By Josh Morris, CPA/PFS, CFP®
For businesses that applied for and received PPP loans when they were first available, the time to apply for forgiveness has either come or is fast approaching if you choose to elect the 8-week covered period. For those businesses that have yet to apply, the clock is ticking to do so since lenders will be unable to issue SBA application numbers under current guidelines after June 30th and lender deadlines might be sooner. In this post, we will discuss the purpose of the Payroll Protection Program, the changes that have been made since the CARES Act was enacted, and how to qualify for forgiveness. Depending on how your business is structured, when the loan was received, and how COVID-19 affected your business, the forgiveness timeline and/or calculation could be different, which we will address in detail below.
Summary of the PPP
Congress created the PPP as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, which became law on March 27, 2020. This bipartisan legislation authorized Treasury to fund SBA-backed loans of up to $10 million to businesses that could be used to cover payroll, mortgage interest, rent, and specified utilities. PPP funds are available to small businesses that were in operation on February 15, 2020 with 500 or fewer employees (including not-for-profits, self-employed individuals, sole proprietorships, and independent contractors).
These loans were designed to help businesses and not-for-profit organizations facing economic hardships created by the coronavirus pandemic and help employees remain employed and paid. PPP loans can be fully forgiven if the funds are used for eligible expenses and other criteria are met. However, the loan forgiveness amount may be reduced if there are any decreases in employee headcount, decreases in salaries or wages per employee, or if payroll expenses are less than a specified ratio of the overall loan proceeds.
Congress initially approved $349 billion in PPP funding. After that money was quickly exhausted, Congress authorized another $310 billion, bringing the program total to $659 billion. As of 5 p.m. ET Friday, June 19, 2020, the SBA had approved more than 4.6 million loans totaling nearly $515 billion.
PPP Flexibility Act
Over the past few months, there has been much confusion about the Paycheck Protection Program, which is to be expected based on the expediency needed to help stimulate the economy in the midst of a crisis. Businesses rushed to apply for funding and the funds were rapidly exhausted despite any clear, official guidance on how the funds must be used to qualify for full forgiveness. The Treasury and SBA issued multiple FAQs, which were updated every few weeks with additional clarification, but many questions remained unanswered.
On Friday, June 5, 2020, the PPP Flexibility Act was signed into law. This law made some changes to the Paycheck Protection Program making it easier for businesses to qualify for forgiveness, which included the following:
- Extending the “Covered Period” from 8 weeks to 24 weeks after the loan proceeds are received or December 31, 2020, whichever is earlier
- Reducing the payroll expenditure requirement from 75% to 60% (partial forgiveness will be granted for an amount to the extent payroll costs make up 60%)
- Exceptions to FTE reduction penalties for documenting an inability to:
- rehire individuals employed on February 15, 2020;
- hire similarly qualified individuals before December 31, 2020; or
- return to the same level of business as before February 15, 2020 due to COVID and compliance with requirements or guidance issued
- Extending the repayment period, which was previously 2 years, to 5 years for all loans issued after June 5, 2020 (lender and borrower must agree to extend the term for loans issued before June 5, 2020)
- Deferring loan payments until the forgiveness amount determined by the SBA (previously was 6 months from date of the loan)
- Ability to defer the employer’s share of 2020 payroll taxes (50% due in 2021, and the remainder due in 2022)
This new law along with the revised applications and instructions that were issued this week reduced some of the restrictions and answered many questions so that businesses can properly utilize the PPP funds and gather the documentation required to qualify for maximum forgiveness.
Revised Forgiveness Applications and Guidance
Late on Tuesday, June 16th, the SBA released revised applications and instructions for the forgiveness applications and also created a new EZ application to help reduce the paperwork burden for businesses that meet one of the requirements below:
- EZ Forgiveness Application and Instructions
- Applied for the PPP loan as a self-employed person, an independent contractor, or a sole proprietor with no employees;
- Did not reduce salary or wages for any employee making less than $100,000 per year by more than 25% during the covered period and did not reduce the number or the average hours of their employees (except laid-off employees who refused an offer to return); or
- Did not reduce salary or wages for any employee making less than $100,000 per year by more than 25% during the covered period and experienced reductions in business activity as a result of health directives related to COVID-19.
