Updates on your PPP loan

There have been a lot of changes since our initial blog on the PPP loan posted on April 2nd, so we wanted to give you a quick comparison of where we were originally vs. where we are now.

In case you don’t recall, initially you were required to spend 75% of your loan proceeds on payroll costs and 25% on rent, mortgage interest, and utilities and the time period to use your PPP funds was a short 8-weeks from the date of disbursement.  However, on June 5th, the Paycheck Protection Program Flexibility Act of 2020 was passed.  This act changed the ratio for how the loan proceeds could be used to 60% on payroll costs and 40% on rent, mortgage interest, and utilities.  The act also extended the time period to 24 weeks.  At that time, you could either elect an 8-week period or a 24-week period. Ultimately a clarification was released that allows companies to apply for forgiveness any time between 8 – 24 weeks. Essentially, once the funds are fully spent, you can apply for forgiveness.

Now, as a refresher, payroll costs consisted of gross wages paid to employees, the employer portion of health insurance costs, the employer portion of retirement plan contributions, and the employer portion of state unemployment taxes. 

The original cap for gross wages per employee for the 8-week period was $15,834.56.  This was later increased to $46,153.84 if a company elected the full 24-week period.  If a company elected a time period between 8 – 24 weeks, the gross payroll cap per employee is $1,923.07 per week. Thus, you would multiple the number of weeks by $1,923.07 to determine the maximum amount for each employee for the time period elected. 

In the early stages of the PPP loans, there was no difference between the cap for employees and owner-employees.  However, a clarification was later issued stating that owner-employees were to be capped at 8 weeks of their 2019 compensation. Owner-employees couldn’t be limited to the $1,923.07 per week for the elected time period or the $100,000 threshold that other employees are subject to.  This means any increase in salary for the calendar year 2020 is not factored in for forgiveness purposes. This is not a favorable outcome for owner-employees that were earning more pre-pandemic.

In addition, many Schedule C’s calculated their loans based on their net income plus retirement contributions, as initially allowed, and are now faced with repayment when they weren’t anticipating it.  Recent clarifications announced that retirement contributions for self-employed individuals aren’t allowed for forgiveness purposes.  All Schedule C’s are maxed at $20,833 for forgiveness unless they have payroll, rent, utilities, and mortgage interest costs.  Mortgage interest costs for your home do not qualify for forgiveness, even if you have a home office.  Only mortgage interest costs for commercial properties are eligible for forgiveness.  As you can imagine, many small business owners were upset with some of the recent changes. 

On July 17th, we received some potentially good news. Mnuchin called for automatic forgiveness to smallest businesses that received loans of $150,000 or less. This would reduce the administrative burden for many small businesses, accountants, attorneys, and banks if it passes. PPP loans under $150,000 account for 85% of the number of loans given, but only accounts for 26% of the dollar amount of loans. They are set to vote in early August – for now, there is a temporary hold on applying for forgiveness until August 10th for all businesses that received loans of less than $150,000.  If your company received more than $150,000, there is no need to wait if you spent 100% of the funds. 

Do not get too excited about automatic forgiveness. Even if the bill for automatic forgiveness passes, taxpayers are still required to spend the funds as requested and must keep documentation of how the funds were spent for at least 3 years in case SBA audits your loan.  

Below is a quick summary of the changes on how funds can be spent:

Payroll costs75% of proceeds (minimum)60% of proceeds (minimum)
Rent & utility costs25% of proceeds40% of proceeds
Spending term8 weeksUp to 24 weeks

Below is a quick summary of the changes on weekly payroll costs by category:

Original amountsUpdated amounts
Employee limit$1,923 $1,923
Owner employee limit$1,923 2019 compensation divided by number of weeks in period, capped at $20,833 
Employer 401k contribution for employeesNo limitNo limit
Employer 401k contribution for owner-employeesNo limit2.5 months of 2019’s contribution amount

Lastly, there is discussion of a second round of PPP funding for companies that were impacted the most by the pandemic.  The initial requirement is your revenues from 2020’s Q1 – Q2 must be 50% less than 2019’s Q1 – Q2. This appears to be too high for most businesses to qualify so we’re hoping it will be reduced. We’ll keep you posted as more details are released.

As always please do not hesitate to contact us if you have any questions.

Angela and Devon