UPDATED 5/14/20  – The U.S. Department of the Treasury and the Small Business Administration have released updated Paycheck Protection Program FAQs which state that “any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

The statement comes in the wake of speculation that PPP applicants who applied for the relief while having access to preexisting sources of liquidity could be on the receiving end of administrative action from the SBA due to the certifications signed in the loan document. PPP loans can be repaid by the borrower by May 18 in order to avoid any potential penalties relating to the good faith certification.

UPDATED 5/4/2020 – Treasury and the SBA have released updated PPP FAQs which state that both agencies “intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.”

We would like to stress that until the final guidance is issued, we do not know exactly how this rule will affect final forgiveness. We will update this blog and our clients as future guidance is released.

UPDATED 5/1/2020Notice 20-32, issued by the IRS on Thursday, April 30, 2020, provides guidance that the expenses used to document and earn forgiveness for the PPP loan would be considered nondeductible for tax purposes. This notice places the ball back in the court of Congress to pass additional legislation to ensure the forgiveness of the PPP is executed as they had originally intended. Read our full blog on Notice 20-32 here.

Original post

On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law by President Trump in an effort to provide economic relief in the wake of the COVID-19 (Coronavirus) pandemic. Below, we outline the United States Small Business Administration’s Paycheck Protection Program.

The Paycheck Protection Program is an expansion of the SBA’s 7(a) loan program. The federal government will guarantee loans made by local lenders to eligible borrowers.

Eligibility

  • Businesses and non-profits with 500 or fewer employees
    • The number of employees is considered on an affiliated-company basis.
      • The affiliation rule is waived for businesses in the hospitality industry.
    • The 500 employee cap can be exceeded for certain industries.
  • Individuals who operate under a sole proprietorship or as an independent contractor
  • No net income limitation
  • The program requires good faith certification that the loan is necessary due to economic hardship caused by the COVID-19 (Coronavirus) pandemic.
  • The loan must be used for payroll, group healthcare costs (including premiums), mortgage interest, rent, utilities and interest on any other debt obligations that were incurred before February 15, 2020.

Loan Amount

  • Can be no greater than 2.5x the borrower’s average total monthly payroll.
    • Not to exceed $10 million
    • Payroll costs include compensation of U.S. employees; vacation, parental, family, medical, or sick leave; employee benefits of group health care coverage and retirement; and payment of state and local taxes.
    • The amount of compensation for any employee or owner in excess of $100,000 must be removed from payroll costs.
    • Note for businesses: 1099 payments to independent contractors are not included in payroll costs as they have the ability to apply for a PPP loan on their own.
    • For an independent contractor or sole proprietor, payroll costs include wage, commissions, income, or net earnings from self-employment.

Loan Forgiveness

  • Borrowers would be eligible for loan forgiveness in an amount equal to the sum spent for the 8 weeks after the loan origination date on:
    1. Payroll costs (excluding compensation in excess of $100,000 per year for any one employee). Note: Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
    2. Group healthcare benefit costs and insurance premiums;
    3. Interest payment on any mortgage incurred before 02/15/2020;
    4. Rent on any lease in force before 02/15/2020; and
    5. Utilities for which service began before 02/15/2020.
  • For sole practitioners, borrowers would be eligible for loan forgiveness in an amount equal to the sum spent for the 8 weeks after the loan origination date on:
    1. Payroll costs (excluding compensation in excess of $100,000 per year for any one employee). Note: Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
    2. Group healthcare benefit costs and insurance premiums;
    3. Owner compensation replacement (8/52) of 2019 net profit
    4. Interest payment on any mortgage incurred before 02/15/2020
      to the extent they are deductible on form 1040 Sch C;
    5. Rent on any lease in force before 02/15/2020
      to the extent they are deductible on form 1040 Sch C; and
    6. Utilities for which service began before 02/15/2020
      to the extent they are deductible on form 1040 Sch C.
  • The amount of loan forgiveness shall be reduced proportionately by:
    1. The number of employees during the covered period as compared to either the prior year or January and February 2020; and
    2. Any reductions in salary in excess of 25% of an employee’s total salary or wages as compared to the last quarter that the employee was employed.
  • Exemptions are available (for reductions) if the employer re-hires its employees no later than June 30, 2020.
  • For US federal tax purposes, forgiven amounts will not be taxable cancellation of debt income.

Repayment

  • Any portion of the loan not forgiven will have a term of 2 years and an interest rate of 1%.
  • Loan deferral period is 6 months. Interest will accrue during this time but may also be forgiven.

Lending

  • Currently, lending will be done through SBA approved lenders.
  • The SBA has established guidance on these loans as of April 2, 2020. 
    • Please click here for borrower information.
    • Please click here for the program application. Fill out this form and submit to your SBA Participating Lender.
    • You can also contact your SBA Participating Lender for additional information.

Important Dates

  • Starting April 3, 2020, small business and sole proprietorships can apply. 
  • Starting April 10, 2020, independent contractors and self-employed individuals can apply.

Click here to visit the SBA’s website to learn more. Click here to read the Treasury Department’s FAQ document.

Click here to download our Paycheck Protection Program loan calculator spreadsheet.

Click here to download our spreadsheet which compares the Paycheck Protection Program to the Employee Retention Credit.

If you have questions regarding the SBA’s Paycheck Protection Program, please reach out to your personal Sciarabba Walker contact or email us at info@swcllp.com.