Are You Protected Under the Paycheck Protection Program?Pat Fontana
In response to the economic struggles faced by many small businesses during the early days of the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 27, 2020. The Paycheck Protection Program (PPP) was enacted as part of the CARES Act. Though the official application period for a PPP loan is now closed, it is important to understand whether you are protected under the Paycheck Protection Program.
Realizing that small businesses continued to struggle and that the requirements for PPP loan forgiveness may have been too stringent given the ongoing challenges related to the pandemic, the PPP Flexibility Act was passed on June 5, 2020. This act provided greater flexibility and more time to maximize loan forgiveness. For example, Section 3(a) of the Flexibility Act amended the definition of ‘‘covered period’’ for a PPP loan from ‘‘the period beginning on February 15, 2020 and ending on June 30, 2020’’ to ‘‘the period beginning on February 15, 2020 and ending on December 31, 2020.’’
PPP Loan Details
As a small business owner, you want to be sure you are protected under the Paycheck Protection Program and will not incur more debt than you can afford during the pandemic. If you follow the Small Business Administration (SBA) guidelines, your PPP loan can be forgiven. Keep in mind that:
- PPP loans have an interest rate of 1%.
- Loans issued prior to June 5 have a maturity of 2 years. Loans issued after June 5 have a maturity of 5 years.
- Loan payments will be deferred for six months.
- No collateral or personal guarantees are required.
- Neither the government nor lenders will charge small businesses any fees.
The SBA states that the loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (at least 60% of the forgiven amount must have been used for payroll).
Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease. The loan forgiveness form and instructions include several measures to reduce compliance burdens and simplify the process, including:
- Options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles
- Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the 24-week period after receiving their PPP loan
- Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness
- Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30
- Addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined.
PPP Loan Repayment Terms
As long as you submit your loan forgiveness application within ten months of the completion of the Covered Period, you are not required to make any payments until the forgiveness amount is remitted to the lender by SBA. If the loan is fully forgiven, you are not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, you must repay any remaining balance due on the loan on or before the maturity date of the loan. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount.
You are responsible for paying the accrued interest on any amount of the loan that is not forgiven. The lender is responsible for notifying you of remittance by SBA of the loan forgiveness amount (or that SBA determined that no amount of the loan is eligible for forgiveness) and the date on which your first payment is due, if applicable.
Eligible Payroll Costs
Payroll costs include all forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay. Note that forgivable cash compensation per employee is limited to $100,000 on an annualized basis. You will use the gross amount before deductions for taxes, employee benefits payments, and similar payments, or the net amount paid to employees.
The compensation of self-employed Schedule C (or Schedule F) individuals, including sole proprietors, self-employed individuals, and independent contractors, that is eligible for loan forgiveness is limited to 2.5/12 of 2019 net profit as reported on IRS Form 1040 Schedule C line 31 (or 2.5/12 of 2019 net farm profit, as reported on IRS Form 1040 Schedule F line 34). Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness; health insurance and retirement expenses are paid out of net self-employment income.
CLEAR VIEW BUSINESS SOLUTIONS CAN HELP KEEP YOUR SMALL BUSINESS PROTECTED
The rules and regulations of the Paycheck Protection Program (PPP) are complicated. The experts at Clear View Business Solutions can help make sure you are protected as you determine how to qualify for PPP loan forgiveness. Learn more about how we can help you and your business by contacting Clear View Business Solutions to speak to our team about our services. Give us a call at (520) 544-0177.