June 4 Update
House Bill H.R. 7010 passed the Senate and is now on its way to the President to sign. In addition to amendments relating to the PPP loan program, the bill provides that the deferral of employment taxes is now available even for taxpayers who have PPP loans that re forgiven under the CARES Act. This will allow taxpayers who obtain PPP loans and intend to apply for loan forgiveness to also defer the applicable employment taxes.
April 30, 2020 Update
The IRS has issued Notice 2020-32, which provides further guidance on some certain tax consequences associated with PPP loans. In particular, the IRS has confirmed that expenses paid with PPP loans will not be deductible to the extent attributable to the portion of the loan forgiven.
On March 27, 2020, the federal government enacted the CARES Act. The Act includes a $349 billion dollar stimulus package available to small businesses in the form of a Small Business Administration 7(a) loan, known as a Paycheck Protection Program Loan. The loan is forgivable, and amounts to grant, if certain conditions are met. Below is a summary of the Paycheck Protection Program Loan terms and conditions along with a summary of a few other loan related provisions in the Act.
1. Paycheck Protection Program Loan under 7(a) (NOTE: use of this loan may preclude eligibility for tax credits and payroll tax deferral under CARES Act)
a. Issuing Entity. Approved SBA 7(a) lenders have authority to approve and issue the loans. Applications unavailable until SBA issues guidance to lenders. SBA has until 4/26/20 to produce guidance. The lender has to make an decision on an application within 60 days of receipt.
i. Consideration criteria (the below is all the act provides, but it’s not necessarily exclusive):
1. Was the business in operating on 2/15/20?
2. Did the business pay salary and payroll taxes OR pay independent contractors reported on 1099?
b. Eligibility. Businesses in operation as of 2/15/20, who either paid employee salary and payroll taxes or paid an independent contractor on a 1099, and who fit into one of the following three categories: (i) less than 500 employees, (ii) small businesses meeting SBA’s industry specific standards (NAICS), and (iii) businesses with multiple physical locations, not more than 500 employees at any given location, and are classified in the NAICS with a code of 72 at the beginning – generally, accommodation and food service industries. *Certain affiliation regulations may apply to companies with related ownership, management or control.
c. Loan Amount. An eligible borrower can get a loan for the aggregate of the following up to $10mil: (i) 2.5x it’s average monthly payroll for the 12-month period ending on the date of the loan and (ii) the amount of an EIDL loan issued to the borrower under Section 7(b)(2) between 1/31/20 and 6/30/20 (covered period).
i. Seasonal business variation – Payroll determination period runs either (i) 12 weeks from 2/15/19 or (ii) 3/1/19 to 6/30/19 – borrower’s choice. SBA determines whether borrower is seasonal. No criteria provided.
ii. “Payroll” – defined in Section 1102(a)(2)(viii):
- Payroll excludes: (i) compensation paid to an employee over 100k annually, as prorated for the covered period; (ii) taxes imposed by 21, 22, and 24 of IRC during covered period; (iii) employees with principal residence outside US, (iv) qualified sick leave wages and family leave wages for which credit is given under Families First Coronavirus Response Act.
d. Use of Funds. Loan funds may be used for (i) payroll costs, (ii) costs related to the continuation of group health care benefits during period of paid sick, medical or family leave, and insurance premiums, (iii) employee salary, commissions, or similar compensations, (iv) mortgage interest, (v) rent, (vi) utilities, and (vii) interest on debt obligations incurred prior to 2/15/20.
e. Application Requirements.
i. Good faith certification (page 23, line 5) – uncertain economic conditions make the loan necessary, funds will be used to retain workers and payroll or for qualified uses, and no duplicate applications submitted to SBA to cover cost of qualified uses of proceeds.
ii. Typical SBA percentage fees are waived. Requirement to prove alternative credit arrangements are unavailable is also waived.
iii. No personal guarantee or collateral requirement.
f. Loan Terms.
