Sean Manning is CEO and Founder of Payroll Vault Franchising LLC, as well as a CPA, and Thought Leader in the Financial Field.
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The Payroll Protection Program (PPP) has caused a good deal of confusion for entrepreneurs and small-business owners as it has evolved — and as deadlines have changed. Most recently, the application deadline was extended to August 8, 2020.
In fairness to government entities making the program possible, the need for the loans arrived in a flash, with the pandemic changing the game for so many businesses. The program went into place quickly, so clarifications and modifications have come along since its inception.
The most notable modification, the Paycheck Protection Program Flexibility Act (PPPFA) became law on June 5, reducing restrictions on how PPP money may be used and expanding the time window in which businesses may spend the loan.
With a lot of misinformation floating around, let's take a look at some basics of the program in its current state.
How much must be spent on payroll?
Originally, in order for the PPP loan to be eligible for forgiveness, the program required operators to use at least 75% of the loan on payroll costs.
The PPPFA reduced that threshold to 60% spent on payroll costs, while the remaining 40% may be used on nonpayroll costs.
What constitutes an allowed payroll cost?
Payroll costs (the 60%) allowed have remained the same in definition since the PPP started and may include:
• Salary, wages, commissions, or tips (up to $100,000 on an annualized basis per employee)
• State and local taxes assessed on compensation
• Costs related to group health care benefits that continue during periods of paid sick, medical or family leave, as well as insurance premiums.
The remaining 40% may go toward rent, utilities, interest payments on a mortgage and/or interest on any other debt incurred before February 15, 2020. The funds may not be used to make payments on principal debt.
How long does the business have to spend the funds?
The PPPFA changed the original PPP requirement that the borrower had eight weeks from the loan origination date to use the funds. Now, the covered period is the earlier of 24 weeks after the date the borrower receives the funds or December 31, 2020.
During the covered period, the borrower must maintain a headcount of employees and compensation levels. The extension of the period means the borrower must maintain these records longer.
However, borrowers who received a PPP loan before the enactment of the PPPFA still may elect the shorter eight-week period for purposes both of spending the funds and maintaining these records.
How much can be forgiven?
How much can be forgiven first depends on whether the funds have been used for the approved purposes and then on certain criteria:
• The headcount of full-time employees must not be reduced from the business's average monthly levels during 2019 or during the past 12 months.
• If the business opened in the second half of 2019, it can use average headcounts from January 1, 2020, to February 29, 2020.
• If the business is seasonal, it can determine monthly averages using numbers from February 15, 2019, or March 1, 2019 to June 30, 2019. (Note: this could change if the new August 8 deadline bill is made law.)
Failure to rehire employees
The PPP, when it launched, required that when an employer received PPP funding and subsequently reduced its number of employees during the covered period, the amount eligible for forgiveness would be reduced proportionately. But, if the employer rehired the employees by June 30, 2020 full forgiveness would still apply.
The deadline has now been extended under the PPPFA from June 30, 2020, to December 31, 2020.
Further, the PPFA allows borrowers to treat unfilled positions as if they were filled by the new December 31, 2020 deadline. The PPPFA adds two new exemptions:
• First, the forgiveness reduction will not apply if the borrower, in good faith, can document an inability to rehire the same or similar employees that were in place as of February 15, 2020.
• Second, the forgiveness reduction will not apply if the borrower, in good faith, can document an inability to return to the same level of business activity before February 15, 2020, due to Covid-related social distancing, sanitation and other safety requirements or guidance from the Centers for Disease Control, Health and Human Services, or Occupational Safety and Health Administration issued between March 1, 2020 and December 31, 2020.
When must repayment be made?
Initially, under the PPP, the borrower could defer loan payments for six to 12 months, depending on what the lender and borrower agreed. Now, under the PPPFA, the borrower may defer payment until the date the borrower remits the amount of loan forgiveness to the lender.
However, there is a catch. If the borrower does not apply for loan forgiveness within 10 months after the end of the covered period, then the payment deferral window stops at the end of that 10 months or December 31, 2021, whichever comes first.
Deferring payroll taxes
Another beneficial change since the inception of the PPP regards the deferral of payroll taxes. At first, employers whose loans were eligible for forgiveness could not defer payment of federal payroll tax, but under the PPPA, they can do so, under the CARES Act.
Requirements are always subject to further change and clarification. Small businesses can navigate the murky waters of PPP loans, as well as the myriad laws and regulations that affect payroll in general, by following updates shared on official government websites.
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