This article from Slarskey LLC provides you with updates to the Paycheck Protection Program (“PPP”). You can also download a PDF of the article.
Prepared by Slarskey LLC for our MicroAmplified Partners as of June 23, 2020
After hearing concerns from small business owners across the country about the restrictions of the PPP, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was passed to make the PPP easier to use and be forgiven. We are sharing this update to provide easy to follow guidance on these recent changes, which were signed into law last week.
The Flexibility Act — What has Changed in the PPP?
Below are highlights of each of the changes to the PPP under the Flexibility Act.
- Relaxed payroll requirements: A new 60/40 rule has been released, which means that in order to get your loan forgiven, you only need to spend 60% of the loan on payroll, and the remaining 40% on the other eligible expenses (which remain defined as mortgage interest, rent and utilities). Previously, you needed to spend 75% of your PPP loan on payroll.
NOTE: Previously, forgiveness was reduced proportionally to the extent that funds fell below the original 75% threshold for payroll expenses. The proportional reduction is not present in the text of the Flexibility Act, suggesting that borrowers who spend less than 60% of the loan proceeds on covered payroll expenses may not be eligible for forgiveness. This all-or-nothing position is contrary to the SBA’s approach in the Loan Forgiveness Application and Loan Forgiveness Regulations, so it remains to be seen how the SBA will interpret this provision when revising the application and regulations to address the Flexibility Act.
- Forgiveness period extension: You now have a longer period of time to spend your PPP funds. The covered period has been extended from 8 weeks to 24 weeks.
- December 31, 2020 is the final cutoff date for eligible expenses. For loans disbursed July 16 and later, this means that you will not be able to take full advantage of the 24 weeks.
- The “clock” starts from the date the first payment was made by your lender (which may not be the same as the date that you signed your loan agreement).
- Note that while the extension applies to all loans, those with existing loans can still choose to go with the original 8-week period, and apply for forgiveness sooner.
- Enhanced rehiring exemptions: For small business with employees, the deadline that employers have to rehire employees that were laid off or restore reduced employee wages (if lay off or wage reduction occurred between February 15 and April 26), is extended from June 30 to December 31, 2020.
- Payroll tax deferral: If a borrower received forgiveness, payroll taxes would have been immediately due. Under the Flexibility Act, payroll taxes will remain deferred until December 31, 2020.
- Repayment deferral and clarification: The 6-month deferral on repayments has been removed. You do not need to repay the PPP until your forgiveness application has been processed and completed.
- You have up to 10 months after the end of your covered period to apply for forgiveness. After that time, payments will be required.
- Program extension: New PPP loans will have a loan length extended from 2 years to 5 years. Interest remains at an annual rate of 1% for all loans.
- The PPP application deadline was not extended. You have until June 30 to submit an application for a PPP loan.
For more details on any of these changes, please refer to the resources in the section titled “Where Can I Find More Detailed Information?”.
Loan Forgiveness
The PPP loan can be completely forgiven if you use it for eligible expenses and if you can provide proof of those expenses. In order to receive forgiveness, you will need to fill out a Loan Forgiveness Application form and submit it to your lender.
With the changes put into effect by the Flexibility Act, the PPP loan does not need to be repaid,
IF:
- the funds are used for payroll costs (or income replacement), interest on mortgages, rent, and utilities” during the covered period (now 24 weeks after disbursement of the loan); AND
- at least 60% of the forgiven amount was used for payroll (or income replacement) during that time period;
- AND the remaining amount of the loan is used for mortgage interest, rent and utilities.
It’s still the case that portions of the loan may not be forgiven if you have made certain defined reductions in headcount or salaries, as amended by the Flexibility Act.
Terms are slightly different from sole proprietors or independent contractors. Read on for more….
PPP Loans for Sole Proprietors or Independent Contractors
Sole proprietors and independent contractors benefit from the concept of “owner compensation replacement” which greatly simplifies the loan forgiveness process:
- Since these individuals and businesses usually don’t have payroll, the loan is based on monthly “average” net profit (see sample calculation below).
- With “owner compensation replacement”, you automatically get eight week’s worth of net profit forgiven, without having to spend it on anything.
As with PPP loans to small businesses that have payroll, the remaining PPP funds will need to be spent on utilities, rent, and mortgage interest expenses in order to be forgiven.
- You must have claimed or be entitled to claim a deduction for those expenses on your 2019 Form 1040 Schedule C in order to claim them for forgiveness.
- If you don’t have any eligible business expenses you can use the PPP funds for, the remaining balance of the loan will need to be repaid according to the PPP loan terms.
- At 1% interest for 5 years, it’s one of the best loan terms you can find, but there is no prepayment penalty if you wish to pay it all off early.
How to calculate monthly average net profit and “owner compensation replacement”:
- To calculate your monthly average net profit, your 2019 net profit divided is by 12. This number times 2.5 equals your PPP loan amount, which means your PPP loan is roughly ten weeks worth of net profit.
- The amount of “owner compensation replacement” you’re eligible to claim for forgiveness is calculated by multiplying your reported net income in 2019 on your Schedule C by 8/52 (or 0.154).
How to Apply for Loan Forgiveness
Applications for loan forgiveness will be processed by your lender.
- You will need to fill out a PPP Loan Forgiveness Application form (to be updated in accordance with the Flexibility Act) and submit it to them within 10 months after the end of your covered period.
- If you don’t submit your loan forgiveness application within that time frame, you will have to begin paying principal and interest after the covered period ends.
Then what happens?
- After you submit your application for forgiveness, your lender is required by law to review the application and submit its decision to the SBA within 60 days. The Lender’s decision may take the form of an approval, in whole or in part, a denial, or if directed by the SBA,a “denial without prejudice” due to a pending SBA review of the loan.
- If forgiveness is denied, a Borrower may request that the SBA review a Lender’s decision denying forgiveness within 30 days of receiving the denial notice from the Lender.
Frequently Asked Questions
What’s the biggest loan I can get? The PPP limits compensation to $100,000. For sole proprietors or independent contractors with no employees, the maximum possible PPP loan is therefore $20,833, with $15,385 automatically eligible for forgiveness as owner compensation replacement. The remaining $5,448 can be forgiven if spent on the approved expenses over the 24 weeks of the PPP. (See the section entitled “How Much Can I Borrow?” in our previous update for more details.)
Do I need any documentation to prove my expenses for forgiveness? You will need to prove your expenses for utilities, rent, and mortgage interest. However, for the owner compensation replacement, you just need to provide your 2019 Schedule C to be able to claim the eight weeks of net profit for forgiveness.
Can I use the entire PPP loan to cover my payroll? No. The updated guidance prevents self- employed individuals from claiming the entire amount as income replacement.
Can I use the PPP loan to pay 1099 employees? No, that is not a permitted use of PPP funds.
We hope you found this update useful as you continue to navigate the PPP. If you have additional questions, we at Slarskey LLC are happy to help — feel free to contact Renee Bea or Noraan Sadik. We also encourage you to speak with your own professional advisors as you continue to make decisions about your business.
This document is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. Use of this article does not create an attorney-client relationship between you and Slarskey LLC. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney. In addition, the information provided in this document may change based on guidance by the Small Business Administration or Treasury as well as a change in law.
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