In Less Than Five Weeks PPP Funding Disappears: What You Need to Know
As of June 30, 2020, there was more than $130 billion of Paycheck Protection Program (“PPP”) funding still remaining for small businesses. The window for small businesses to apply for PPP funding is dwindling and now officially ends on Saturday, August 8th. While it has been a bumpy road in understanding the congressional law changes and Small Business Administration (SBA) constantly changing guidance, clearer and more business favorable terms have developed. Please read the following before letting the August 8th PPP application deadline pass by.
What is the Principal Loan Amount that I Could Receive?
Provided you fall under the SBA expanded definition for PPP eligibility, the principal balance that can be borrowed is generally 2.5 times 2019 monthly payroll costs up to $10 million. Payroll is generally defined to include:
- Employee gross payroll that does not exceed an excess of an annual salary of $100,000 (maximum $20,833).
- Employer contributions to defined-benefit or defined-contribution retirement plans.
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums.
- Payment of state and local taxes assessed on the compensation of employees (i.e. New York State Unemployment Insurance).
- What if the business doesn’t have payroll? Don’t forget that independent contractors and sole proprietors are also eligible for the PPP loan. They can calculate the maximum amount of loan they can borrow by utilizing the number reflected on line 31 of their 2019 Schedule C (limited to $100,00) divide by 12 and multiply by 2.5.
Why Would I Want to Take a PPP Loan?The major advantage of PPP funding is that the entire debt could be forgiven provided that the funds are utilized on designated expenditures during a specific time period. Based on the original CARES Act and SBA guidance, in order for businesses to receive full debt forgiveness they were required to utilize 75% of their PPP funding on payroll and 25% on non-payroll expenses such as covered mortgage interest, rent, and utilities over an 8-week period. Many businesses decided not to take the PPP funding under those conditions as they were not paying employees due to governmental health restrictions.
However, on June 5th the President signed into law the Paycheck Protection Program Flexibility Act which altered how the PPP funding could be utilized and extended the time period for utilizing the PPP funds. Under the existing law, in order to receive full debt forgiveness only 60% of the PPP funding has to be utilized on payroll, and 40% can be used on non-payroll expenses as listed above. Even more important, the time in which businesses can utilize their PPP funding in order to receive debt forgiveness has been extended to 24 weeks.
For example, if a business obtains a $500,000 PPP loan on June 30, 2020, they will have until December 14, 2020 (168 days) to spend at least $300,000 on payroll and $200,000 on non-payroll expenditures. If they are unable to reach $300,000 of payroll, the SBA still allows a portion of the PPP funding for debt forgiveness. For example, if the business only spent $250,000 on payroll, they would be allowed a maximum debt forgiveness amount of $416,667 (250,000/60%).
Other items that would have to be tracked during the 24-week time period would include full-time equivalents (FTE) and reduction of salaries by more than 25% for employees who made less than $100,000 in 2019. If the FTE’s during the 24-weeks is less than the FTE equivalent for specific testing periods in 2019 or 2020, there could be a further decrease in debt forgiveness. Similar rules exist if you have not restored employee salary reductions during the 24-week period. However, there are safe harbor tests that could allow the FTE or salary reduction to be ignored.
What Happens if I Don’t Get My Full PPP Debt Forgiven?
For any PPP principal balance that remains after debt forgiveness, the Paycheck Protection Program Flexibility Act extends the loan maturity to five years for loans taken after June 5, 2020, and the interest rate remains at 1%. The Act also extended the deferment of principal, interest, and fees related to PPP funding for 10 months after the last day of the 24-week time period.
So What Do I Do Now?
We strongly encourage any business that is eligible for PPP funding who has not already applied to reach out to their bank immediately. If they need help identifying a bank to start a relationship with, please do not hesitate to contact us. It is important for small businesses to take advantage of this government assistance in order to ensure financial stability now and potential need throughout the remainder of the year if COVID restrictions should resurface in the fall.
As always, The Bonadio Group is here to help guide you through this process and ensure you maximize your debt forgiveness. Click here to get in touch with us for assistance today.
The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.