Don’t Forget to Apply for Your PPP2 Funding

March 22, 2021 by Leave a comment

As we discussed in an earlier article, the second round of Paycheck Protection Program (PPP2) loans is open. If your business qualifies, then we highly recommend applying for this government funding; but do it soon, because the March 31 deadline is approaching quickly!

Under the PP2 loan program, a business can obtain a forgivable loan. The loan must be spent on eligible expenses (like payroll, mortgage interest, utilities, rent, and certain other expenses). As long as (1) the loan it was spent on eligible expenses, (2) at least 60% of the loan was spent on payroll, and (3) employee and compensation levels are maintained, then the loan may be forgivable, which means it does not need to be repaid. As an additional bonus, the loan forgiveness does not constitute taxable income.

To qualify for the PPP2, your business must:

  • have 300 or fewer employees;
  • have previously received a First Draw PPP loan;
  • have used the full amount of the prior PPP loan only for authorized uses; and
  • have experienced at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

To meet the final bullet-point, you need to show the reduction only on in one set of correlative quarters. Most aviation industry businesses experienced at least one quarter of harsh economic circumstances in 2020 so most aviation industry businesses should qualify under this element.

The small business administration has published guidance on how to calculate your maximum loan.

Applications can typically be submitted through your local bank. There are a number of financial organizations that are also processing these loans for businesses who don’t want to use their local bank. The deadline for applying for this program is March 31, 2021.

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Second Draw PPP Loan

December 29, 2020 by 2 Comments

The President has signed the Covid-19 relief legislation, which means that there is an opportunity for businesses to seek a second loan under the Paycheck Protection Program (PPP).

Some things will remain the same with this second iteration of the PPP. The maximum amount of the loan will be equal to 2 and a half months of payroll (this can be based on 2019 payroll OR the one-year period prior to the loan). If you spend the loan on certain authorized expenses during the covered period then the loan can be forgiven (so you do not have to repay it).

But there will be some key differences in the second PPP. The most important of these is that the second draw PPP will be limited to businesses that can show an adverse effect from Covid-19. Nearly all of ASA’s members have been affected by Covid-19 so hopefully this works to the benefit of our members. The manner in which you must show effect is by comparing your 2020 quarterly gross receipts with those of the corollary 2019 quarter. If you can demonstrate that your quarterly gross receipts dropped by 25 percent or more from the corollary 2109 gross receipts for the same quarter, then you meet this prong of the eligibility test. There are also special rules if you were not in business for all of 2019.

We recommend that you simply arrange your gross receipts like this to assess eligibility:

  2019 2020 Subtract the 2020 quarterly gross receipts from the 2019 quarterly gross receipts and divide by the 2019 quarterly gross. If the number is greater than 25% (0.25) then you may be eligible for a second draw PPP Loan.
1st Qtr Q1 gross receipts Q1 gross receipts (2019Q1-2020Q1)/2019Q1
2nd Qtr Q2 gross receipts Q2 gross receipts (2019Q2-2020Q2)/2019Q2
3rd Qtr Q3 gross receipts Q2 gross receipts (2019Q3-2020Q3)/2019Q3
4th Qtr Q4 gross receipts Q4 gross receipts (2019Q4-2020Q4)/2019Q4

Other minor change include a tighter focus on smaller businesses: second draw PPP eligibility will be limited to businesses with fewer than 300 employees. The first round of PPP had a limits of 500 employees.

Payroll, rent and utilities remain allowable expenses for purposes of earning loan forgiveness, and the new law expands the scope of allowable expenditures to include (i) certain operations expenditures, like software that is necessary to facilitate business operation, (ii) uninsured property damage caused by vandalism or looting, (iii) payments to supplier providing essential goods, and (iv) certain worker protection expenses.

The new law also clarifies certain payroll costs. It establishes that group life, disability, vision, or dental insurance are included as part of payroll costs.

The maximum loan for the second draw PPP will be $2,000,000.

