Update 7/2/2020:
The deadline to apply for a PPP loan has now been extended until 8/8/2020.
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Update 6/16/2020:
Clarification: The extension to 24 weeks to use the funds for loan forgiveness applies ONLY to loans after 6/5/2020. For loans approved prior to 6/5/2020, there is the option to use either the 8-week or 24-week test.
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Update 6/10/2020:
Additional information has been provided with regards to the loan forgiveness.
The 60% requirement for payroll costs (ie. payroll, state payroll taxes, group health insurance, and retirement plans) that needs to be spent within 24 weeks will not be all or nothing. However, the portion spent on non-payroll costs are limited to 66.67% of the payroll costs.
Example: (A = payroll costs, B = non-payroll costs)
$150K loan
Full forgiveness: A >= $90K and B <= $60K
Partial forgiveness: A = $60K B = $50K
Amount forgiven would be $60K from A and $40K from B for a total of $100K forgiveness
The loan terms have been extended to 5 years, however this only applies to borrowers who were approved after June 5, 2020. For those loan approved prior to June 5, it's based on a case-by-case determined by the SBA lender.
It's very possible that additional guidance will continue to be provided in the coming months.
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Update 6/8/2020:
The PPP drama continues to unfold over the past few weeks. However, there is an official update regarding the forgiveness of the loan. The Paycheck Program Program Flexibility Act (PPPFA) has now been signed by the President and SBA has issued new forgiveness guidelines.
Below are the major changes:
- Initially, 75% of the loan must be used towards payroll. That has now been decreased to 60%. The remaining funds can be spent on operating costs (ie. office lease, utilities, etc.) The authorized uses of the PPP has not changed, just the amount.
- Initially, the funds must be spent by 8 weeks. That has now been extended to up to, 24 weeks. However, if a business chooses to apply for loan forgiveness in 8 weeks, they are still able to do so.
- Previously, businesses had until 6/30/2020 to rehire employees for that salary to count towards forgiveness. That's now extended to 12/31/2020.
- There seems to be more leniency in the employee headcount. If a business cannot rehire an employee or an equally qualified employee, there is still a chance that the loan can be forgiven. This area is still unclear, so we are still waiting for SBA guidance.
- If the loan is not forgiven, then the loan must be repaid over 5 years. This is an increase from 2 years. The interest rate remains the same at 1%.
To forgive a loan, the business owner must fill out the loan forgiveness application and submit to the lender. The lender reviews it, then submits to the SBA for final approval. This process could take up to 5 months.
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Update 5/12/2020:
Now that most businesses have already received their PPP funds, the focus is on how to get this loan forgiven. If you qualify, but have not applied yet - apply now! The mad rush is over and there's still about $1 billion that has not yet been allocated.
Authorized use of PPP are broken down in 6 categories:
- “Payroll costs” -
- Salary (up to $100K), wage, commission, or similar compensation - limited to employees whose primary residence is in the US
- Payment of cash tip or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment required for the provisions of group health care benefits, including insurance premiums
- Payment of any retirement benefit
- Payment of State or local tax assessed on the compensation of employees
- Mortgage interest payments
- Rent payments
- Utility payments
- Interest payments on any other debt obligations that were incurred before 2/15/2020 (not included in calculation of forgiveness amount)
- Refinancing EIDL loan made between
Interestingly, Only 1-4 count towards forgiveness. To have the entire loan forgiven, "1" must be at least 75% of the loan and "2-4" must be the rest of the loan AND the number of FTE (full-time equivalent) must remain at least the same as either 1/1/2020-2/29/2020 or 2/15/2020 - 6/30/2020. The forgiveness amount will be prorated based on the change in FTE.
There will be lots of questions regarding how to forgive this loan. While most businesses will turn to their banks, recognize that PPP may have been the first SBA loan for your bank. Therefore, anticipate that there will be a learning curve as the banks learn how to navigate the SBA. Here are a some best practices on how to mange this loan:
- Document in your Corporate Minutes the need to apply for this loan.
- Best to open a seaprate bank account for the the PPP funds or at least a separate account to record and track expenses internally.
- Keep track of receipts (i.e. mortgage, rent, utility, etc.).
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Update 4/28/2020:
The second wave of PPP loans for $310 billion started to process yesterday morning at 10:30am EST. As expected, there have been some changes to better expedite the process and also some hiccups along the way.
