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Paycheck Protection Program Loans

Introduction

Paycheck Protection Program Loans (“PPP Loans”) will be available until June 30, 2020 to small businesses, including sole proprietors, and certain other organizations. PPP Loans could also be described as conditional grants because all or a portion of PPP Loans will be forgiven if the borrower meets certain conditions, which include retention of employees and maintaining the employees’ wages.  PPP Loans are in the amount of 2-1/2 times the borrower’s average monthly payroll costs, not to exceed $10 million. The total appropriation available to small businesses under this program is $349 billion. Several commentators have estimated that demand from small businesses will far outpace the appropriated amount.

The proceeds of PPP Loans may be used to pay for the following costs and expenses: (1) payroll costs; (2) group healthcare benefits; (3) interest (but not principal) on mortgage loans incurred prior to February 15, 2020; (4) rent on leases entered into prior to February 15, 2020; (5) utilities; and (6) interest (but not principal) on other debts incurred prior to February 15, 2020. Utilities expenses include electric, gas, water, transportation, telephone and internet services which began prior to February 15, 2020.

PPP Loans are forgivable up to the full principal amount of the PPP Loan.  The amount of the PPP Loan forgiveness will be lowered if the borrower reduces its number of Full Time Equivalent (“FTE”) employees or if the borrower lowers the wages of rank and file employees.

The portion of a PPP Loan forgiven will NOT be treated as taxable income.

PPP Loans are nonrecourse and the proprietor is not required to personally guarantee the loan. PPP Loans have no origination fee and the interest rate may not exceed 4.0% per annum. (The SBA has indicated that the interest rate on PPP Loans will be 0.5% per annum, then adjusted to 1% based on bank resistance.  This appears to be a moving target as of the writing of this article.)  Payments on PPP Loans are deferred for a period of at least 6 months, but not more than 1 year. PPP Loans have no prepayment penalty. For any portion of a PPP Loan which is not forgiven, the maturity date of the loan cannot exceed 10 years. (The SBA has announced that the anticipated term of PPP Loans will be 2 years.)

If the borrower’s PPP Loan is forgiven, the borrower is not eligible for the deferral of payroll taxes offered under Sec. 2302 of the CARES Act. Also, an employer who receives a PPP Loan is not eligible for the employee retention credit provided for in Sec. 2301 of the CARE Act.

Eligible Borrowers

Borrowers eligible to receive PPP Loans include any business; nonprofit organization, as described in IRC Sec. 501(c )(3); veterans organization ,as described in IRC Sec. 501(c)(19); or Tribal business with no more than 500 employees. Individuals who are sole proprietors or independent contractors are also eligible borrowers.

A business may have more than 500 employees if their employment is still below the Small Business Administration’s (the “SBA”) determination of the standard number of employees in their industry’s NAICS Code.  Also, for businesses in NAICS Code 72 (Accommodation and Food Service businesses), the business will be eligible if it has no more than 500 employees in any location.  The SBA’s affiliation rules are waived for business in the NAICS Code 72, is a franchisee or received financial assistance from a Small Business Investment Company.

A sole proprietor must submit documentation to substantiate the operation of a business, which may include payroll tax returns, Forms 1099-MISC or income statements.

The borrower must certify the following: (1) that the uncertainty of the current economic conditions makes the loan request necessary to support ongoing operations, (2) the loan funds will be used to retain workers or make mortgage, rent, or utility payments, (3) the borrower has not submitted duplicate PPP Loan applications with multiple lenders, and (4) during the period from February 15, 2020 to December 21, 2020, the borrower has not received another SBA Loan for the same expenditures. A borrower is presumed to be adversely impacted by COVID-19.

Loan Amount

The maximum loan amount is the lesser of A) $10 million or B) the sum of 2-1/2 times the average monthly payroll costs incurred during calendar year 2019 plus the amount of any SBA Economic Injury Disaster Loan obtained after January 31, 2020. (Special rules apply to seasonal employers and new businesses.)

Payroll costs include the following expenses: A) Salary, wages, commissions, or similar compensation; B) payment of cash tips or equivalent; C) pay for vacations and for parental, family, medical or sick leave (see below regarding reduction for FFCRA credits); D) dismissal or severance pay; E) payments for healthcare benefits, including insurance premiums; F) retirement benefits; G) state or local taxes assessed on compensation; and H) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment or similar compensation not in excess of $100,000. 