One limitation that may affect some ASA members – especially those whose business is focused in China – is a set of second draw PPP limits related to China:

  • If your business enjoys 20% or more ownership by a Chinese entity then your business is excluded from the second draw PPP;
  • If your business enjoys 20% or more ownership by an entity that has significant operations in China (including Hong Kong) then your business is excluded from the second draw PPP [“significant operations in China” is undefined and likely will be defined in the upcoming regulations]; or
  • If your business’ Board of Directors includes a resident of China then your business is excluded from the second draw PPP.

The deadline for second draw PPP application is March 31. The regulations for these new second draw PPP Loans ought to be out soon, and businesses should wait for the new regulations before applying (banks likely will not accept new applications until those regulations have been released).

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Start Thinking About PPP Loan Forgiveness

August 4, 2020 by 1 Comment

Many of ASA’s members obtained Paycheck Protection Program (PPP) Loans.  Now is the time to start thinking about what you need in order to obtain loan forgiveness, so you do not have to pay the loan back.

If you didn’t get the loan and you are eligible, then please apply now, before it is too late – you can find more details, here.

Forgiveness

One of the most attractive features of the PPP Loan program is that borrowers who spend the money on the intended expenses can get some or all of the loan forgiven.  The intended expenses are:

  • payroll
  • rent
  • mortgage interest and
  • utilities

But to secure forgiveness, you’ll need to submit the rights forms with the right supporting documentation.

See Our Video for More Guidance

ASA just finished a webinar on the process for obtaining loan forgiveness. It explains what forms need to be completed and provides tips on how to complete them.  It also details the supporting documentation that the government requires you to file in order to secure loan forgiveness.

The webinar is available on-demand, here.  Even if you haven’t yet hit the point of loan forgiveness, it is worthwhile to understand the requirements for loan forgiveness, so that you can take the right steps to maximize your forgiveness potential.

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Free Money Is Still Available (PPP)

August 3, 2020 by 2 Comments

If you haven’t yet applied for a Paycheck Protection Program (PPP) Loan, then there is still time.  The deadline for applying has been pushed back to August 8, 2020.

One of the most attractive features of the PPP Loan program is that borrowers who spend the money on the intended expenses can get some or all of the loan forgiven.  The intended expenses are:

  • payroll
  • rent
  • mortgage interest and
  • utilities

Forgiveness is also tied to retention of staff (headcount) and supporting payroll levels (retaining staff at 75% or more of their pre-Covid wages and hours).  Businesses that lose headcount may still be eligible for reduced forgiveness.

ASA compiled a list of Frequently Asked Questions on the PPP; the FAQ page includes information on eligibility.  If you are eligible but still have not yet applied, then please review the FAQ for more details and instructions.

ASA just finished a webinar on the process for obtaining loan forgiveness.  It is available on-demand, here.  Even if you haven’t yet hit the point of loan forgiveness, it is worthwhile to understand the requirements for loan forgiveness, so that you can take the right steps to maximize your forgiveness potential.

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PPP Amendments Make It Easier to Get Loan Forgiveness

June 5, 2020 by Leave a comment

Many of you have heard that Congress has passed a bill that would change some of the standards associated with the Paycheck Protection Program (PPP).

H.R.7010 is entitled the “Paycheck Protection Program Flexibility Act of 2020.”  That bill was signed into law today by the President.  We have a short status update at the bottom of this post.

The Changes

The bill features a number of important changes to the CARES Act Paycheck Protection Program (PPP) and the loan forgiveness program associated with it.

Covered Period for Spending and Loan Forgiveness

The covered period is changed in two different places in the new law.

First, the covered period for basic PPP program is changed the so that it ends at the end of the year (not June 30, 2020) as originally established.  Technically, this covered period is the period during which applicants can seek a loan.  More importantly, this is also the period during which PPP funds may be expended.  So, companies that were worried about whether they could pay out the money they received for PPP loans (on authorized expenses), will have a longer period for spending that money.

Second, the covered period for purposes of PPP loan forgiveness is also changed.  This is slightly more complicated.  For loan forgiveness purposes the covered period will end on the earlier of (A) 24 weeks after PPP loan origination or (B) December 31, 2020.

