Got a Paycheck Protection Program loan? 5 New Things to Consider to Maximize Forgiveness

If you applied for the Paycheck Protection Program in early April, you’ve been on a quite a rollercoaster.

In May, Congress recognized this program wasn’t working for us small business owners. As a result, they passed the Paycheck Protection Program Flexibility Act in early June. The new law has extended the covered period, clarified several forgiveness provisions, and given us more time to repay any unforgiven loan balance.

However, the timing of these new rules left previous loan recipients with even more uncertainty over how to use loan funds during two critical weeks for those on the 8-week use program.

As of June 16, 2020, the SBA has updated its guidance and two forgiveness applications, the EZ Forgiveness Application and Full Forgiveness Application.

Read on to find out how these rule changes will help you use all of your loan funds and maximize your forgiveness.

One: You can choose either an 8-week or a 24-week loan period.

If you’ve kept on all of your employees and would like to restructure in July, the 8-week period will still be your best option.

In most other cases, the 24-week period will be better for you.

If you have a business that hasn’t yet been able to reopen, you can choose the 24-week period and begin to use your loan funds when you’re ready to reopen. You won’t be penalized for any COVID-19 restrictions that reduce your ability to bring back your staff by the end of the covered period.

If you’re in the 24-week camp and not affected by COVID-19 closures, you have until the end of your covered period or December 31, 2020 to restore your staffing levels. You can pay an individual employee cash wage compensation of up to $46,154 over this period.

You can choose the start date of your covered period as either your loan origination date or the first day of the next pay period. For all of these options, you will advise your lender of your choices on your forgiveness application form. There is no need to actually opt-in with any paperwork. You choose and inform your lender.

Two: If you’re self-employed or a business owner, you can pay yourself an additional “payroll replacement” amount.

If you’re self-employed or a business owner, the 24-week period allows you to give yourself 2.5 months of owners payroll replacement, versus 8 weeks under the 8-week plan capped at $15,385.

If you’re a one-person business without many expenses, this will be your best option for using most of your loan to pay yourself. Your 24-week payroll replacement is 2.5/12 * 2019 Schedule C income, capped at $20,833. For most solo owners, the new 2.5 month calculation will allow you to use 100% of your funds toward payroll expense.

One more note for the self-employed – the updated interim rule of June 11 clarifies that you cannot use these funds to contribute to your own retirement program. Only employer-sponsored programs are eligible.

If you decide to opt into the 24-week period, be aware that any unforgiven portions will include more months of accrued interest. It’s in your best interest to understand any unforgiven portions and prepay those as early as possible.

Three: You have more flexibility to use the funds – up to 40% for qualified non-payroll expenses.

The PPP Flexibility Act changed the 75/25 ratio of payroll to non-payroll expenses to a 60/40 ratio. As long as you use 60% of your loan proceeds for qualified payroll expenses, you are eligible for full forgiveness. If you use less than 60%, the updated interim rule clarifies that your forgiveness will be reduced proportionally.

Keep in mind, eligible non-payroll expenses are mortgage interest, rent or lease payments, or utility payments that were established and paid by the business on or prior to February 15, 2020.

Four: You may not need to fill out that cumbersome employee Schedule A Worksheet and safe harbor calculation. 

A new version of the PPP Forgiveness Application – the EZ application – allows three groups to skip over the Schedule A worksheet and simply self-certify that you maintained your payroll and headcount. 

You can use the EZ form if you:

  • Are self-employed and have no employees; OR
  • Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; OR 
  • Experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

Let’s unpack that a bit. 

If you’re self-employed or a one-person company, the EZ form removes all the sections you skipped in the previous version. You’ll simply enter your owners payroll replacement pay as the qualified payroll expense amount.

If you kept all of your employees with at least 75% of their pre-COVID wages and no hourly reductions, your life gets considerably easier. You can simply self-certify that you did not reduce wages or hours. You no longer need to create a ledger of all your employees for the safe harbor calculation. 

Or, if you were unable to operate your business at pre-COVID levels between February 15 and the end of your covered period due to government-mandated closures, but you paid those who could resume at least 75% of their pre-COVID wage rates, you would also be able to self-certify your forgivable use of funds without detailing your headcount or safe harbor calculation. Even with staff reductions, you must use 60% of funds for qualifying payroll expenses to qualify for full forgiveness.

On the EZ application, you’ll list out your summary payroll costs, business mortgage interest payments, business rent or lease payments, and business utility payments. You’ll add that amount up and compare it to the total PPP loan amount and the updated 60% payroll requirement. Your forgiveness amount is still the smallest of the 3 calculations.

If you’re keeping categorized records of your PPP spending, using the EZ form should save you considerable time. 

Five: You may have up to five years to repay unforgiven portions, and get a longer grace period before your first payment.

For any loans originated after June 5, 2020, the terms have been updated by default to give you five years to repay, versus the original two. If your loan was originated prior to June 5, you and your lender may agree to a longer repayment period.

Additionally, with the longer 24-week covered period, it no longer makes sense that you would start repaying your loan at the six month mark. Instead, your first repayment has been delayed until your loan forgiveness has been determined by your lender. You also have up to ten months from the end of your covered period to apply for forgiveness.

With that in mind, your forgiveness assessment might take place as much as 18 months after your loan originated. If you are concerned about interest repayment, consider prepaying your known unforgiven portions (like your EIDL Advance Grant) as soon as possible in your loan period.

If you’re considering applying for a PPP loan, $130 billion in funds are still available as of our publication date. You’ll have to act fast, though – the program closes for good on June 30, and the more in-demand lenders have set end dates beginning from June 19 for taking new applications. You can work with any lender that’s still taking applications, anywhere in the U.S.

For more on these updated rules, check out the replay of our June 5 webinar, PPP: The Goat Rodeo ContinuesWe review in detail the impacts of the PPP Flexibility Act and review step-by-step how to complete the Full Forgiveness Application.

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