There are big changes to the Paycheck Protection Program that benefit independent contractors and sole proprietors. The changes include more lenient requirements for how you spend the money, an easier process for loan forgiveness, and a longer period of forbearance. But the deadline to sign up is approaching at the end of the month, so if you haven’t applied yet, the clock is ticking.
Paycheck Protection Flexibility Act of 2020
The deadline to sign up for the Paycheck Protection Program is currently June 30th. That didn’t change in the latest update. The changes were authorized in legislation called “The Paycheck Protection Flexibility Act of 2020, which was sent to President Trump’s desk for final approval on Friday, June 5th. (1) (2)
- One of the biggest changes is a reduction in the amount that the borrower needs to spend on payroll to get the loan forgiven, from 75% of the loan to just 60%. The rest of the money can be used for paying other expenses such as mortgage interest, rent, and utilities. Money spent on payroll is “supposed” to hit 60% for loan forgiveness but that isn’t a hard and fast rule. Forgiveness will apparently happen for the portion spent on payroll, plus any of the money spent on other expenses during the spending window. It helps make the revised program more “flexible.”
- Another big change is that borrowers are being given a bigger spending window. It was previously 8 weeks, and is now 24 weeks. Loans that were granted before June 5th may opt to use either 8 weeks or 24 weeks, but new loans will only have the 24-week option. There are benefits to both, depending on your situation. The 24-week window gives borrowers more time to meet that 60% threshold for a maximum amount of loan forgiveness, while the 8-week window is good for people who can meet that threshold more easily and would like to get the loan forgiven and off their balance sheet. It’s also easier to keep the business operating for just 8 weeks, instead of 24 so that bar has been raised for new borrowers as the nation tries to get the economy rolling again.
- The difference between old and new PPP loans is also highlighted by a third revision. Borrowers with loans made after June 5th will have five years to pay back the amount that is not forgiven. Loans made before that date will only have two, although borrowers may be able to negotiate an extension to five years with the bank that issued the loan. It’s up to the bank. The interest rate on the money that has to be paid back is just 1%.
- Getting a loan forgiven is also easier with a new form called the “EZ Forgiveness Application.” The Small Business Administration says it will require “fewer calculations and less documentation for eligible borrowers.” You can get that at the Small Business Administration website. (3)
- The Flexibility Act is also giving borrowers a longer period of time before they have to start paying back the loans. The Acts extends the forbearance period from six months to a year.
Maximum Loan Size for the Self-Employed
Those are some of the important features of the revised program that apply to entrepreneurs without any employees. Many real estate professionals fall into this category, although property owners earning passive income with rentals do not, but for those who do qualify, a sole proprietor can get a maximum loan amount of $20,833 that may be completely forgivable. The formula is based on 2019 Schedule C income, with a maximum of $100,000 considered for the loan. You’ll find that number on line 31. To determine the size of the loan, you would divide that number by 12 for a monthly amount and multiply that by 2.5. That gives you the two-and-a-half months of pay that the program will cover. (4)
If you think you need financial help because of the pandemic and you qualify for this program, you should get your application in before the end of the month.
(1) PPP Flexibility Act Passes Congress: NAR Report
(2) SBA Updates PPP: NAR Report