June 8th, 2020
As you may know, the PPPFA (PPP Flexibility Act) was signed into law Friday. Unfortunately, the new regulations raise more questions than they answer regarding the law's application to the self-employed. Below is a summary of the changes; however if you are self-employed, I would advise you to stick to the original rules until there is clarification. The original regs are likely to get a self-employed individual a good percentage of loan forgiveness and it is not yet clear whether the new ratio of payroll/other expenses even applies to "owner compensation replacement" as defined in the CARES Act.
The new law does the following:
-Changes the payroll/other expenses ratio to 60%/40% - now 40% of the loan is allowed for non-payroll expenses, when before the limit was 25%. However, it appears the ratio now applies to the loan amount (not the forgiveness application amount), leading us to believe there will be no forgiveness for a borrower who fails to spend at least 60% of the amount borrowed on payroll costs. Again, it's not known whether this new ratio applies to income replacement for the self-employed.
-Extends the "covered period" to 24 weeks following disbursement of funds (or to December 31, 2020, whichever is first) if the 8 weeks is not sufficient for employers to meet the restoration of FTEs and salary/wages required under the CARES Act. The covered period under the original law was 8 weeks from the loan disbursement date and you are still allowed to use that if you desire.
-Extends the minimum repayment term to 5 years (instead of 2 years) and allows a borrower to negotiate a longer term - up to 10 years - with the lender.
-States the first payment will be deferred to 6 months following the determination of forgiveness, providing the forgiveness application is made within a reasonable amount of time (within 10 months of the end of the original 8-week covered period).
-Allows recipients of forgiveness to defer employer payroll taxes for Social Security (OASDI), paying half of these taxes on December 31, 2021, and the other half on December 31, 2022. The first rules allowed no deferment of these taxes for individuals whose loan was forgiven.
-Increases the safe-harbor period for restoring a workforce to pre-pandemic levels, extending the deadline to December 31, 2020, and also includes a new exception to bringing back workers when an employer can document a health or safety requirement related to COVID-19 that restricted the business from doing so.
Be on the lookout for a revised PPP forgiveness application, as the calculations on such a document should clear up some of the many questions surrounding the new guidelines. If you are planning to apply for forgiveness, it may benefit you to wait - you have time, even if your deadline will ultimately be June 30.
In the meantime, document all expenses. And for now, if you're self-employed, it's probably wise to keep using the following forgiveness rule: for every $75 you use for income replacement, don't spend more than $25 on qualified other business expenses.