How Will the New PPP Loan Forgiveness Terms Impact Your Business Finances?
The coronavirus pandemic has left small businesses across the nation struggling to stay afloat and meet their payroll costs. The federal Paycheck Protection Program (PPP) was launched in March 2020 as part of the CARES Act to help business owners keep employees on payroll and off unemployment with a short-term federal loan.
The initial rollout of the program was a bit confusing for small business owners, many of whom were unclear about how to apply and what they could use their loan for. Fortunately, the government recently changed the PPP’s terms to make it easier to apply for, utilize, and repay these earmarked federal funds.
What are the new PPP loan forgiveness terms?
On June 5, President Trump signed the PPP Flexibility Act of 2020, which changed and added some more favorable terms to paycheck protection program loans. An overview of some of the changes include:
1. Greater flexibility in how the loans can be used.
PPP loans can be forgiven if 60% or more of the loan is used for employee payroll costs. The other 40% can be used for other essential expenses like rent. Previously, businesses had to use 75% of the loan for payroll in order to qualify for loan forgiveness.
2. Extended forgiveness period.
Borrowers who receive their PPP loans after June 5 are now able to use their loans within a 24-week period or until December 31, 2020, whichever is first. Previously, borrowers had to use their loan within an eight-week period to qualify for forgiveness.
This 24-week period is much more advantageous for businesses who would not have been able to satisfy the required 60% of qualifying payroll expenses during an eight-week period. Many businesses that received their loans early on planned to use them during the required eight-week period, only to find that they were unable to open or operate their businesses during that time.
Because these businesses didn’t have the need for staff at their full capacity, they couldn’t qualify for forgiveness and were responsible for paying back their full loan. Now with a 24-week forgiveness period, businesses have more time to generate sufficient demand to justify bringing their employees back on payroll.
3. Payment deferral.
Before the PPP Flexibility Act, borrowers were expected to begin paying principal and interest on any unforgiven portion of their PPP loan six months after their funding date. Now, borrowers have up to 10 months after the end of their 24-week “forgiveness period” to file for PPP loan forgiveness, which will subsequently determine their payment deferral date. If you do not submit an application, you must begin making principal and interest payments beginning on the date of that 10-month mark.
How might a PPP loan affect your business taxes?
If your PPP loan is forgiven, the funds you received are tax-exempt. It should be noted, though, that a PPP loan cannot be used to pay your regular business taxes. You also can’t write off any business expenses you paid (rent, mortgage, utilities, etc.) using your PPP loan.
Under the CARES Act, employers can defer payroll taxes until December 31, 2020. Once your PPP has been forgiven, you must pay your accumulated payroll taxes on a delayed schedule – 50% of the deferred amount is due by December 31, 2021 and the other 50% by December 31, 2022.
Finally, if you plan to take advantage of the new tax credits Families First Coronavirus Response Act (FFCRA), you can still do this even if you receive a PPP loan. However, you cannot use PPP loan funds to pay for sick and family leave wages if you’re expecting to get a tax credit for that leave.
Still have questions? Contact Miller & Company
The June 30 PPP loan application deadline is fast approaching, and if you haven’t taken advantage yet, now is the time to do it. If you’re unsure about how a PPP loan might impact your business finances, the experts at Miller & Company LLP can guide you through the loan process and help you with your tax needs for the future. Contact accountants near you with offices located in New York City, Washington, DC and Sarasota, FL today for a consultation.