i. Maximum maturity of 10 years from the date borrower applies for loan forgiveness
ii. Maximum interest rate of 4%
iii. All payments, interest, and loan fees deferred for at least 6 months, up to a year at lender’s discretion
iv. Non-recourse: Loans are 100% guaranteed by SBA, and the SBA “shall have no recourse against any individual shareholder, member, or partner of an eligible recipient of a covered loan for non-payment of any covered loan” as long as the borrower uses the funds only for the designated purposes. (*Lender may have recourse)
g. Loan Forgiveness.
i. Upon application, the SBA may forgive loan proceeds used within 8 weeks from the date of loan origination on the following items:
1. Payroll (same exclusions for loan calculation purposes apply)
2. Mortgage interest on a pre-2/15/20 mortgage (real or personal property)
3. Rent on a lease in force prior to 2/15/20
4. Utilities (electric, gas, water, transportation, phone, and internet – sewer not mentioned) if service contract began before 2/15/20
ii. Increased wages paid to tipped employees may be forgiven.
iii. SBA won’t forgive more than the principal.
iv. Forgiveness Reduction.
1. Reduction 1 (geometric): Sum of forgiveness available multiplied by the following fraction: borrower’s average number of full-time equivalent employees per month employed during the 8 week period from the date of the loan origination (“covered period” for this forgiveness section) divided by borrower’s choice of the following (see Reduction Exception below):
a. Average number of full time equivalent employees per month employed by borrower from 2/15/19 to 6/30/19; or
b. Average number of full time equivalent employees per month employed by borrower from 1/1/20 to 2/29/20
c. Seasonal employer variation – must choose 2/15/19 to 6/30/19
d. Calculation Note: Average number of full time employees calculated by calculating the average number of full-time equivalent employees for each pay period falling within a month.
2. Reduction 2 (arithmetic): Reduce forgiveness by aggregate sum of salary/wage reductions for the covered period in excess of 25% of the total that an employee received during the most recent full quarter during which the employee was employed before the date of loan origination. Does not apply to employee who received, during any single pay period in 2019, wages or salary at an annualized rate of pay in an amount more than $100k. (see exception below).
3. Reduction 3 (arithmetic): Less the amount of an emergency EIDIL grant.
4. Reduction Exception.
a. For Reduction 1 above, if the reduced, qualified employee in the numerator was let go between 2/15/20 and 4/26/2020, and the employee is rehired (although a new employee appears to also qualify) by 6/30/20, then the reduction of that employee will be negated in the computation of Reduction 1.
b. For Reduction 2 above, the same principle above applies, except the salary reduction that occurred within the covered period must be undone by 6/30/20.
v. Forgiveness Increase: Borrower may receive forgiveness for additional wages paid to “tipped employees” under the Fair Labor Standards Act.
2. Emergency EIDL Grant under CARES Act amendment to Section 7(b)(2)
a. From 1/31/20 to 12/31/20, eligible participants who apply for an EIDL loan may request the SBA to provide up to 10k to be delivered to the applicant within 3 days after the SBA receives the application. The funds may be used for (i) providing sick leave to employees unable to work due to the direct effect of COVID-19, (ii) maintaining payroll to retain employees during business disruptions or substantial slowdowns, (iii) meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains, (iv) making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses. However, funds from this grant and the paycheck protection loan can’t be requested for or earmarked for the same purpose.
b. The applicant must provide an affidavit of self-certification that the applicant is an eligible participant.
c. The amount of an emergency grant does not need to be repaid but will be reduced from the loan forgiveness if the applicant receives a paycheck protection loan under 7(a).
3. EIDL Loans
a. CARES Act modifications to loan structure:
i. Loans now available for the declared COVID-19 emergency
ii. Personal guarantee removed for loans under 200k.
iii. Removed requirement to prove alternative funds are unavailable.
iv. Applicant must have been in business by 1/31/20.
v. SBA may approve applicant solely based on credit score and shall not require tax return or SBA may use alternative methods
1. SBA must have self-certification, under penalty of perjury, from borrower certifying it is an eligible entity
vi. Application: https://disasterloan.sba.gov/apply-for-disaster-loan/index.html
4. Loan Subsidy ($17bil)
SBA will forgive next 6 months of payments (principal, interest, and associated fees) for borrowers of SBA guaranteed loans – 7a, EIDL, 504, and Microloans. This applies to existing loans.