Payroll costs do NOT include A) compensation of an individual employee in excess of $100,000; B) federal payroll taxes; C) compensation of an employee whose principal residence is outside the United States; D) qualified sick pay for which a credit is allowed under Sec. 7001 of the Families First Coronavirus Response Act (the “FFCRA”); and E) qualified family leave for which a credit is allowed under Sec. 7003 of the FFCRA.

Use of PPP Loan Proceeds

PPP Loan proceeds may be used for any of the following expenditures during the covered period between February 15, 2020 and June 30, 2020:

1. Payroll costs (as described in the Loan Amount sections);
2. Group health care benefits during periods of paid sick, medical or family leave, and insurance premiums;
3. Employee salaries, commissions and similar compensation;
4. Interest on mortgage loans, excluding prepayments and principal payments;
5. Rent;
6. Utilities; and
7. Interest on any other debt incurred before February 15, 2020.

Utilities expenses include electric, gas, water, transportation, telephone and internet services which began prior to February 15, 2020.

How to Obtain a PPP Loan

The CARES Act anticipates that the SBA will process applications for PPP Loans through approved SBA lenders including federally insured banks and credit unions. The approved lenders will process and fund the PPP Loan applications. The ACT instructs the SBA to draft regulations and rules within 15 days of passage of the CARES Act.

Forgiveness Amount

A PPP Loan borrower is eligible for forgiveness of the indebtedness for the sum of the following amounts paid during the eight week period beginning on the date of the origination of the PPP Loan (the “covered period.”):

1. Payroll costs (as described in the Loan Amount section);
2. Interest on mortgage loans, excluding prepayments and principal payments;
3. Rent; and
4. Utilities.

The lenders will be reimbursed by the SBA for the amount of the PPP Loan forgiven.

Limits on Amount of Loan Forgiveness

The amount of a PPP Loan forgiven will be reduced if the borrower reduces its number of Full Time Equivalent (“FTE”) employees or substantially reduces the salary or wages of its rank and file employees.

1. Reduction for Decline in Number of FTEs

The loan forgiveness will be reduced if the PPP Loan borrower reduces its number of FTEs during the covered period below the number of FTEs during a base period to be selected by the borrower.

The amount of loan forgiveness is calculated using the following formula:

At the election of the borrower, the Base Period is either 1) the period between February 15, 2019 and June 30, 2019 or 2) the period between January 1, 2020 and February 29, 2020.  Special rules as noted below apply for seasonal employers and for employers who furloughed employees without pay or at reduced pay, after February 14, 2020 and before April 26, 2020 and rehires those workers and eliminated the pay reductions by June 20, 2020.

The amount of loan forgiveness cannot exceed the principal amount of the loan or the total amount of eligible costs incurred during the covered period. Accordingly, the fraction shown above applied to eligible costs cannot exceed 1.

2. Reduction for Reduced Salary and Wages

The loan forgiveness is reduced by the sum of any reduction in wages and salaries during the covered period for any tested employee that exceeds 25% of the employee’s total wages and salary during the most recent full quarter before the covered period. For loans obtained during the second quarter of 2020, the most recent full quarter will be the quarter ended March 31, 2020.

Tested employees include any employee who did not receive, on an annualized basis, more than $100,000 in wages or salary during any pay period in 2019.

The following table illustrates the compilation of the reduction

Do not include employees in the compilation who received more than $100,000 on an annualized basis for any pay period in 2019.

Note that the Covered Period is a period of eight weeks totaling 56 days. The salary and wages paid during the eight week Covered Period is being compared to 91 days during the quarter ended March 31, 2020. Accordingly, the number of days in the Covered Period represents only 61.5% of the number of days in the prior full quarter. It is unclear whether this is the result Congress intended or if this is a drafting error that will be corrected by clarifying rules or regulations.

By way of example, Sally Smith works for Good Employer. She makes $400 per day or $2,000 per week. Good Employer retains Sally at her regular rate of pay throughout the covered period. Accordingly, Good Employer pays Sally $16,000 during the covered period (8 weeks x $2,000 per week.) During the prior quarter, Sally was paid $26,000 ($2,000 per week x 13 weeks). With respect to Sally, Good Employer will have a forgiveness reduction of $3,500 even though Sally retained her same rate of pay ($16,000 paid less 75% of the $26,000 paid in prior quarter.)

