What the Paycheck Protection Program Flexibility Act means for small business owners

If your business has been impacted by COVID-19, there are resources to help you weather the storm and keep employees on the payroll. Eligible businesses can apply for full or partial loan forgiveness, which could make a significant difference on your balance sheet.

We know how time consuming it is to keep up with COVID-related resources, so we’ve created a guide with everything you need to know about the Paycheck Protection Program Flexibility Act (PPPFA), and how you can take advantage of this fund before the extended deadline of August 8th.

What is the PPPFA?

The PPPFA is the latest of several relief bills passed in an attempt to help businesses impacted by the global COVID-19 pandemic. The bill was passed to provide clarity and flexibility to the original Paycheck Protection Program rules brought forward in the CARES Act.

Eligible businesses include those with 500 or fewer employees, self-employed workers, independent contractors, gig workers, and sole proprietors who have been negatively impacted by the global pandemic.

On July 4, 2020, President Trump signed the Paycheck Protection Program extension bill, giving small business owners another five weeks to apply for a PPP loan. The aim of the extension was to make loan forgiveness easier and provide more opportunities for businesses to get full loan forgiveness.

What’s changed under the PPPFA?

The PPPFA allows more flexibility in terms of how funds can be distributed between payroll and operational costs like rent, utilities, internet, etc. The new act requires only 60% of the loan go directly towards payroll instead of 75%. If less than 60% n is used for payroll, you may still be eligible for partial forgiveness.

Additionally, the amount of time given for the loan to be used in full was extended to 24 weeks or by December 31, 2020, and business owners now have five years to pay it back.

For a comparison of the old and new rules, see our Help Center article.

Applying to lenders

In order to apply, you’ll need to prove your business was operational on Feb. 15, 2020, and show the amount of your average monthly payroll costs. You can fill in the revised application form here.

If you’re concerned you haven’t heard back about your application or received a rejection from a lender, you have the option to apply through different lenders. If you were rejected, be sure to question why in case there was an error that can be fixed. Use the Small Business Administration’s tool for finding eligible lenders.

Qualifying for loan forgiveness

After receiving your loan, you can apply for forgiveness provided you keep full-time employees on payroll or rehire them within 24 weeks (or by December 31st, 2020). As the borrower, it’s your responsibility to submit a loan forgiveness application that proves you’ve used 60% of the funds on payroll expenses (including wages, healthcare, benefits, hazard pay, etc.). The lender must then submit a decision to the SBA within 60 days.

Be prepared to prove that these expenses were incurred during the covered period from the first day you received the funds, or at the beginning of your payroll cycle once the funds were deposited.

The eligible forgiveness amount will not decrease if you can document the inability to (a) rehire employees that were on your payroll on or before February 15, 2020, and/or (b) hire new employees for those roles by December 31, 2020. An example of this would be a written offer to rehire workers that was declined, or if you were unable to hire a suitably skilled replacement.

You may still qualify for loan forgiveness if you haven't been able to return to the same level of business you were at before February 15, 2020. In this case, you’d be required to document your inability to meet specific compliance conditions related to sanitation, social distancing, or any other COVID-19-related requirements.

Qualifying for partial loan forgiveness

If you were unable to spend at least 60% of your loan on payroll costs, you won’t be eligible for full loan forgiveness. However, you can still qualify for partial forgiveness if you had to reduce the number of full-time employees due to COVID-19 or needed to reduce wages in order to keep your business operating.

What happens if you don’t qualify for loan forgiveness?

If you don’t qualify, there is no cause for serious concern. The PPPFA has created a 5-year amortizing term loan with a 1% interest rate and a deferral of 6 months. If you received funding under the PPP, your interest rate and deferral period stays the same but you’ll have a two-year amortizing term, which you can ask to be converted into a five-year loan should you need it.

Paying back your loan

After your deferral period, you can begin repaying your loans without any prepayment penalties. Interest accrues until the loan is fully paid off. Business owners have the option to defer their portion of social security tax (50% due December 31, 2021, and the other due December 31, 2022) to help unlock additional cash needed to repay the loan.

If you can’t repay the loan, the SBA has arranged for lenders to cover the principal amount. For small businesses that can’t cover 1% interest, the loss will be that of the lender.

If you need help getting an accurate picture of your financial statements, one of our Wave Advisors would be happy to help. Book an appointment today.