How will this work?  Let’s say that you received a PPP loan on April 28, 2020.  The 24-week period should end on or about October 12.  This means that you would have until December 31 to spend the PPP money to comply with the loan program requirements, but if you want to obtain loan forgiveness for the loan then you would need to spend the money on forgivable expenses by the earlier deadline of 24 weeks after PPP Loan origination (in this hypothetical that begins with an April 28 loan origination, October 12, 2020 appears to be the last day for forgivable expenditures).

Thus, for most PPP businesses (who intend to seek PPP loan forgiveness), it will be important to spend the PPP Loan on forgivable expenses by the 24th week after the loan origination.  For many businesses, this means spending the money on verifiable forgivable expenses before the 24-week anniversary of the loan origination.

But if you get a late PPP loan (a loan that is originated after July 16, 2020), then your ‘spend period’ and ‘forgiveness period’ will be the same.  Both would end on December 31, 2020; so, your total time period may be less than 24 weeks.

One other note on the covered period.  If you received your loan before June 5 (the date of enactment) and want to elect to retain an eight week period as your covered period then may elect to do that (retaining a covered period that begins on the date of the loan origination).

Minimum Floor – 60% of PPP Must Be Spent on Payroll to Obtain Forgiveness

Under the original law, one generally wanted to spend a certain percentage of the loan on payroll and spend no more than a certain percentage of the loan on authorized non-payroll expenses like rent. This was because the loan program was designed to set a maximum loan based on 80% payroll and 20% other expenses (like rent).  Assuming your headcount remains the same, you keeps salaries at 75% or more of spending from the reference period in order to maximize your potential for forgiveness.  Everyone’s numbers are different but in an ‘optimized’ situation, that meant keeping your payroll at about 60% of the loan amount (or more) in order to maximize forgiveness.  Under the old law, anything less would likely be subject to a reduction in forgiveness.

Treasury regulations applied a flat 75% test, requiring 75% of the funds provided to be spent on payroll if you intended to seek forgiveness.  This interfered with the numerical simplicity of the ‘optimized’ situation.  The new law returns the 60% threshold as the minimum amount that must be spent on payroll in order to qualify for forgiveness.

For those who do spend less than 100% of the PPP Loan on payroll, the new law imposes a “60% floor” for those who seek loan forgiveness.

The new law sets a minimum threshold that requires at least 60% of the PPP be spent on payroll, or else you lose all possibility of loan forgiveness.  You can still spend 100% of the PPP loan on payroll without penalty – you don’t need to hit the 60% mark exactly – but if you spend less than 60%  of your PPP loan on payroll then you may be ineligible for loan forgiveness.  This does means you can spend up to 40% of your PPP Loan on other forgivable expenses (covered mortgage interest, covered rent, or covered utility payments) and still get some or all of your loan to be forgiven.

What if I Can’t Rehire Employees?

The PPP loan forgiveness program also has a reduction in the percentage of a loan that can be forgiven for businesses that lose headcount as compared to their previous headcount. The comparison period is either February 15, 2019 – June 30, 2019, or January 1, 2020 – February 29, 2020 (at the option of the borrower).  If your average headcount in the comparison period was 40 and your average headcount in the covered period, today, is 30 then the maximum loan forgiveness would be reduced to 75%.

A concern expressed by a number of ASA members has been that they are seeking to rehire furloughed/laid-off workers and those workers refuse to return (for a variety of reasons, including because of fears about continuing danger from Covid-19, and because of lucrative unemployment benefits currently offered pursuant to the CARES Act).  Thus, they are encountering difficulties in returning to the higher numbers based on this refusal.

The new law provides a safe harbor for businesses that make a good faith effort to rehire, but are rebuffed by the past employee.  To make use of this safe-harbor, the employer must be able to document that it has tried and failed to rehire individuals who were employees on February 15, 2020; and that it has also tried and failed to hire similarly qualified employees for the unfilled positions on or before December 31, 2020.

