In these unprecedented times, entrepreneurs are fighting to keep their businesses afloat and their employees paid. One of the hoops many small business owners are working to navigate is the PPP Loan and its forgiveness provisions. As a reminder, the Paycheck Protection Program (PPP) Loan was introduced by the US. Department of Treasury with the main objective of incentivizing small businesses to keep their employees on payroll during the economic shutdown COVID-19 caused. 

 

While the program has good intentions of helping small businesses weather the storm and keep employees working, a lot of ambiguity was left in what was actually deemed “qualified expenses” under the PPP program – which can have a tremendous impact to your bottom line. While the funds were distributed as loans that must be paid back, if certain guidelines are met these loans can become forgivable. The ambiguity and lack of guidance from the Department of Treasury on how loans will be treated has left business owners confused and anxious about the PPP Loan Program. Let’s discuss the guidelines of the program and what the next stages will be for entrepreneurs navigating the process. 

 

Updates given on June 5th, 2020 for PPP loans

There were a few major changes that were clarified by the Small Business Association and Treasury Department in the latest guidance given on June 5th, 2020, such as how much must be spent on payroll to have a loan forgiven, how long the “covered period” is for loans to be eligible for forgiveness, and a change in the maturity of PPP loans. Let’s take a look at each of these and how they may apply to you and your business. 

 

60% of Loan on Payroll for Forgiveness Eligibility:

It’s in the name, “Payroll Protection Program” (PPP). The main purpose of these loans is to cover the employees of small businesses who were adversely affected by the Coronavirus Pandemic of 2020. However, a lot of frustration has been expressed by business owners who have applied for these loans and argue there are many more expenses they’re paying on top of payroll that aren’t factored into the PPP Loans such as rent, utilities, etc. Under the initial guidance, 75% of the loan must be used to maintain full time employees at no less than 75% of their pre-pandemic compensation levels.  

The most recent updates as of June 5th, 2020 have reduced this number to only having 60% of the loan being used to cover payroll with the other 40% now available to use towards other overhead expenses. There was some concern at first over the language used to define the new 60% rule; it appeared partial loan forgiveness would no longer be available after the June 5th update. On June 8th, the Treasury Secretary and Small Business Association (SBA) Administrator issued a joint release to clarify that partial loan forgiveness for small businesses would still be eligible if less than 60% of the PPP loan was used for payroll. 

 

Loan Maturity:

When the PPP Program was created, the guidance stated that loans were eligible to be paid back up to a 10–year term period. Under the initial guidance however, loans were being set at a 2–year term. Updated language given on June 5th, 2020 changed the term of these loans from 2 years to 5 years. Additionally, while loan terms are set at 5 years, banks have the option to extend the term of the loan at their discretion up to the 10–year time frame if they choose to do so. 

 

Covered Period:

The “covered period” references the period in which forgiveness of loans are eligible. The covered period starts from the time funds are received, and under the original format lasted 8 weeks. During this time frame, business owners must use all the funds of the loan to be eligible for forgiveness and do so in a way that is centered on the 60% rule for payroll as previously discussed. 

While the covered period was originally 8 weeks ending on June 30th, 2020, new guidance has extended the covered period to 24 weeks. For people who received PPP loans before June 5th, 2020 you can choose which covered period you want to fall under – and there are advantages to both. The extension to 24 weeks means that business owners must keep all full–time employees on payroll without reduction below 25% of salary for the full 24-week period, rather than the old guidance which required only an 8-week duration. For some businesses, it might make more sense to keep the old 8-week duration as it’s less time they must float their payroll costs if the option is available. 

 

Conclusion:

The PPP Loan program has great intentions and is critical to stemming some of the negative affects the COVID-19 Pandemic has caused. With an initial $349 billion in funding under the CARES Act, and another $310 billion being issued in a second wave of funding, there is a lot riding on the line for business owners to understand how the PPP Loan program works and if they’re eligible for forgiveness. A lot of businesses have been returning their PPP loans or have stopped requesting loans, as evidenced by the nearly $130 billion still left in the coffers of the second round of funding, mostly due to the lack of clarity surrounding how the program works. 

It will be critical for small businesses to stay up-to-date on guidance from the Treasury Department and Small Business Association as the provisions of the PPP loan come into clearer focus. This program, while murky, can provide a huge boost to businesses who have been adversely affected during these trying times. DPWM will make sure to keep you up to date as new guidelines and clarification is given on the mechanics of the PPP program.