Perhaps this is what Congress intended. After all, Good Employer will get an income tax deduction of $16,000 for the wages paid to Sally from the PPP Loan proceeds. Using a 21% tax rate, Good Employer gets a $3,360 income tax benefit for the payment of Sally’s wages. But $12,500 of the PPP Loan used to pay Sally will be forgiven.  We believe it is more likely perhaps not, but are awaiting guidance on if this is a drafting error or the intended consequence.  As information is released concerning forgiveness we expect clarification and direction on this matter.

Documentation of Forgiveness

The borrower must submit required documentation to obtain debt forgiveness. Required documentation includes the following:

1. Verification of number of FTEs on the payroll and their pay rates for a) one year period before loan origination; b) covered period, c) base period elected by borrower, including payroll tax filings;
2. Verification of mortgage, rent and utility payments during the covered period, which may include cancelled checks, account transcripts or other documents;
3. A certification from a representative of the borrower that a) documentation submitted is true and correct and b) that the amount for which forgiveness is requested was used to retain employees or make mortgage, rent or utility payments; and
4. Such other documentation the SBA may require.

The lender is required to make a decision regarding the requested forgiveness within 60 days after the lender receives the borrower’s application for forgiveness.

Incentives for Lenders

The Cares Act provides several inducements for lenders to participate in the PPP Loan program including:

1. The originating lender will receive a processing reimbursement equal to between 1.0% to 5.0% of the originated loan amount;
2. Rate of interest of up to 4.0% per annum;
3. 100% guarantee of principal and accrued interest from the SBA;
4. 0% Risk Weighting for bank capital requirements;
5. Exemption from Troubles Debt Restructuring disclosures under existing generally accepted accounting principles.

The demand on lenders has been greater than anything we have seen in our generation.  This demand, coupled with concerns around inadequate funding for the program overall, has resulted

Supplement A
Paycheck Protection Program Loan
Special Rules

Seasonal Employers

In determining the maximum PPP Loan amount for a Seasonal Employer, in lieu of using the monthly average of payroll costs for the 1 year period before the PPP Loan, the Seasonal Employer may use the average payroll costs for either A) the 12 week period beginning February 15, 2019 and ending May 10, 2019 or B) the four month period beginning March 1, 2019 and ending June 30, 2019. The SBA shall promulgate rules defining a “Seasonal Employer.”

In determining the reduction, if any, of the Forgiveness Amount, a Seasonal Employer shall apply the following fraction to determine the Forgiveness Amount:

New Employers

For employers that were not in business during the period from February 15, 2019 to June 30, 2019, at the request of the borrower/employer, the borrower/employer may calculate its average monthly payroll costs for the period from January 1, 2020 to February 29, 2020.

Rehires

Covers period February 15, 2020 to April 27, 2020 (30 days after date of enactment.) Applies when an employer has had a reduction in FTEs or wages paid after February 15, 2020. This provision permits the employer to eliminate the reduction in FTEs or salary by June 30, 2020.

This provision appears to have limited application. It is unlikely that applicants/employers will receive covered loans much sooner than April 15, 2020. The testing period is the eight week period after the origination of the loan.  The Forgiveness reduction will be based on the eight week period after the loan is received. The borrower/employer will have the opportunity to re-hire employees immediately upon receiving the PPP Loan, and accordingly, be fully staffed during the eight week testing period.

Useful Links:

U.S. Small Business Administration

PPP Sample Application Form

U.S. Department of Treasury

Assistance for Small Businesses

PPP Information Sheet - Lenders

PPP Information Sheet - Borrowers

Small Business Paycheck Protection Program

U.S. Chamber of Commerce

Coronavirus Emergency Loans | Small Business Guide and Checklist

CIRCULAR 230 DISCLOSURE: DO NOT TAKE ACTION WITHOUT DISCUSSING YOUR SITUATION WITH YOUR CPA. 

The information contained herein is general in nature and based on authorities that are subject to change. Blankenship CPA Group, PLLC guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Blankenship CPA Group, PLLC assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. Circular 230 Disclosure: This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

FOR EMPLOYMENT AND BENEFITS RELATED ACTIONS PLEASE ALSO DO NOT TAKE ACTION WITHOUT DISCUSSING WITH YOUR HR ATTORNEY