PPP Repayment Guidance – Revised and Final Rules

Finally, PPP Repayment guidance is here! The best news is that the Paycheck Protection Program (PPP) loans are 100% forgiven if you meet certain criteria. The even better news is that final guidelines bring less stringent requirements for easier compliance. As of June 12, 2020, the Small Business Administration released New and Revised Guidance Regarding the Paycheck Protection Program. This is the Paycheck Protection Program Flexibility Act (PPPFA).

You can still submit a PPP application. The new deadline to apply for a PPP loan is now August 8, 2020. If you haven’t yet got funds, and you need them – there are still a few days left.

View a list of lenders participating in the Paycheck Protection Program by state.

Do You Want Your PPP Repayment Over 2-years or 5-Years?

PPP has gone through multiple regulatory changes. These changes affect what funds can be used for and the period of time funds can be spent. One of the most important dates is “the maturity date of the loans based on when the SBA loan number was assigned.” If the SBA loan date is on or after June 5, 2020, the loan automatically has a 5-year maturity.

If the SBA loan date is before June 5, 2020, the loan automatically has a 2-year maturity. Borrowers with a loan date after June 5 can only use the 24-week testing period to qualify for forgiveness. However, if the borrower and lender agree, you can extend loans with a 2-year maturity to a 5-year maturity. These borrowers can decide whether to elect to use an 8-week or a 24-week expenditure period. Many borrowers are not aware they can extend their loans. Therefore, it’s a good idea to talk to your lender and be on the same page. Most borrowers have a 2-year maturity date.

If all the changes and variables are confusing to you, take comfort in the fact that many CPAs are also finding it difficult to keep up and keep it all straight. Remember, this regulation is very new.

Items to Consider with PPP Repayment

Businesses with employees may prefer the 5-year extension because it provides greater flexibility for borrowers to qualify for loan forgiveness. However, Solo 401k businesses without employees should not have to be concerned with any requirements to maintain employment for up to 5-years. If you’ve already maximized the forgiven amount by paying your own salary, you can also be done with the loan in 2-years instead of continuing the accounting headache for 5-years.

But, also consider possible financial ramifications. Keep in mind that the purpose of a PPP loan is to use the forgivable portion for payroll, rent (or mortgage), and utilities. The lender converts any unforgiven portion to an SBA loan with a 1% interest rate. The unforgiven portion is probably better extended to 5-years maturity.

A small business loan can be difficult to obtain under any circumstances. In this instance, the 1% interest rate is incredible. The 2-year versus 5-year maturity will make a big difference in the monthly payments. If you convert a $50,000 to a 1% SBA loan, the monthly payments will be slightly over $2,100 a month for 2-years. That number lowers to less than $860 a month for 5-years term. Lower monthly payments could be crucial if the economic recovery is slow to happen.

PPPFA Forgiveness Lowers Payroll Portion From 75% to 60%

Before the PPP Flexibility Act, PPP borrowers had to spend at least 75% of loan proceeds on payroll costs. They also needed to spend up to 25% on permissible non-payroll costs. Failing to meet the 75% payroll threshold meant a reduction in the borrower’s forgiveness amount. An important PPPFA modification is the ability to spend up to 40% on permissible non-payroll costs and reduces the payroll potion to 60%.

Quickly noticed in the new PPPFA language was the lack of wording to allow partial loan forgiveness if the borrower uses less than 60% of the loan amount for payroll (PPP had partial forgiveness in the 75% version). The lack of this language became known as the “cliff issue” or the “cliff rule.” After the PPPFA was enacted, Secretary of the Treasury Mnuchin assured Congress that borrowers that fail to spend 60% of their loan on payroll costs will continue to be eligible for partial loan forgiveness. The formula gets a little complicated but it does exist.

Other Important Factors About the Revised and Final PPP Rules

Does your business does have employees? Then, you had to rehire them before June 30, 2020. The PPPFA extends the deadline for rehiring and restoring wages and salaries to December 31, 2020.

The PPPFA did not change what are forgivable payroll and non-payroll costs. Payroll costs still include:

• Salary, wages, commissions, or tips (max of $100,000 annually per employee).
• State and local taxes based on compensation.
• Costs related to continuing group health care insurance premiums and benefits of paid sick, medical or family leave.

Allowable non-payroll costs are:

• The interest portion of mortgage payments (but not principal).
• Rent (including rent under a lease agreement).
• Utilities.
• Interest (but not principle) on other business debt incurred before February 15, 2020.

When You Can Apply for PPP Loan Forgiveness

The original legislation does not have a specific deadline for when PPP loan forgiveness must be applied for. However, the PPPFA suggests the deadline is 10 months after the last day of the covered period. The language suggesting this is… [borrowers] “shall make payments of principal, interest, and fees on [PPP loans] beginning on the day that is not earlier than the date that is 10 months after the last day of such covered period.”

Importantly: if the borrower does not apply for forgiveness before the end of the 10-month loan forgiveness application deadline, he or she will be required to make payments of principal, interest, and fees on the full amount of the PPP loan.

Similarly, there is no language preventing the borrower from spending all of the loan proceeds early and applying for loan forgiveness before the end of the covered period. The benefit of doing this earlier is to clear all of your PPP liabilities from your accounting records as soon as possible.

On June 17, 2020, the SBA and Treasury released an updated version of SBA Loan Forgiveness Application Form 3508 (and related instructions). This version includes the changes to the PPP anticipated by the PPPFA. Also released is a new and simplified forgiveness application, SBA Loan Forgiveness Application Form 3508EZ (and related instructions). Most Solo 401k account holders should be able to use the simplified version.

This is nothing more than a summary of the PPP and PPPFA revised rules, forgiveness requirements, and repayment process. This is not a substitute for tracking your own expenses. Know when each must be paid to qualify for forgiveness, which ones can be forgiven, and any alternatives that you might have.

More Resources

Looking for more information on the PPP? Visit these previous blogs:

• Blog post: PPP Loans and the Solo 401k
• Article: PPP Round 2 Approved
• Blog post: PPP for Sole Proprietor
• Article: PPP Loan Forgiveness and the Solo 401k
• Blog post: PPP Loan Extended