The latest PPP Loan bill that has been passed by the Senate and the House adds much-needed relief around planning for PPP Loan Forgiveness. I have broken down the changes below with observations on what that means for small business owners.
Optional 24-Week Extended Period
Businesses that have already been funded prior to the law change will be able to choose to use the original 8-week rules or adopt a longer 24-week period to spend the money on forgiveness related expenses.
Observation: This is great news for businesses that were coming up short on forgiveness spending. More payrolls (3x as many) can be included in the calculation.
Observation: The 24-week option does require at least 60% of the funds to be spent on payroll. If you miss the 60% requirement, there is a possibility of partial forgiveness. If you stick with the 8-week option, we believe that the pro-rated sliding scale forgiveness amount (non-payroll costs are limited to 25% of forgiveness amount) still applies.
Observation: The 24-week covered period cannot extend beyond December 31, 2020. June 30, 2020 is the deadline for applying for the PPP Loan. New applications will need to be funded by July 15th to take advantage of the full 24 weeks.
Borrowers can use the optional 24-week option to restore their workforce levels and wages to pre-pandemic levels for full forgiveness. This extends the period from June 30th to December 31.
Observation: The problem with the old 6/30 deadline was that many employers are struggling to get employees to come back to work either due to fear of the virus, generous unemployment compensation and local laws preventing them from being open.
Observation: The legislation added two new exceptions to workforce restoration. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations due to local reduced operating restrictions. Previously, the guidance allowed for exceptions where employees would turn down good faith offers to be rehired and where employees requested a reduced hours per week.
5 Year Payback
The terms of the loan are changed from a 2-year payback to a 5-year payback. The rate is still fixed at 1%.
Observation: For existing loans, the extended payback period must be agreed upon by the lender and the borrower.
Payroll Tax Deferral
The bill allows businesses that took the PPP loan to defer the employer portion of payroll taxes under the CARES Act Payroll Tax Deferral Program. Previously the PPP Loan disqualified businesses for this program.
Observation: The payroll tax deferral program allows employers to defer the employer share (6.2%) of social security tax or half of self-employment taxes on wages paid (or self-employment earnings) from 3/27/20 to 12/31/20. 50% of the taxes will need to be paid by 12/31/21 and the remaining amount will be due by 12/31/22.
Observation: Owners can be held personally responsible for unpaid payroll taxes of their business. Plan carefully here. Our recommendation is that if you need to defer expenses you look for other areas to do so.
The forgiveness applications have yet to be modified for all these changes. We believe that more changes will be coming as many questions have not been answered. The 11-page forgiveness application is overly complex as it is currently written. Its a significant contrast to the two-page initial applications used to qualify for the PPP Loans. We are hoping for a much simpler version to replace it.
We are here to help
Optimizing the benefit of these loans will require extensive analysis and understanding. We are here to help you navigate and optimize them for your business. Please feel free to call or email us to schedule a consultation and obtain a proposal customized for you specific situation.