60% Is Not a Cliff, Indeed

June 15, 2020 Alerts and Newsletters

On June 11, the Small Business Administration (SBA) and the Treasury Department published important guidance that the revised 60% condition under the Paycheck Protection Program Flexibility Act will be applied proportionately, and not as a cliff.

Background. The CARES Act, enacted on March 27, authorized loans to a wide range of small businesses in an amount equal to 2.5 months of prior year payroll costs (as defined). These loans were eligible under Section 1106 to be forgiven, but only to the extent that the entire loan proceeds were spent on covered costs during an 8-week covered period. Moreover, forgiveness was made subject to potential offsets for reduced headcounts or for wages reduced by more than 25%.

On top of these complicated statutory offsets to forgiveness, SBA/Treasury additionally imposed (by rule) another important limitation – namely that payroll costs expended during the 8-week period must constitute at least 75% of the total amount for which forgiveness is sought. Failure to reach 75% resulted in proportional reduction in forgiveness. For example, if a business spent 70% of the loan amount on payroll costs, its maximum forgiveness would be 70/75ths of the loan amount.

For most businesses, spending 75% of their loan amount on payroll costs within an 8-week period was difficult, if not impossible, and so the 75% condition was the subject of much criticism.

Concern about the New 60% Threshold. Congress stepped in with the Flexibility Act. As summarized in our earlier article, The New PPP Math: 24 + 60 = > Forgiveness + > Paperwork, the Act not only extended (to 24 weeks, instead of 8) the period during which covered costs may be expended, but also loosened the 75% standard:

“To receive loan forgiveness under [CARES Act § 1106], 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 payment of [covered nonpayroll costs].”

Many commentators had read this new 60% condition as a “cliff” – i.e. zero forgiveness unless payroll costs during the covered period reach at least 60% – rather than a mere substitution of 60% for 75% under the proportionate disqualification approach adopted by SBA/Treasury.

Swift Clarification. With its June 11 guidance, SBA/Treasury has moved quickly to quell these concerns:

“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 [SBA] Administrator, in consultation with the [Treasury] 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.”

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