As an alternative, the new law also permits the employer to document an inability to return to the same level of business activity (as compared to the level of activity as of February 15, 2020) due to certain legal compliance requirements (e.g. if CDC rules or OSHA rules would preclude a return to work).  This latter provision is unlikely to apply to most members of the ASA community, but it would apply to businesses that cannot return to work because inability to engage in social distancing makes the job dangerous for employees.

Interest Deferral

Under the original provisions, interest on the PPP loan was deferred for six months.  The new law changes this so that interest is deferred until the you apply for the loan forgiveness and tell the bank the amount of loan forgiveness to which you are entitled.  After you apply for loan forgiveness the law requires a decision within 60 days about whether loan forgiveness is warranted.  The new law is a little vague on whether interest accrues during this 60-day period – it is likely that this question will be answered in regulations.

Don’t look at this provision and think that if you never apply for loan forgiveness then your obligation to pay the loan back never applies.  The law set up a ten-month limit.  If you haven’t applied for PPP loan forgiveness within 10 months after the last day of the covered period, then you will need to start making payments of principal, interest, and fees on the loan beginning 10 months after the last day of the covered period.

If the PPP Funds Remain as a Loan …

PPP loans can remain unforgiven (it is legal to use them on certain non-forgivable expenses).  In such a case it becomes a low-interest loan.

The new law establishes a minimum maturity of five years for loans that remain unforgiven (the original bill set 10 years as a maximum, so this means the term for remaining unforgiven portions of loans will be 5-10 years).

Tax Status Not Fixed

Congress anticipated that the PPP would be forgiven if the payroll-related purposes of the PPP loan were met. To ensure that the debtor doesn’t need to pay extra taxes for this life-line, Congress explicitly stated that the forgiven amount is not included in gross income.

Congressional intent was thwarted by IRS Notice 2020-32 which explains that 26 U.S.C. § 265 disallows a deduction to a taxpayer for any amount that is allocable to income that is exempt from income taxes. The IRS Notice interprets this to mean that the expenses on which the forgiven loan is spent become non-deductible expenses.

The net result of the IRS Notice for many businesses would be the same as if they had treated the loan forgiveness as taxable income in the first place.  This issue has not been addressed in the new law.

Bills to address this concern have been introduced in the House (H.R.6821) and Senate (S.3612).  A full analysis of this provision is found here.

Status

The House passed H.R. 7010 on May 28 by an overwhelming vote of 417-1.  The bill has been held up in the Senate, where Senators Lee and Johnson have expressed concerns with some details in the bill.  They feel that the bill was intended to be a short-term solution and that loan applications should be limited to Aug. 15 (not through the end of the year).  The concerns were resolved and the bill was passed in the Senate.  The next step is for the President to sign it.  There is no reason to believe that the President won’t sign the Bill into law.

Update: The President signed the bill into law this afternoon.  June 5, 2020

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IRS Thwarts Congress’ Efforts to Make PPP Loan Forgiveness Tax-Free

May 4, 2020 by 3 Comments

The IRS has published new guidance that makes Paycheck Protection Program (PPP) Loan Forgiveness less valuable (but it is still valuable).

Under ordinary circumstances, when a loan is forgiven, the debtor recognizes taxable income in the forgiven amount. So, if a debtor borrows $100,000 and the lender agrees that the loan does not need to be repaid, the lender typically gets a $100,000 deduction for bad debts and the debtor must declare income in the amount of the $100,000 forgiven (or “cancelled”) loan. For tax purposes, it is like the bank paid that money to the debtor.

Congress anticipated that the PPP would be forgiven if the payroll-related purposes of the PPP loan were met. The US government would reimburse the bank for the loan amount. Thus, the bank would not have an offsetting deductible loss associated with the cancellation of debt. To ensure that the debtor doesn’t need to pay extra taxes for this life-line, Congress explicitly stated in the CARES Act Loan Forgiveness provisions:

“For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.”

So far it all makes sense. Forgiven PPP loans become truly free money to those who receive them. And this fits the intended purpose, which is to bail out companies in a time of need. But recently, the IRS issued IRS Notice 2020-32 explaining how this provisions would be interpreted. And that is where the problems begin.

