SBA And Treasury Eliminate The 60 Percent Cliff
Originally published in the Rockland County Business Journal on June 18, 2020
In a previous article reported last week, we talked about the Paycheck Protection Program Flexibility Act (the “Flexibility Act”), which was designed to improve the initial Paycheck Protection Program (the “PPP”), which became law in March of 2020. One of the more controversial provisions of the Flexibility Act was its 60 percent “cliff.”
The cliff mandated 60 percent of the loan be spent on payroll expenses or no forgiveness would be granted.
But yet again, the Small Business Administration (the “SBA”) and the Treasury Department (the “Treasury”) have quickly done an about-face; the cliff is gone!
The SBA and Treasury now make clear that forgiveness under the new 60 percent payroll related usage requirement will be applied proportionately if it is not fully met, and not as a draconian cliff.
One of the key provisions of the Flexibility Act reduced the threshold PPP borrowers need to spend on payroll expenses from 75 percent to 60 percent. However, with the reduced threshold, many legal scholars believed it came with a steep cost which would completely eliminate loan forgiveness if a borrower failed to meet the minimum 60 percent payroll spending requirement.
Under the original PPP, a borrower’s inability to reach the 75 percent threshold would have merely caused a proportionate reduction in forgiveness. For example, If a borrower spent 50 percent of its loan proceeds on approved payroll costs, the borrower would have 50/75 of the total loan amount forgiven, assuming all other requirements were met.
Unfortunately, the results in the above example were nullified with the passage of the Flexibility Act when the following language was added:
“To receive loan forgiveness… an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for (any other approved non-payroll expense).”
The legal community took this new language to mean the federal government was not simply intending to replace 75 percent with 60 percent as the new threshold, but rather it was creating a cliff that if not met would eliminate all loan forgiveness.
Now, under the Flexibility Act, the same borrower as illustrated above would be left with no loan forgiveness. If a borrower spent 50 percent of its loan proceeds on approved payroll costs, the borrower would fail to meet the 60 percent minimum requirement and would have none of its loan forgiven.
Concerns spread quickly from one PPP borrower to the next, and the SBA and Treasury were forced to clarify (backtrack) quickly to alleviate growing unease.
As a result, the SBA and Treasury issued the following guidance late last week:
“While the Flexibility Act provides that a borrower shall use at least 60 percent of the PPP loan for payroll costs to receive loan forgiveness, the Administrator, in consultation with the Secretary, interprets this requirement as a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness. This interpretation is consistent with the new safe harbor in the Flexibility Act.”
This new guidance is a major relief to many PPP borrowers, but the need for it marks just another example of how the federal government, SBA and Treasury Department have been playing catch up every step of the way with the administration of the PPP as a whole.
The PPP was intended to help millions of borrowers stem the tide of financial ruin brought on by COVID-19, and now with this new guidance, the Flexibility Act will help ensure that it does.
Robert G. Brody is Founder and Managing Member and Mark J. Taglia is Counsel at the law firm Brody and Associates, LLC. firstname.lastname@example.org and email@example.com (203) 454-0560.