PPPFA Update

July 7, 2020

Dear Clients & Friends,

In our last article, we promised to update readers as soon as we could in order to clarify certain ambiguities in the Paycheck Protection Program Flexibility Act (PPPFA). We were especially concerned about an apparent ‘cliff edge’ that would result in no loan forgiveness at all, if borrowers spend less than 60% of their loan on payroll. The Final Interim Rules (IFR) provided welcome guidance on this and other matters.

We’re pleased to say it’s great news! There is no cliff edge. For full forgiveness, borrowers must spend at least 60% of their loan on payroll costs and the rest on other eligible expenditure. However, if you fall short of the 60% amount, partial forgiveness is still available. The forgivable amount is calculated by dividing the amount spent on payroll by .60. For example, if you used your $100k PPP loan for payroll costs of $51k and non-payroll costs of $49k, the $51k is divided by .60 to give a new total forgivable amount of $85k. This new partial forgiveness is a lot better than nothing.

The good news does not stop there. Loan application for funding has been extended! With over $129 billion remaining, the Small Business Administration (SBA) will continue to take and approve applications until August 8th, 2020. As we mentioned previously, the loan forgiveness covered period has also been extended from 8-weeks to 24 weeks, and with the same rule that expenses must have been paid or incurred during that period. Prepayments, aside from mortgage interest, are also allowed under the new expansion.  Businesses that took out loans before June 5th can elect to stick with the 8-week period.

How will the new IFR affect YOUR business forgiveness calculation?

Crucially, this extension means that self-employed individuals with no employees can now have 100% of their loan forgiven (capped at $20,833 for 24 weeks), whereas previously it would have been impossible to meet the minimum payroll requirement in 8-weeks.

For Self-employed individuals (Sch C or F files and General Partners), since retirement and health insurance contributions are included in net self-employment income, they cannot be separately added to the payroll calculation.

For non-owner employees, it has effectively increased the amount of payroll compensation eligible for forgiveness for each one of your employees from $15,385 to $46,154 in addition to health insurance and retirement plan expenses!

For owner-employees (S and C Corp Shareholders.), SBA provided guidance on the forgiveness compensation, confirming and limiting it to:

  • lesser of 250% average monthly 2019 employee cash compensation, or the cap of $15,385 for 8 weeks and $20,833 for 24 weeks, and
  • employer retirement and health care contributions made on the behalf of each shareholder. (Please note: S Corp owners can no longer include health insurance costs in the forgiveness calculation since it is already reported as part of their wages.)

To further reduce the burden on employers, and in addition to the full time employee (FTE) exemptions calculation mentioned in an earlier article, SBA is allowing business to exclude in their FTE a reduction in employees for business that were directly or indirectly effected due to state and local order closures.  (It’s important to note that you will be required to include specific documentation backing up your exemption with your forgiveness application.)

All business are able to apply for forgiveness at the earlier of the end of their covered period or when funds are exhausted. For amounts that are not forgivable, loans approved after June 5th must now be repaid within five years. Loans approved before that date have the original two-year maturity unless the borrower and lender agree to extend it.

A final piece of good news—especially for those who don’t like to do paperwork for fun! —is that a new EZ application form is now available. This is a simplified short-form PPP application requiring fewer calculations and less documentation. Borrowers eligible to use this form include:  

  • self-employed individuals with no employees,
  • employers who did not reduce employee wages by more than 25% or have any reduction in employee hours, and
  • employers who both experienced reduction in business activity related to health directives due to COVID-19 and did not reduce employee wages by more than 25%.

With much of the country starting to create a new “normal,” these recent clarifications are very welcome. We hope this will lift some of the burden for businesses working hard to recover from a very difficult few months. And, as always, if we can be of further assistance by connecting you with our banking relationship for funding, helping you complete your forgiveness application as banks will start accepting them, or have additional questions – we are here to assist you.  

Stay safe and healthy,

The CJBS Team