The IRS Notice explains that there is a law – 26 U.S.C. § 265 – that disallows a deduction to a taxpayer for any amount that is allocable to income that is exempt from income taxes. The IRS Notice interprets this to mean that the offsetting payments that make the loan forgivable become nondeductible under section 265. In other words, the expenses that the forgiven loan is spent on becomes non-deductible expenses. The net result of the IRS Notice for many businesses would be the same as if they had treated the loan forgiveness as taxable income in the first place. Here is a simple example to illustrate the effect:

Example

Let’s say that a business has $1,000,000 in taxable income from normal operations in 2020. That business obtained a $100,000 PPP loan and used 100% of it on payroll. During 2020, the business paid total deductible wages of $600,000. Late in 2020 our hypothetical business applied for and received 100% loan forgiveness. To make this simple let’s assume that the business had $400,000 of other ordinary business expenses and no retained revenues.

If this had bean an ordinary loan that was forgiven, then the business would have an extra $100,000 income from the loan cancellation. Since it had $1,000,000 in taxable income from normal operations, $1,000,000 in ordinary business deductions, and an extra $100,000 income from the loan cancellation, it would pay 2020 taxes on $100,000 of income.

Because of the way that the IRS has interpreted the deduction issue under the Notice, when filing 2020 taxes, the business would exclude the $100,000 loan cancellation from income, but it would need to also exclude $100,000 of payroll from its deductions (because of section 265). Which means that the net result would be a payroll deduction of $500,000 instead of $600,000. The business would still be liable for taxes on $100,000 of income. This gets the business to the same tax result as if it had treated the loan forgiveness as income in the first place!

In some cases there may be a slight advantage to this approach (e.g. if the business has concerns about income caps or deduction caps) but for most businesses it simply unnecessarily complicates their tax filing, with little real change. Most importantly it frustrates the clear intent of Congress to prevent the loan forgiveness from being treated as taxable income.

There are ways to address this discrepancy. Many have talked about a legislative solution by which Congress would clarify that it did not intend to impose extra taxes on recipients of PPP loan forgiveness. If the IRS wanted to come up with a corrected notice, then the IRS could recognize that the language of the CARES Act excludes the forgiveness from income while the language of the section 265 talks about exemption from income (and could use this semantic difference to declare that section 265 does not apply in this particular situation).

To the extent that the PPP replaces lost revenues, on which a business would have paid taxes anyway, the IRS Notice puts businesses in a comparable situation to that they might have experience without Covid-19 (comparable – not the same). The business receives money and pays taxes on that money as income. The reason the IRS position is disappointing is because it is clear that Congress intended something different.

Even if this issue does not receive a legislative solution, PPP loan forgiveness is still a positive thing for those who are able to benefit from it.

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Paycheck Protection Program: Frequently Asked Questions

April 3, 2020 by 5 Comments

We’ve gotten a lot of questions about the Paycheck Protection Program. We will use this location to try to offer some answers for the ASA Community.  If you have questions that are not answered here, then please email them to Jason Dickstein and he will attempt to find answers and post them to the blog.

These answers are general in nature and are not meant to reflect legal advice.  Answers to your specific questions can turn on specific facts that apply to your situation.  Many of these issues can get far more complicated when you consider unusual fact patterns.  If you are uncertain about how the law applies to your particular facts, then you should contact an attorney for assistance.

Also, please note that SBA has JUST issued regulations for this program, which are available here.

 

Is my business eligible for the Paycheck Protection Program?

The Paycheck Protection Program. is meant for small businesses, and certain other businesses described in the CARES Act.  Under SBA rules, to be considered a small business you need to meet the SBA’s guidelines for your industry.

Industry small business thresholds are distinguished and published based on NAICS codes.  To identify the threshold that applies to you, you need to first identify the NAICS code that reflects your primary business activity.  In determining the primary industry in which a concern or a concern combined with its affiliates is engaged, SBA considers the distribution of receipts, employees and costs of doing business among the different industries in which business operations occurred for the most recently completed fiscal year. SBA may also consider other factors, such as the distribution of patents, contract awards, and assets.

