PPP Breaking News: Treasury Announces Relief From 60% Cliff
“Four score and 7 modifications to the PPP rules ago…”
Yesterday, U.S. Treasury Secretary Steven Mnuchin and Small Business Administration (SBA) Administrator Jovita Carranza released a joint statement regarding the passage of the Paycheck Protection Program (PPP) Flexibility Act, which was enacted on Friday and covered in our June 3rd blog post, Senate Passes House Bill H.R. 7010 – PPP Borrowers Breathe A Great Sigh of Relief, which explains its provisions.
Yesterday’s statement provides that “this bill will provide businesses with more time and flexibility to keep their employees on the payroll and ensure their continued operations as we safely reopen our country,” and expressed gratitude to both Democratic and Republican lawmakers for passing the legislation last Friday, which provided much needed guidance and peace of mind to tens of thousands of small businesses — and some confusion, of course.
The statement generally reiterates what the new law provides, with one change that will apparently be made, and one clarification that will be important to borrowers.
60% Cliff Abolished.
The new 60% statutory requirement, which replaced the 75% requirement, as described below, will not be a cliff, meaning that if a borrower spends less than 60% of the PPP loan amount for expenses that otherwise would be forgivable for payroll, state payroll taxes, group health insurance and retirement plans (which are referred to as “payroll costs”) during the 8 or 24 week testing period, then that borrower will get some forgiveness, instead of no forgiveness. While we do not believe that the SBA or Treasury Department have the authority to change the statute in this way, this is a welcome move towards what we expect the next iteration of the law to say, or for the SBA to follow, as a welcome change.
Now, a borrower that spends less than 60% of its PPP loan amount on payroll costs will be able to have forgiveness on all of such payroll costs, plus non-payroll expenses for interest, rent and utilities, to the extent that such non-payroll expenses do not exceed 66 2/3% of the amount spent on payroll expenses. Another way of calculating this is to divide payroll costs by 1.5 (or multiply them by 66 2/3%, if you are not so good at division) to determine the maximum amount of interest, rent and utilities costs that can count towards forgiveness.
For example, if the loan was $150,000 and the borrower spends only $60,000 on payroll expenses and $50,000 on interest, rent and utilities, then only $100,000 will be forgiven, instead of no forgiveness at all. This is based on $60,000 plus $40,000 (66 2/3% of $60,000).
Only Post-June 5th Approved Borrowers Will Get a 5-Year Payback Period.
The letter also explains that under the new law loans that were approved after June 5th can be paid back in 5 years, instead of 2 years, and that no interest has to be paid (at the 1% rate) until that 5 (or 2) year period. Approval is considered to have occurred on the day the SBA assigned a loan number to the borrower. The banks are permitted to extend the loan period for pre-June 5, 2020 loans for up to 5 years, but are not required to do so, and many borrowers will doubtlessly be held hostage by banks and be coerced into signing other types of long-term loan agreements as result of this. Lenders will want the leverage to be able to demand repayment on a 2 year basis, while borrowers will want as much time as possible to repay the loan.
It is very predictable that further adjustments will occur in these rules, and that they will primarily be borrower friendly.
The webinar mentioned above will discuss why most borrowers will not have to repay their loans, even if there are significant reductions in workforce, assuming that they are beyond the borrower’s control.
As always, I welcome questions, comments and suggestions of our coverage on this and related topics at email@example.com.
If you would like to attend a free webinar on the newly issued statement that will be aired today at 9 a.m., noon and 3 p.m. EDT, you can email me at firstname.lastname@example.org and put the word “CLIFF” in the subject line.
Special thanks to Brandon Ketron and Kevin Cameron for helping me to understand and interpret these rules.