules and forgiveness application to $15,385 as the limit on forgivable compensation to individuals will be increased to $46,1384 ($100k x 24/52), for borrowers using the 24-week forgiveness period.

·         Creates several exemptions from the forgiveness FTE Reduction, by exempting employers:

o   Who are able to document that they cannot hire back the same employees or a “similarly qualified” replacement before December 31, 2020.  

§  As drafted, this is a total exemption from the FTE Reduction, but presumably it is intended only to apply to exclude those employees for whom replacements can’t be found and not, say, other positions that were eliminated by the borrower.

§  It is not clear what documentation would be required to meet this standard, so we will need SBA to provide their usual helpful clarity on this.

o   Who are able to document that they cannot “return to the same level of business activity” as they had on Feb 15, 2020 due to compliance with HHS, CDC or OSHA requirements or guidance issued from March 1, 2020 through December 31, 220 “related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”

§  I think that the reference to “guidance” was meant to be expansive here, but the failure to expressly mention state and/or local laws and orders is puzzling and unhelpful.

§  The meaning of that “or” becomes pretty important.  As drafted, this does NOT appear to even implicitly pick up those state shelter-in-place orders unless the “or” is meant to mean HHS, CDC or OSHA requirements or guidance orany other worker or customer safety requirements.  However, that “or” is the first conjunction in the sentence (i.e., there is no “or” between “sanitation” and “social distancing”), so the broader reading would not seem to be grammatically correct.  Thus, borrowers who are closed due to state orders, will need to be able to document that such closure is due to (perhaps because the state order is based upon?) HHS, CDC or OHSA guidance.

We are continuing to monitor the other proposals pending in Congress, such as the HEROES Act, the RESTART Act and the bill proposed by the Community Bankers Association that wouldautomatically forgive all PPP loans under $150k, but we don’t currently have any clarity on what will develop there, especially in today’s ever-more-uncertain political climate.  If you have questions or suggestions about any pending or proposed legislation or regulation, please contact our Policy colleagues copied above.

I hope that you, your colleagues and your loved ones remain healthy and safe in these incredibly trying times.