Currently, the government has announced that a $2 trillion coronavirus stimulus package has recently been signed into law and that the stimulus package contains some provisions that can help start-ups and small businesses. It also introduces new deadlines for the businesses due to the COVID 19.
One of the aspects of the bill is the PPP flexibility to act on new deadlines. This article will discuss everything that will help you to make further decisions regarding paycheck protection programs – PPP flexibility act new deadlines.
What is the Paycheck Protection Program?
The Paycheck Protection Program is a loan scheme that comes from the Coronavirus Aid Relief and Economic Security (CARES) Act. This program is about $350-billion. It intended to provide American start-ups and small businesses with 8 weeks of cash-flow assistance through 100% federally guaranteed loans. The loans are managed under the guidance of the Small Business Administration (SBA). You can read some important things in the bill in this article.
- Start-ups or small businesses are eligible
- No loan payments for the first 6 months
- No collateral or personal guarantees required
- The loan has a maturity rate of two years and an interest rate of 1%
- The loan could be forgiven and turn into a non-taxable grant
- No fees
- The loan covers expenditure for eight weeks starting from the loan origination date (if the obligations began before February 15, 2020)
Qualification for the Program
Paycheck Protection Program loans cover more areas than SBA disaster loans. Small businesses, independent contractors, sole proprietorships, and self-employed individuals can all qualify.
- Sole proprietorships will have to submit a Schedule C from their tax return filed or to be filed showing the net profit from the sole proprietorship.
- Independent contractors will have to submit Form 1099-MISC along with their Schedule C.
- Self-employed people will have to submit payroll tax filings reported to the Internal Revenue Service.
What Can You Use it For?
There are two major limitations if you like the loan to be forgiven:
- You have to spend the money within a certain period of time. Originally this was 8 weeks from receiving your money, but per the 6/5 PPP Flexibility Act businesses now have 24 weeks to spend their loan,
- It needs to be spent on rent, mortgage interest, payroll costs, or utilities. The payroll cost is subject to the same limitation as above that you can’t use it for the incremental compensation over $100k for anyone who is paid that amount.
These constitute huge areas of expense for most start-ups.
In the eight weeks from your loan signing date, all expenditure related to the following can be forgiven:
- Payroll:- wage, salary, vacation, medical, parental, family, sick leave, or other health benefits
- Rent:- as long as the lease agreement was in effect before February 15, 2020
- Utilities:- as long as service start before February 15, 2020
- Mortgage interest:- the mortgage was signed before February 15, 2020
You will require to keep your records and have correct bookkeeping to prove your expenses during the loan period. You will also have to have spent 75% of their loan on payroll to qualify for loan forgiveness.
The lender has to decide within sixty days of your forgiveness application submission.
New PPP Loan Forgiveness Conditions
When the PPP loan became part of the Coronavirus Aid Relief and Economic Security (CARES) act, that time, the intention was to protect employment by helping small businesses cover payroll and other expenditures during the economic interruption caused by COVID-19. This is reflected and the following are the requirements set out for PPP loan forgiveness:
PPP Loan Amount- 24 Weeks Condition
Normally, businesses who want loan forgiveness were required to spend the whole amount within 8 weeks of the first loan disbursement. But under the PPP Flexibility Act, businesses can now spend their funds over 24 weeks to be eligible for forgiveness.
60/40 rule for Payroll
It means at least 60 percent of the amount has to be spent on eligible payroll. In other words, you are allowed to spend PPP loan funds on other areas like lease or utility bills, the SBA has indicated that no more than 40 percent of the loan can be forgiven for these non-payroll things. But yes, 60% or more of your loan amount must go towards paying your employees to be fully forgiven. Earlier, PPP Flexibility Act change i.e. the original ratio for forgiveness was 75% on payroll and 25% on other qualified expenses.
It means you cannot decrease headcount or salaries by more than 25%. To protect and maintain employment, full loan forgiveness is dependent on keeping your workforce mostly intact. The rules state that the amount of your PPP loan eligible for forgiveness is reduced proportionally if you reduce your employee headcount or decrease salaries by more than 25% for employees making under $100K annually.
Also, SBA specifies an exception that if you lay off an employee then offer to rehire them at the same pay and hours. If your employee denies the offer to be rehired then it doesn’t count against your PPP loan forgiveness amount. The Act also introduced new allowances for businesses and start-ups who are unable to find required replacements, or who can’t restore normal business operations due to problems like local shelter-in-place orders, etc.
PPP Flexibility Act New Deadlines
Headcount is one of the factors that affect how much of your loan might be eligible for forgiveness. As per the earlier Coronavirus Aid Relief and Economic Security (CARES) act, your loan can only be fully forgiven if you did not decrease your employee headcount, or else hired back previous laid-off employees by June 30. Now, that date has been pushed back that means you can now rehire employees until December 31.
The PPP Flexibility Act also creates new allowances for businesses and start-ups whose employees decline offers, who can’t restore regular business operations, or, who can’t find qualified replacements due to shutdown orders or similar situations.
PPP Flexibility Act New Deadlines also pushes back the last date to apply for loan forgiveness. Earlier, you had to apply within 6 months of your loan’s origination date. Now, to apply for forgiveness, you have until 10 months after the date of the last covered period.
If your loan isn’t forgiven, then you will be happy to hear that the deadline to pay it back has also been extended. Instead of 2 years, now PPP loans will mature in 5 years. But It is important to note that this rule is only applied to PPP loans issued after June 5, 2020. However, you can get your repayment date extended to 5 years if you and your lender mutually agree to do so if your PPP loan was issued before June 5.
Payroll Tax Deferral
The PPP Flexibility Act also brings a significant change around payroll taxes. The Coronavirus Aid Relief and Economic Security (CARES) Act included an option for businesses to defer paying the employer’s share of Social Security taxes but it should be noted that not if the business had a PPP loan forgiven.
Now, businesses that receive PPP loans and have their loans forgiven can also take benefits of the option to defer their payroll tax payments. You will pay the delayed taxes in two equal parts in December 2021 and 2022 if you choose to defer.