Last updated: June 24, 2020: When the Greek philosopher Heraclitus said, “Change is the only constant”, he was probably looking ahead a few thousand years to the PPP Loan Program.
Launched on March 27th, 2020 as part of the CARES Act- the Federal Government’s $2.2 Trillion Stimulus package in response to the COVID Pandemic- the Paycheck Protection Program Loan has been a huge success, if measured in terms of response.
The initial $349 Billion ran out in a matter of days and it was quickly replenished by a rare act of bipartisan support, with an additional $310 Billion. This seems to have met the demand, since there are less than two weeks left to apply for the loan, and there is still about $130 Billion left.
After the initial confusion regarding the loan application subsided, there were fresh questions on utilization of loan proceeds to maximize forgiveness. With some strong lobbying by the small business community, the Paycheck Protection Program Flexibility Act was passed in early June.
The changes to the program as per this new Act is surprisingly borrower-friendly. Some points were not very clear. Therefore, today, June 19th, the SBA released yet another clarification to the loan program and its forgiveness rules. Here is the 19th Interim Final Rule released earlier this week.
Here are some of the important points, as it relates to PPP Loan Forgiveness along with their latest clarifications.
Paycheck Protection Program Flexibility Act
Covered Period
The period during which you need to make the business expenses that you hope to get forgiven. Initially, it was 8 weeks. That made it hard for businesses (particularly the self-employed) to get the entire loan principal forgiven since the maximum loan amount was 2.5 x monthly payroll costs.
The PPPFA changed the covered period to 24 weeks, making it much easier to reach the numbers needed for forgiveness.
For borrowers who obtained their loans prior to the passage of PPPFA on June 5th, they can still choose to go with the 8 week covered period.
Forgivable Compensation
This clarification was eagerly anticipated by all. In changing the covered period from 8 weeks to 24 weeks, was the forgivable compensation for each employee also subject to change?
The answer is yes.
Non-owner Employees
An employee’s compensation under consideration for PPP is maxed out at $100,000 annualized. For a 24-week covered period, that amounts to $100,000/52 x 24 = $46,154. A lot more than $15,385 (as per original calculation of $100,000/52 x 8: for an 8-week covered period).
Over and above this amount, for a non-owner employee, the amount paid towards health insurance, retirement contributions and state/local employment taxes are also forgivable.
Self Employed Individuals
For the self-employed, without any employees, that is, who file a Schedule C- originally it appeared impossible to get your entire loan forgiven. Your maximum loan amount was 2.5 x net monthly income. Capped at $100,000 a year, that was $100,000/12 x 2.5 = $20,833. But maximum forgiveness allowed was $100,000/52 x 8, or $15,385 (for an 8-week covered period).
With the PPPFA changing the covered period to 24 weeks, the maximum forgiveness increases to $20,833 (or maximum loan amount, if less than $10,833)- implying that all of the loan is forgivable.
This amount includes all other benefits (retirement, health insurance payment), unlike for non-owner employees.
Owner Employees
For owner-employees, including S-corp owners, etc, the maximum forgiveness is $20,833 for a 24 week covered period.
This amount includes retirement contributions (since they do not want employers to be stashing large amounts into their own retirement accounts).
COVID Diaries.
Payroll vs Non-Payroll Expenses
Since the main purpose of the CARES Act was to keep folks employed, the rules stated that at least 75% of the loan proceeds needed to be used for payroll costs in order to have them forgiven. 25% of the loan was allowed to be used for other costs, such as mortgage interest or rent payments on business property and covered utilities.
The expenses may be incurred or paid within those 8 or 24 week periods, thereby increasing the actual amount of time even further.
The PPPFA changed this ratio to 60%-40%. If at least 60% of the loan proceeds are utilized for payroll, and 40% or less on non-payroll expenses, you can get all of it forgiven.
If you are not able to get to 60% for payroll expenses, you are still eligible for partial loan forgiveness.
Replacement of Full-time Employees
PPP rules mandated originally that by June 30, 2020, a business needed to hire back the same number of FT employees as it had as of February 15, 2020- in order to qualify for maximal loan forgiveness.
This became a hurdle for businesses closed due to lockdown and social distancing mandates. Or because business was too slow to warrant bringing back all employees.
The PPPFA modifies this rule and allows businesses to return to the same level of FTE as of February 15, 2020 by the end of the year, rather than June 30.
Loan Maturation
Loan maturation has gone up from 2 years to 5 years for PPP loans processed after June 5, 2020. For loans given earlier, the maturity can go up to 5 years if the lender and borrower both agree.
Payment Deferral
Payments can be deferred to 6 months after you get a decision on loan forgiveness.
PPP Loan Forgiveness Application
The SBA released new loan forgiveness applications:
You are eligible to go for the easier EZ Application if you fulfill the following criteria:
- You are self-employed without any employees- both now as well as in 2019 (on which time-period your maximum loan amount (2.5 times net monthly income was based) or for new businesses (Jan-Feb 2020), or,
- You did not reduce your employees’ wages by more than 25% and did not reduce employee hours during the covered period, as compared to the reference period from January 1-March 31, or,
- Your business activity declined due to health mandates secondary to COVID and hence you may have had reductions in the number of employees or their hours worked but you did not reduce any employees’ wages by more than 25%.
Loan Documentation Requirements
Keep all documentation required for the Forgiveness Application including your eligibility for loan application, bank account statements, tax filings, payroll reports, employee hiring/rehiring/firing records, any declined offers by employees for re-hire, the Schedule A related to the Forgiveness Application and its related worksheets for a minimum of 6 years after loan forgiveness or full repayment.
The SBA reserves the right to investigate all aspects of your loan for that duration.
Forgiveness Timeline
- You have 10 months from the end of your covered period to apply for forgiveness.
- Your lender needs to process and make a decision on your loan forgiveness within 60 days and forward its decision to the SBA.
- SBA has 90 days to make its decision.
- You do not need to pay interest or principal until a final decision has been made for your case, without interest accruing during this phase.
- If you choose not to apply for forgiveness, you can defer payments for 10 months after the end of the covered period. Interest does accrue during this period.
- The amount forgiven is not taxable.
- However, the expenses that you use the loan funds for, can no longer be taken as business deductions. This has the unintended consequence of increasing taxable income for the business. Hence, there is proposed legislation of this being revised.
Thank you for reading! As always, some answers as well as some new questions.
To reiterate, I am not a lawyer or accountant by profession. This is only meant for general information and discussion. Please defer to the people who do this for a living for your unique situation.
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