New clarification on PPP loan forgiveness: 60% payroll “cliff” no longer applies

In this 3-minute read:

  • 60% payroll requirement for loan forgiveness no longer a “cliff” (all or nothing)
  • Revisions and clarifications to the Paycheck Protection Program
  • Revisions to the Treasury’s Interim Final Rule under the PPP

The new Paycheck Protection Flexibility Act was signed into law by President Trump on June 5, 2020. The PPPFA contains several important clarifications and modifications to previous Paycheck Protection Program loan rules under the CARES act.

The most important thing to remember is the deadline for application for a PPP loan has now been extended. But you only have until August 8, 2020 to apply for a PPP loan.

Another very important change is the reduction in the minimum amount borrowers must spend on payroll in order to achieve 100% loan forgiveness. Previously, the rules stated that borrowers must devote at least 75% of their PPP funds to approved payroll costs, or they would have to repay a portion of their loan.

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The new law changes that threshold to 60%; in other words, borrowers must spend at least 60% of their PPP funding on approved payroll, or they cannot receive full loan forgiveness.

IMPORTANT NOTE: Initial reports on the PPPFA stated that the new 60% threshold was a “cliff” or an “all or nothing” minimum, where if you didn’t spend at least 60% of your funds on payroll, NO portion of your loan could be forgiven, and the language of the bill certainly seems to suggest that. However this has been clarified in a new revision to the Treasury’s PPP Interim Final Rule, where we find this example and interpretation:

“… to receive full loan forgiveness, a borrower must use at least 60 percent of the PPP loan for payroll costs, and not more than 40 percent of the loan forgiveness amount may be attributable to nonpayroll costs. For example, if a borrower uses 59 percent of its PPP loan for payroll costs, it will not receive the full amount of loan forgiveness it might otherwise be eligible to receive. Instead, the borrower will receive partial loan forgiveness, based on the requirement that 60 percent of the forgiveness amount must be attributable to payroll costs. For example, if a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in nonpayroll costs constituting 40 percent of the forgiveness amount).”

This interpretation is in line with the “safe harbor” intent of the new law, which was intended to increase flexibility for PPP borrowers in these uncertain financial times.

Here’s how borrowers decide which forgiveness application to use. You may use Form 3508EZ if:

  • You are self-employed and have no employees; OR
  • You did not reduce the salaries or wages of employees by more than 25%, and did not reduce the number or hours of employees; OR
  • You experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of employees by more than 25%.

If you don’t fit into any of the above conditions, you will need to complete and submit the full PPP loan forgiveness application.

Updates and clarifications to the Paycheck Protection Program

Other relevant changes/updates to the PPP loan program are as follows:

  • Borrowers who secure PPP loans after June 5, 2020 have 5 years to repay any unforgiven portions of their PPP loan (previously it was 2 years). Borrowers who secured PPP loans prior to June 5 will by default have 2 years to repay but may choose to arrange with their lender to extend the loan repayment deadline to 5 years 
  • The interest rate remains 1%
  • Small businesses must still apply for PPP loans by June 30, 2020. (Deadline for application remains the same)
  • The “covered period” is extended to 24 weeks; businesses now have 24 weeks to spend their PPP funding (extended from 8 weeks)
  • Businesses have until December 31, 2020 to spend their funding (previously the deadline was June 30.
  • PPP borrowers who have previously been approved can opt to extend the eight-week period to 24 weeks, or they can adhere to the original eight-week period
  • NEW PPP borrowers (approved after June 5, 2020) will have a 24-week covered period, but it can’t extend after December 31, 2020
  • As discussed above, borrowers are now required to spend at least 60% of the funding on payroll costs to receive full loan forgiveness. Borrowers may still receive partial forgiveness if they use less than 60% of their PPP loan for payroll costs. Previously, borrowers were required to spend at least 75% of their PPP loan on payroll costs to receive full loan forgiveness 
  • Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-COVID levels required for full forgiveness. The deadline for restoring payroll and headcount levels has been extended to December 31, 2020 (previously June 30)
  • The new legislation includes two new “safe harbor” exceptions allowing borrowers to achieve full PPP loan forgiveness even if they are unable to fully restore their workforce. The new bill allows borrowers to claim safe harbor if they can, in good faith, provide documentation that they could not find qualified employees or were unable to restore business operations to February 15, 2020, levels due to COVID-19 related operating restrictions. (Previously, borrowers were still able to exclude from their forgiveness calculations any employees who turned down good faith offers to be restored at the same hours and wages as before.)
  • Businesses that get a PPP loan may now also delay payment of the employer portion of their payroll taxes. This was previously prohibited under the CARES Act

There’s still time to apply for a PPP loan, but hurry! The extended deadline for application is August 8, 2020

If you haven’t applied for your PPP loan and you determine it’s right for you, there is still time. Talk to your lender and get your application submitted ASAP.

Sign up for your Womply Free account and we’ll keep you updated on new funding opportunities. Customer relationships thrive when local businesses and consumers are connected through Womply data and technology.

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