On June 11, 2020, the Small Business Administration issued amending key provisions of its April 2, 2020 Interim Final Rules on the Paycheck Protection Program (“PPP”), including provisions addressing loan maturity, deferral of loan payments, and forgiveness, to conform to the recently enacted Paycheck Protection Program Flexibility Act (“PPPFA”).  For a detailed analysis of the provisions of the PPPFA, please review our previous legal alert.

The most significant element of the June 11 Interim Final Rules is the clarification it provides on the PPPFA’s requirement that borrowers must spend 60 percent of the PPP loan on covered payroll costs.  Originally, the April 2, 2020 Interim Final Rules indicated that 75 percent of the forgiveness amount of a PPP loan must be attributable to covered payroll costs.  In application, this meant that a borrower that failed to spend at least 75 percent of the loan amount on covered payroll cost would receive a reduced amount of forgiveness.  While the PPPFA lowered that percentage to 60 percent, it also included language indicating that: (1) the 60 percent requirement is based on the total loan amount, not the eligible forgiveness amount; and (2) failing to meet this 60 percent threshold would preclude a borrower from receiving any forgiveness, as opposed to simply resulting in a decrease in forgiveness.

The new Interim Final Rules explain that while the PPPFA states that a borrower “shall use at least 60 percent of the PPP loan for payroll costs to receive loan forgiveness,” SBA interprets that requirement as a proportional limit on non-payroll costs as a share of the borrower’s forgiveness amount, rather than as a threshold for receiving any loan forgiveness.  This interpretation is consistent with SBA’s prior guidance that created the 75 percent requirement.  In practice, a borrower that fails to spend at least 60 percent of the loan amount on covered payroll costs will suffer a reduction in the amount of forgiveness for non-payroll costs in an amount necessary to establish the required 60/40 ratio.

For example, a borrower that spent $600,000 on covered payroll costs and $600,000 on covered rent, utility, and mortgage interest payments during the relevant forgiveness period would not be entitled to forgiveness in the amount of $1.2 million.  Rather, the maximum amount of forgiveness that the borrower could receive is $1 million ($600,000 for covered payroll costs and $400,000 for the remaining covered payments).

Unfortunately, the Interim Final Rules do not provide clear guidance on the application of certain elements of the PPPFA to borrowers that received their PPP loan prior to the enactment of the PPPFA and elect to utilize the original 8-week covered forgiveness period as opposed to the PPPFA’s new 24-week period.

For example, while it appears that the 60 percent requirement discussed above will apply to all PPP loans, it is unclear whether borrowers that elect the original 8-week period will also be required or able to utilize the original June 30, 2020 deadline for determining if they have cured any reductions in full-time equivalent employees or wages to avoid a decrease in forgiveness, or if they will be required or able to utilize the new December 31, 2020 deadline.  SBA recognizes that additional guidance is required in these areas and the Interim Final Rules explain that it will also be issuing revisions to its preexisting rules on loan forgiveness and loan review procedures to address amendments the PPPFA made to the loan forgiveness requirements.

If you have any questions about the Paycheck Protection Program, the Paycheck Protection Program Flexibility Act, or any other aspect of the CARES Act, please contact Josh Steele or the Harris Beach attorney with whom you usually work.

This alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.