For example, let’s imagine you are operating a repair station and also distributing aircraft parts.  The repair station accounts for 60% of your revenues, and it also accounts for 75% of your personnel.  Under this hypothetical, the repair station appears to be the predominant business for purposes of identifying the appropriate NAICS code to apply.

This table shows a few of the NAICS codes that commonly reflect the business models of ASA members:

Business Activity NAICS (2017) Size Standard
Aircraft Parts Distribution 423860 500 employees
Aircraft Sales 441228 500 employees
Commercial Aircraft Leasing (dry lease) 532411 $35,000,000 annual revenue
Air Transportation Support Activities, including Repair Stations (but excepting “factory” conversion, overhaul and rebuilding) 488190 $35,000,000 annual revenue

There are special rules for the Paycheck Protection Program. If your business does not meet the small business thresholds, but it has 500 employees or less, then it is permitted to apply for the Paycheck Protection Program (unless otherwise excluded).  For example, a repair station that has average receipts of $40 million would appear (at first blush) to be too large to qualify as a small business; but if it has only 400 employees then it likely is permitted to apply for the Paycheck Protection Program under this special rule.

This size standard includes the employees/revenue of your foreign and domestic affiliates (you have to consider affiliates, too, when calculating whether you meet the size standards).

There are exclusions, too.  They include those who are delinquent in paying a past SBA loan, and businesses with significant owners (>20%) who are in jail, under indictment, or otherwise subject to the criminal justice process.

Source 13 C.F.R. 121.107

 

How do I calculate revenue for size standard purposes?

For small business purposes you should use your most recent tax returns to identify your revenue.   If you are looking at your business tax return, this typically means your “total income” plus “cost of goods sold.”  You msut use the average of the most recent three years.  Where there are affiliates, you have to include the revenues of your affiliates.

Source 13 C.F.R. 121.104

 

How do I calculate number of employees for size standard purposes?

For small business purposes you should use the average number of employees (including those of your affiliates) in each pay period for the past 12 calendar months.

In determining your business’ number of employees, you should counts all individuals employed on a full-time, part-time, or other basis.  This includes employees obtained from a temporary employee agency.  Part-time employees are each counted the same as full-time employees (they are not fractions).  Volunteers are not considered employees (but for many companies in the ASA community, volunteers could violate the Fair Labor Standards Act so be careful about characterizing employees as volunteers).

Source 13 C.F.R. 121.106

 

What are the SBA Affiliation Rules and how do they impact my ability to qualify as a small business?

In determining whether a business is a small business, the SBA will add in the revenue/employees of its affiliates.  So if a business has three locations that are subject to common ownership or control, then the employees/revenues of all three locations will be aggregated to determine if the business is a small busieness.

Concerns and entities are affiliates of each other when one controls or has the power to control the other.  Two businesses may also be affiliates when a third party (or group) controls or has the power to control both.   It does not matter whether control is actually exercised, so long as the power to control exists.  Factors to consider in determining affiliation include ownership, management, previous relationships with or ties to another concern, and contractual relationships.  Negative control, like minority ownership with the power to prevent a quorum, can also be a form of control.

Foreign affiliates and non-profit affiliates are also considered affiliates for these purposes.

The Paycheck Protection Program created a special exception to the affiliation rule.  The exception applies to businesses under the NAICS codes beginning with 72 and having 500 or fewer employees at each location.  This includes hotels and restaurants.  This means that a hotel chain can treat each location as a separate business for purposes of applying the 500 person limit.

Source: CARES Act, 13 C.F.R. 121.103.

 

How do I apply for the Paycheck Protection Program?

Applications for the Paycheck Protection Program must be filed with a qualified bank or financial institution.  This includes lenders who are already qualified to process SBA section 7(a) loans.  You should consult with your local lender as to whether it is participating. You can visit the SBA website for a list of SBA lenders.

Source: Treasury PPP Fact Sheet for Borrowers

 

What is the Maximum Loan Size?

