June 5, 2020
On June 5, President Donald Trump signed legislation to address restrictions on the Small Business Administration’s (SBA) Paycheck Protection Program (PPP).
While further guidance and clarification from the SBA and Treasury is likely, here is a summary of the provisions that appear in the Paycheck Protection Program Flexibility Act.
Specifically, the law:
- Extends the covered period during which the loan may be used for forgivable expenses from eight weeks following disbursement of the loan to 24 weeks from loan disbursementor Dec. 31, 2020, whichever is earlier. Borrowers who received loans before June 5 may elect to continue using the eight-week covered period.
- Lowers the amount that must be spent on payroll costs from 75 percent to 60 percent. SBA and Treasury issued a statement that the new 60 percent threshold is not a cliff, meaning that if a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.
- Extends the period in which employers may rehire or eliminate a reduction in employment, salary, or wages that would otherwise reduce the forgivable amount of a PPP loan to Dec. 31, 2020. However, the forgivable amount will be determined without regard to a reduction in the number of employees (compared to Feb. 15, 2020) if the recipient is (1) unable to rehire former employees and is unable to hire similarly qualified employees by Dec. 31, or (2) unable by Dec. 31 to return to the same level of business activity that existed before Feb. 15, 2020, due to compliance with federal requirements or guidance related to COVID-19.
- Replaces the six-month deferral of payments due under PPP loans with deferral until the date SBA pays the lender the amount of loan forgiveness. If a borrower fails to apply for loan forgiveness within 10 months after the last day of the covered period for forgiveness, the borrower must begin to make payments of principal, interest, and fees on its PPP loan.
- Establishes a minimum maturity of five years for new PPP loans as opposed to the current two-year maturity date. The five-year maturity takes effect on the date of enactment and will apply to any PPP loan made on or after June 5. Lenders and borrowers, however, may mutually agree to modify the maturity terms of prior-disbursed PPP loans.
- Eliminates a provision that makes PPP loan recipients who have PPP debt forgiven ineligible to defer payroll tax payments.
- The final date to obtain a PPP loan remains June 30, 2020.
This law will likely be subject to additional guidance by SBA and Treasury. Small-business borrowers should have a firm understanding of the provisions above and any related guidance to ensure they meet the criteria for loan forgiveness.
May 27, 2020
Thank you for choosing First Bank for your Paycheck Protection Program (PPP) loan. It has been our pleasure to serve you during these unprecedented times and we will continue to be here for you in the next phase of this loan process. Although there are still questions on the forgiveness process, our goal is to keep you informed the best we can on the loan forgiveness process.
On Friday May 15, the SBA published the PPP Loan Forgiveness Application and related instructions. A copy of the application is enclosed, and can be also found here. The application provides a step by step calculation methodology to help you arrive at the forgivable portion of your loan.
As you prepare for the loan forgiveness benefit of the PPP loan, keep these things in mind to maximize your loan forgiveness:
- Funds must be expensed during the 8-week (56-day) period option you choose. The two options include 1) the Covered Period, which begins on the date the loan proceeds were disbursed to you, or 2) the Alternative Payroll Covered Period which can begin on the first day of your first payroll period following the loan dispersal.
- At least 75% of the PPP loan funds must be used for payroll costs. No more than 25% can be used for non-payroll expenses
(Includes salary, wages, vacation, parental, family medical or sick leave, health benefits)
- Set up a full payroll register for the 8 weeks the funds are expensed
- Keep separate records of employees hired back, as well as their position and pay.
- Document these expenses with 1) Bank account statements or third-party payroll service provider reports; 2) Tax forms for the periods that overlap the Covered Period or Alternative Payroll Covered Period, such as Form 941 and State quarterly business and individual employee wage reporting and unemployment insurance tax filings; and 3) Payment receipts, cancelled checks or account statements documenting retirement and health insurance contributions.
- Document all attempts to rehire employees. If an employee decides not to return to work, the pay attributable to that employee may still be forgivable. Documentation is key.
(February 15, 2020 is the key date. The business mortgage loan and or lease agreement must have been signed and services for utilities must have been in place, prior to this date)
- For business mortgage interest payments, retain a copy of your lender account statements from February 2020 and the months of the Covered Period PLUS one month after the end of the Covered Period.
- For business rent or lease payments, retain a copy of your current lease agreement and receipts or cancelled checks during the Covered Period.
- For business utility payments, you will need copies of invoices, cancelled checks and receipts or account statements from February 2020 and those paid during the Covered Period.
- Keep a spreadsheet or log of every expenditure and date, amount, paid to, and description.
If you are self-employed, an independent contractor, or a sole proprietor:
- Eight weeks of the 2 ½ months net profit is automatically forgivable.
- To qualify for the additional loan forgiveness, business mortgage interest, rent, and utilities must have been claimed as a deduction on your 2019 Schedule C to qualify.
ADDITIONAL THINGS TO CONSIDER:
- If you have already set up a separate bank account, only move the funds to the payment account in the exact amount being paid.
- If no separate account set up, thorough documentation of every expenditure made over the 8-week period.
Remember, these payroll costs are not eligible for forgiveness:
- Payments to independent contractors
- Annual cash compensation over $100,000
- The employer’s share of federal payroll taxes
Please know that there are many unanswered questions on which we are waiting on the SBA to provide guidance. As these become known, we will post updates to our website on this page. Our staff is committed to helping you in this process and is here to help answer any questions you might have. Again, thank you for allowing First Bank to assist you in your PPP loan.
Executive VP – Chief Credit/Senior Lending Officer