Today we want to talk a little bit about the PPP extension and the increased support that is being given to small businesses and how that might affect you as a business owner or an employee of a small business.
PPP Extension and Increased Small Business Support
On March 27th, 2020, the CARES Act was signed into law. The aim of the act was to support small businesses in crisis. Part of the bill was the Paycheck Protection Program. This was a loan program that was originally for $350-billion and provided eight weeks of cash flow assistance in the form of federally guaranteed loans backed by the Small Business Administration. This funding was supposed to help small businesses hold onto their current employees and to bring back employees who had been furloughed due to Coronavirus. The funds could be used by small businesses with 500 employees or less and were supposed to be used on payroll payments and operating costs. This funding ran out completely in around ten days. While the funding had a beneficial impact on some small businesses, it barely scratched the surface. In late April the Paycheck Protection Program was expanded with another $310 billion in funding. The PPP loans were also eligible for forgiveness if certain criteria were met.
The deadline for the PPP loan applications was June 30th, 2020. Seeing a need for more relief, on June 5th, the PPP Flexibility Act was signed by President Trump. This act amended the PPP terms to extend the loan application deadline for the PPP loans to August 8th. In addition to extending the loan application deadline, the act established that the PPP funds could also be used to pay any eligible expenses of small businesses that were incurred during the period beginning on the date that the borrower received the first disbursement of the PPP loan. The expansion now allows for PPP loan funds to be used for payroll costs and non-payroll costs such as mortgage interest, rent, utilities, and insurance premiums. The amendment extended the deadlines of PPP, extended the period for loan forgiveness, changed the percentages applied to eligible costs that could be forgiven and changed the exemptions on full-time equivalent (FTE) employees that are included in calculating forgiveness.
An article by Paychex details the loan forgiveness calculations as follows:
The Loan Forgiveness Application sets forth a three-step calculation to determine the salary/hourly wage reduction and whether you are eligible for the safe harbor. For each employee that worked during your covered period complete each step using salary for salaried employees and hourly wage for hourly employees.
You will need the salary and hourly wage information for the time periods and dates below.
Look-back period. Jan. 1 – March 31, 2020
Reduction period. Feb. 15 – April 26, 2020
February 15, 2020
Your Covered period
Dec. 31, 2020
Calculate Salary/Hourly Wage Reduction
Step 1. Determine if wages were reduced more than 25%.
Divide the average annual salary or hourly wage during Your Covered Period by the average annual salary or hourly wages of the Look-Back Period.
If the result is 0.75 or more you do not have a salary or hourly wage reduction for that employee. If 0.75 or more, proceed to Step 2.
Step 2. Determine if you qualify for the Salary/Hourly Wage Reduction Safe Harbor for each employee.
Compare the annual salary or hourly wages in the Reduction Period to the annual salary or hourly wages on Feb. 15,2020. If the annual salary or hourly wages in the Reduction Period is equal to or greater than the annual salary or hourly wages on Feb. 15, 2020 you do not qualify for the salary/hourly wage safe harbor. Complete Step 3.
Compare the salary and hourly wages on Feb. 15, 2020 and Dec. 31, 2020. If the average annual salary or hourly wage as of Dec. 31, 2020 is equal to or greater than the average annual salary or hourly wage on February 15, 2020 you qualify for the safe harbor and will not be required to take a salary or hourly wage reduction. Otherwise complete Step 3.
Step 3. Determine the Salary/Hourly Wage Reduction.
Multiply the Look-back Period amount by 0.75 the “(3a Amount”).
Subtract 3a Amount from Your Covered Period amount (the “3b amount”).
If the employee is an hourly worker, compute the total dollar amount of the reduction that exceeds 25% as follows:
Multiply the 3b amount by average number of hours worked per week during the Look-back Period and then multiply this amount by Your Covered Period (either 24 or 8 weeks). The result is the salary reduction for the hourly employee.
If the employee is a salaried worker, compute the total dollar amount of the reduction that exceeds 25% as follows:
Multiply the 3b Amount by Your Covered Period (either 24 or 8 weeks) and divide by 52. The result is the salary reduction for the salaried employee.
Extended Deferral of Loan Repayment. Extends deferment of payments of loan principle, interest and fees, from the current six months, to the date when the SBA pays the forgiveness amount to your lender. If a borrower has not applied for forgiveness of a covered loan within 10 months after the last day of the covered period payments on principal, interest and fees will begin.
What Does the Change Mean For Small Businesses?
The changes to the PPP program are intended to provide increased support for small businesses as the Coronavirus continues to ravage the economy. While these changes are a step in the right direction as far as providing some relief for small businesses, this relief seems like little more than a temporary solution to a problem that continues to expand beyond anything we have seen in recent history.