- Forgiveness Application and Instructions (all other businesses that don’t qualify for the EZ application)
After looking over the instructions, we wanted to point out a few items that may be different based on the type of business you have so that you can structure your expenditures to receive the maximum amount of forgiveness under the program. The EZ application is the most straightforward, so if you qualify based on the criteria above, it should be used.
Payroll costs are defined in the latest interim final rule and must account for 60% of the use of PPP funds in order to qualify for full forgiveness. Furthermore, the payroll cost definitions differ for owner compensation compared to all other employees:
- Employee payroll costs are “salary, wages, and tips, up to $100,000 of annualized pay per employee (for 24 weeks, a maximum of $46,154 per individual, or for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums).”
- Owner compensation is “calculated based on 2019 net profit as described in Paragraph 1.b. [of interim final rule], with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period.”
While employee payroll costs are easy to determine, depending on your business structure, the payroll costs for owners could be calculated differently, as illustrated in the chart below:
The SBA and Treasury in these latest revisions make it clear that these adjustments to owner compensation were necessary to be consistent with the structure of the CARES Act when extending the 8-week covered period to 24 weeks. Limiting the compensation of owners to $20,833 accomplishes the focus of the law, which was keeping workers paid and preventing windfalls that Congress didn’t intend. Furthermore, for borrowers with no employees, this limitation will have no effect on the amount of forgiveness allowable, because the maximum loan amount for such borrowers already includes only 2.5 months of their payroll.
With the extension from 8 to 24 weeks, most businesses will be able to qualify for forgiveness without needing to consider nonpayroll costs. That being said, other nonpayroll costs include the following and cannot exceed 40% of the total forgiveness amount:
- Payments of interest (but not principal) on mortgage obligations on real and personal property that originated before February 15, 2020;
- Rent payments on lease agreements in force before February 15, 2020; and
- Utility payment under service agreements dated before February 15, 2020
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Conclusion and Next Steps
For companies that had to reduce employee headcount or wages, more guidance may be needed, but the revisions made by the PPP Flexibility Act should allow for most businesses to qualify for full forgiveness. The instructions on the forgiveness applications are very helpful and also include the list of documentation that will need to be gathered to support the figures used on the application.
One of the key considerations for businesses that were issued loans before June 5, 2020 is whether you should elect to keep the 8-week covered period considering that time period may have already ended or is coming to a close soon. Hopefully, the information listed above has helped you determine which method will result in the maximum amount of forgiveness.
If you are a small business owner, Strategic Financial Planning can help you navigate these decisions along with other aspects of your own financial life. Whether you have been saving already or are just getting started, let us help you navigate your life journey and prepare for the future. To get started or review your progress, call (972) 403-1234 or contact us online to schedule a meeting.
Josh Morris serves as a financial planner with Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With over 10 years of industry experience, Josh is passionate about developing relationships with clients, learning about their dreams, and helping them reach their goals. Josh graduated summa cum laude from Oklahoma Christian University with a Bachelor of Business Administration in Accounting and started his career at Ernst & Young LLP, where he focused his efforts on high-net-worth individuals and their closely-held businesses before transitioning to wealth management. Josh is a CERTIFIED FINANCIAL PLANNER™ Professional, a Texas CPA, and holds the Personal Financial Specialist (PFS) designation from the AICPA. Josh is also a member of the Texas Society of CPAs and has been recognized as a Five Star Wealth Manager. To learn more about Josh, connect with him on LinkedIn.
This content is developed from sources believed to be providing accurate information, and provided by Strategic Financial Planning, Inc. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered legal or tax advice.