As we begin to experience the reopening of businesses and more regular day to day activities, we want to keep you up to speed with Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) loan updates.
Paycheck Protection Program Flexibility Act
The Paycheck Protection Program is closing in on its initial eight-week forgiveness spend period. On June 5, 2020 the Payroll Protection Program Flexibility Act (PPPFA) was passed to give small businesses additional time from 8 weeks to 24 weeks to use their PPP funds and have a better shot at full loan forgiveness.
After two PPP funding bills and 41 rule changes in the past eight weeks, we are closer to understanding how businesses can achieve loan forgiveness through the program. While we may get some pragmatic updates from banks on the administrative filing aspect, we have a pretty good understanding of how things should look.
Here are some of the key changes at this point:
- Loan application filing deadline remains at June 30 (if your business has not filed for a PPP loan yet, you still have time to access these loan funds).
- Loan repayment period extended from 2 years to 5 years.
- Loan forgiveness period extended from 8 weeks to 24 weeks (or December 31, 2020 at the latest).
- Health insurance paid for an owner-employee is not an eligible payroll related cost.
Keep in mind that there are two important criteria for obtaining full loan forgiveness:
- Return Employee count back to the relevant prior period (average employee count for February 15, 2019 through June 30, 2019 OR actual number of employee count as of February 15, 2020) and,
- Spend 100% of the PPP funds with at least 60% of the spending going towards payroll and related (health insurance, retirement plan contributions, state UC taxes) and 40% towards rent and utilities.
Some banks are automatically allowing businesses to file for loan forgiveness under either the original eight-week period or the expanded 24-week period. Loan forgiveness is a key provision in these PPP loans so that businesses are not saddled with future loan repayment on these monies. For businesses that find they are able to use up the PPP funds before the 24-week period date, some banks are encouraging those businesses to submit their loan forgiveness applications soon after they have exhausted the funds.
Keep in the mind that while the loan forgiveness is a non-taxable transaction, the IRS has come out and said that regular deductible expenses paid out of PPP monies will not be tax deductible on the business tax return. This is an important ruling that is not favorable for small businesses. This essentially makes the loan taxable after all.
Here is an example of how this works:
- PPP Loan = $100,000
- Eligible PPP spending on payroll, rent, utilities = $115,000 (60/40%)
- Loan forgiveness = $100,000
- Non-deductible payroll, rent or utilities = $100,000
This non-deductibility means that business owners will have to account for a higher taxable income of $100,000 beyond their book profits. As we work through your tax planning, we are considering the impact of this in your current recommended estimated tax payments.
How much money is left in PPP?
As of June 6, 2020 there was still $130 billion in available PPP funds. If you are eligible and have not yet filed an application to obtain the loan funds, we encourage you to reach out to your bank to get your application filing in now. The program end date is now extended to December 31, 2020 so we still have time in order to get your application filed, however keep in mind that the spending of the funds must be completed by December 31, 2020 also, so you want to give yourself the time necessary to use up the monies on the eligible expenses before year end. If your bank has let you down in this process and you are still looking for alternatives, here is a list of other non-bank SBA loan processors. Several of our customers have been successful in getting their PPP funds through these sources:
If you are considering some more longer term lending options, this may be a good time to consider working through a Small Business Administration (SBA) loan package. The SBA is currently providing Economic Injury Disaster Loans (EIDL) for working capital purposes to help small businesses meet their regular ongoing business financial obligations. Here is a link to the SBA Disaster Loan Assistance program and here is a link to an article that explains the loan program. The general requirements under these loans include:
- Credit history acceptable to SBA.
- Show ability to repay the loan.
- Collateral is required for all EIDL loan over $25,000.
These EIDL loans may be another tool for you in returning your business to pre-COVID-19 levels and beyond.
There are lots of things that will feel very different for the 2020 year. We are doing our best to put you in the best position possible and keep you ahead and proactive on these matters. Please know that we care and will support you as you seek to make the best decisions possible. Don’t hesitate to contact us if you have any questions or concerns.