Paycheck Protection Program Flexibility Act

On June 3, 2020, the Senate unanimously passed the House of Representative bill 7010, the “Paycheck
Protection Program Flexibility Act.” The Flexibility Act passed both houses of Congress with just a
single dissenting vote. President Trump signed the legislation into law on June 5th.

The legislation makes a number of changes to the CARES Act’s PPP provisions, almost all of which
provide greater flexibility for PPP loans and the forgiveness of indebtedness process. These changes
affect not only those borrowers who have already received PPP loans, but may also encourage other
potential applicants (who were reluctant to apply because they were uncertain that the program met their
needs) to apply.

The key changes in the Paycheck Protection Program Flexibility Act are as follows:

• The time period to spend funds in order to achieve forgiveness has been expanded
  from 8 weeks to 24 weeks. Existing borrowers have the option of using the 8 week period if
  they prefer.
• The SBA’s regulatory requirement that at least 75% of the amount requested to be
  forgiven must have been used for payroll costs has been dropped down to a 60% level.
  According to follow-up rules from the SBA, Borrowers must also ultimately use at least 60% of
  the entire loan for payroll costs.
• Loans issued after enactment must have a 5 year payback period, rather than the current
  2 year payback period. For those borrowers who have already received loans, their 2 year term
  can be extended to 5 years with consent of the bank that issued the loan, but the Flexibility Act
  does not require banks to do so. Recipients of existing loans should work with their banks to
  seek the longer term payback. Even if banks may not have a direct financial incentive in making
  such modifications, their client relationships and public reputations could suffer if they fail to do
  so.
• The 6-month deferral period before payments are due has been replaced. The deferral
  period now begins on the loan date and ends on the date the SBA remits the amount of forgiveness to the lender. Borrowers must apply for forgiveness within 10 months after the last day of the covered period. Combine this 10-month period with the fact that lenders have 60 days to make a decision on the application and then SBA has an additional 90 days to act, and it might be a long time before the first payment on a PPP loan comes due.
• The CARES Act established limitations on forgiveness if the borrower’s headcount or payroll was less than its historical numbers. Those reductions in forgiveness are disregarded if headcount and payroll were restored by June 30, 2020. The Flexibility Act extends that amnesty date to December 31, 2020.
• The Flexibility Act provides additional flexibility in determining whether the headcount
  limitation must be applied, by allowing borrowers to disregard instances where it is not
  possible to find qualified people to rehire.
• The Flexibility Act allows PPP borrowers to take advantage of the 2 year deferral
  of payroll taxes that the CARES Act implemented for other taxpayers but prohibited PPP
  borrowers from using.

The following are preliminary observations regarding the effects of the Flexibility Act that may not be
apparent at first blush:

Flexibility on Rehires

In order to avoid reduction of the maximum loan forgiveness because of a smaller headcount than the
borrower’s historical numbers, the Flexibility Act provides some welcome options, but some of these
require warnings.

One of the items of flexibility is if the borrower could not rehire the required number of employees
because of limitations of federal laws (e.g., under guidelines of HHS, CDC or OSHA). So, if federal
laws prohibit or limit the borrower from rehiring because of social distancing or other requirements, the
borrower will not suffer from that. However, what if state or local laws prohibit rehiring while federal
laws do not? If there is an inconsistency between federal and state requirements, the borrower gets a
benefit only if the federal laws imposed the limitation.

Borrowers should also be aware that the SBA provides its own additional elements of grace regarding
rehiring. One of those allows the borrower to disregard an employee from the headcount test if the
borrower can document that a job was offered but the employee declined to come back without a good
reason. To take advantage of this exception, the borrower must notify the agency that would otherwise
be providing unemployment payments to the employee who declines to come back.

The moving of the “amnesty” date from June 30th to December 31st at first blush seems entirely
welcome, giving borrowers more time to rehire. However, some borrowers may find that June 30th is
better for them in their particular circumstances. Borrowers should be aware of the implications and
plan accordingly.

Maximum Payroll For Persons Earning Over $100,000 Per Annum

Before the Flexibility Act, borrowers could include only the ratable portion of $100,000 (i.e., 8/52nds
of $100,000) in the forgiveness request in respect of payroll costs for employees earning over $100,000.
We believe that this ratable treatment will continue under the 24-week forgiveness period established
by the Flexibility Act. Thus, the maximum that can be taken into account for the forgiveness request
should presumably increase from $15,385 (8/52 x $100,000) to $46,154 (24/52 x $100,000), but whether
this presumption survives SBA clarification awaits further word from the SBA.

Documentation Requirements

Borrowers are required to maintain documentation regarding their loan application and use of funds for
6 years following the date that all principal and interest has been forgiven or repaid. With the Flexibility
Act extending the term of loans from 2 years to 5 years, borrowers must be aware that the need to retain
documentation is similarly extended.

What About Deductibility of Expenses?

The IRS has issued a revenue procedure holding that expenses paid with PPP funds for which the
indebtedness was forgiven cannot be deducted.

Although the IRS’s analysis is in most respects impeccable, many members of Congress immediately
complained that it was not Congress’s intention to deny deductions for these expenses. The Flexibility
Act is completely silent in regard to this issue, so any changes to the IRS position must come either from
future legislation or from the IRS changing its position.

About Pavia & Harcourt LLP

Established in 1951, Pavia & Harcourt LLP is a business law firm concentrating in international
commercial and corporate transactions, banking, media and entertainment, real estate, litigation and
arbitration, intellectual property, estate planning and administration, and matrimonial law. We are
based in New York City.

Contacting Pavia & Harcourt LLP

Questions regarding matters discussed in this publication may be directed to the author, to any other Pavia & Harcourt lawyer with whom you may have consulted previously, or to any of the following members of the litigation department:

Robert D. Tolz
+1 (212) 508-2371
rtolz@pavialaw.com

Nicolo’ Majnoni
+1 (212) 508-2311
nmajnoni@pavialaw.com

This publication by Pavia & Harcourt LLP is for information purposes only. It does not constitute legal or other professional advice or opinions on specific facts or matters, nor does its distribution establish an attorney-client relationship. This material may constitute Attorney Advertising as defined by the New York Court Rules. As required by New York law, we hereby advise you that prior results do not guarantee a similar outcome.