If you’re a small business owner and you were able to obtain a PPP loan, you may have started worrying about how you are supposed to spend the loan proceeds to maximize loan forgiveness. You’re not alone. Many business owners have reached out to learn more about how this is supposed to work. Then, on June 5th, the President signed into law, the PPPFA which makes substantial changes to the program and provides more clarity on limits and extended the covered period of the loan. We’re going to break it down for you in this blog.
- Covered Period Extended
- Loan Maturity Extended
- Limit on Expenses other than Payroll Reduced
- Exemptions for Those Unable to Rehire or Replace Employees
- Both Loan Forgiveness and Payroll Tax Deferral Allowed
The covered period has now been extended from 8 weeks to 24 weeks after origination of the loan or December 31, 2020, whichever comes first.
The loan maturity has been increased from 2 years to a minimum of 5 years. This give borrowers a longer amount of time to pay back the portion of the loan that is not forgiven. If the loan was finalized prior to the PPPFA, the lender and borrower can agree to change to the longer term.
The Act requires at least 60% of the loan proceeds be used for payroll and up to 40% can be used for rent, mortgage interest and utility payments. After this announcement, the SBA, in consultation with the U.S. Treasury provided some further guidance in case the borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period. The guidance states that the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.
Because the CARES Act included generous unemployment benefits, in some cases, provide income in excess of what the employer was paying as wages, many employees are resisting returning to work. This makes it difficult for employers to maintain the pre-COVID payroll and head count, which are requirements for forgiveness.
To alleviate this issue, the Act provides an exemption for employers that are unable to rehire an employee who was working for the employer on February 15, 2020 or they’re unable to hire similarly qualified employees on or before December 31, 2020. Another available exemption is one that the employer is unable to return to the same level of business activity due to complying with requirements established by the CDC or OSHA during the period of March 1, 2020 through December 31, 2020, related to the maintenance of standards doe sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
The deferral of payments of the PPP loan principal, interest and fees (originally 6 months to one year) is now changed to the date the loan forgiveness amount is remitted to the bank by the SBA.
Lastly, the original rules of the CARES Act prevented employers who received PPP loan forgiveness from being able to defer payment of payroll tax, another provision of the CARES Act. The PPPFA changes that rule by allowing qualified employers to take advantage of deferring 2020 payroll tax payments even if they’ve received PPP loan forgiveness. It’s important to note, the deferral allows 50% of the eligible payroll taxes to be deferred until December 31, 2021 and the balance to December 31, 2022. Taxes that can be deferred include the 6.2% employer portion of the Social Security (OASDI) payroll tax, and the employer and employee representative portion of the Railroad Retirement taxes (that are attributable to the employer’s 6.2% Social Security (OASDI) tax rate), effective for wages paid March 27, 2020 through December 31, 2020.
If you have any questions about these changes and how they may affect your small business, give our office a call at 908-782-0001 or schedule a consultation with one of our Wealth Advisors to review your particular situation.