After suffering backlash from various large companies accepting multi-million dollar loans, applications from publicly traded companies will now likely be denied. Additionally, the Secretary of Treasury has said that any company who receives more than $2 million in PPP loans will be audited. Previously, large banks were batch submitting applications and in doing so, put smaller banks at a disadvantage. This time around, all applications need to be processed individually. To further minimize any unfair advantages for large lenders, the maximum loan amount per lender is capped at $60 billion.
Since there is such a high volume of applications, technical difficulties appear to be common. Many banks are getting locked out or timed out messages. By the end of the first day, only 100K applications from 4K lenders were submitted to the SBA.
Keep in mind that it's likely the SBA will reject duplicate applications. While it makes sense to cast a wide net, once an application has been officially submitted to SBA, it may be beneficial to withdraw applications with other lenders.
Realistically, it's unlikely for a business who isn't already in queue to receive PPP funds from this second round of funds. However, there will likely be additional funding since companies who choose to return their funds from the first wave have a deadline of 5/7/2020 to do so. And legislators have commented on a possibility of a third wave.
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Update 4/24/2020:
President Trump signed the $484 billion measure to aid business owners and hospitals/testing. Most of the funding, $310 billion will go towards the Paycheck Protection Program. The terms of the PPP will likely remain the same since it's an amendment to the CARES Act that was initially passed 3/27/2020.
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Update 4/22/2020:
The initial $349 billion for the Paycheck Protection Program (PPP) was officially depleted on 4/16/2020. While 1.6 million applications were approved, there were at least 700K businesses still in queue, in addition to businesses that haven't applied yet. Yesterday, the Senate agreed on a deal to amend the CARES Act to provide for another $310 billion towards the PPP. Next step - the House will vote on this tomorrow and is likely to pass. Unsurprisingly, this passed the House almost unanimously. Onto the President's desk for signing, which could be signed as early as tonight.
The stakes seem higher now because it is unlikely there will be a third injection of cash and the funds are expected to last only a few days. All terms are expected to remain the same as this is an amendment to the CARES Act that initially allocated $349 billion.
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Update 4/16/2020:
As of the afternoon of 4/15, about 90% of the $349 Billion allocated for the Paycheck Protection Program have already been allocated. The popularity of this program has far exceeded the amount that's available. There are currently 700K business applications in limbo. While there is bipartisan support for increased funding, there has been difficult reaching a compromise, leaving the future of these loans in jeopardy.
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On 3/27/2020, Congress passed the CARES Act, the largest economic stimulus plan ever at $2.2 Trillion. The intent is to help everyone who has been affected by COVID, effectively everyone.
$349 Billion has been allocated to the Paycheck Protection Program (PPP):
- This program is a loan that can be forgiven if certain qualifications are met.
- No underwriting requirements since the only requirement is to have been affected by COVID - which is everyone.
- Applies for any employer under 500 employees, including sole proprietorship (with only 1099 income).
- The loan amount is 2.5x your average payroll expense (prior to 2/15/2020). Highly compensated employees are capped at $100,000. You'll need to provide a year's worth of 941 (for W2 employees) and/or 1096 (for 1099 independent contractors).
- The interest rate is fixed at 1% over 24 months, with a 6 month deferral period. So essentially, you'll have to pay the unforgiveable portion of the loan back within an 18 month period.
- Once you receive your loan, you have 2 months to spend at least 75% of the loan on payroll AND keep your employee headcount the same. You can terminate an employee, but you must hire another one to keep the total headcount the same. As long as you meet those conditions, the loan will be forgiven.
- Applying for or accepting the loan does not impact credit score. There is no credit pull for this process.
- The amount that is forgiven will be taxable. However, if you spend the entire loan on payroll, the expense is deductible and the net effect is zero.
- Apply through any 7A approved SBA lender.
Remember that the amounts have already been allocated to each program. Therefore, this is on a first come first served basis. However, Congress seems very willing to spend whatever they need to stimulate the economy. So, it's possible they will increase the amount allocated to include more employers and/or the situation continues to get worse.
Depending on your business status, banks will start to accept PPP applications starting at 12am:
- 4/3/2020 for businesses
- 4/10/2020 for sole proprietors
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.