The maximum loan size is two and half times of your average monthly payroll for the prior year (so, 2.5 months-worth of payroll). If you’ve already received a disaster assistance loan between January 31, 2020 and the date on which these loans are made available, then you can also refinance that prior loan under this new program (this amounts to an increase in the maximum loan authority over the “2.5 times payroll” limit).

If you refinance an Economic Injury Disaster Loan (EIDL) through this mechanism, ten you should note that it will be subject to the limits of this loan program (e.g. two year term) as well as the benefits (e.g. lower interest rate)

There is an additional cap of $10,000,000 for the total loan amounts for which you may be eligible.

Source: CARES Act

 

What Can I Use the Loan For?

You can use the loan for

  • Payroll costs for US residents (which include compensation up to $100,000 annual salary)
  • Group health care costs and insurance premiums
  • Employee salaries and commissions
  • Mortgage interest (but not principal)
  • Rent
  • Utilities
  • Interest on pre-existing debt
  • refinancing an EIDL loan made between January 31, 2020 and the date on which the PPP loans become available

Only some of these uses are eligible for loan forgiveness.

The regulations anticipate that at least 75% of the PPP Loan must be used for payroll.

Source: CARES Act, SBA PPP Regulations

 

What qualifies as “payroll costs?”

The sort of payroll costs that are allowable expenses under the Program are compensation to U.S. employees (principal place of residence must be in the United States).  This compensation can take the form of:

  • salary, wages, commissions, or similar compensation
  • cash tips or the equivalent
  • payment for vacation, parental, family, medical, or sick leave
  • allowance for separation or dismissal (severance)
  • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement
  • payment of state and local taxes assessed on compensation of employees

This list does not include the provisions for sole-proprietors because ASA members tend to be structured as businesses.

Source: SBA PPP Regulations

 

How many employees do I have to retain qualify for the Paycheck Protection Program?

The Paycheck Protection Program does not specifically require you to retain any employees, but it is intended to allow you to retain employees, so failure to retain employees will (1) give you less payroll on which to spend the funds, and (2) reduce your ability to obtain loan forgiveness for the Paycheck Protection Program loan.

As part of the loan application, you will be required to certify “that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.”  But this does not mean that you can terminate all of the employees and spend all of the money on lease payments.  The regulations clarify that at least 75% of the loan must be spent on payroll.

The real penalty for failure to retain employees is that the amount of loan forgiveness is reduced if your headcount goes down or your payroll goes down (or if you fail to use the money for payroll).

Headcount Reduction: You compare the average monthly headcount during the eight weeks from the origination of the loan to the average monthly headcount during the period beginning on January 1, 2020 and ending on February 29, 2020. If headcount has gone down then you get a percentage of forgiveness correlative to the percent of remaining employees. For example, if you had 20 employees during the 2019 period, but only 18 during the eight weeks after origination of the loan, then you would only get 90% forgiveness (and the remaining ten percent of the loan would be subject to repayment).

Payroll Reduction: The amount of loan forgiveness is also reduced by the amount of any reduction in total salary or wages of any employee (except for employees who received more than $100,000 pay in 2019). This applies if the employee’s wages during the eight weeks after origination of the loan are reduced in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period. I think this clause may have been improperly drafted by the Senate, because we are comparing wages over an eight week period to wages over a thirteen week period; but it is clearly meant to be an incentive to continue wages at (or near) their pre-loan amounts.

In addition, not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.  So if you try to use the loan for rent and not payroll, you could severely limit your loan forgiveness options.

Source: CARES Act, SBA PPP Regulations

 

If I already applied for an SBA section 7(a) Loan then can I apply for a Paycheck Protection Program loan?

No.  Part of the certification necessary when you apply for the Paycheck Protection Program is a certification that you do not have an application pending for a loan under the same subsection (15 USC 636(a), or section 7(a) of the original Act), nor have you received a loan under that subsection, that would duplicate the purpose of the Paycheck Protection Program.

Thus, if you’ve already applied for a section 7(a) loan to cover things that reflect allowable expenses under the Paycheck Protection Program, then you will need to withdraw that application before you can apply for the Paycheck Protection Program.

This does not seem to apply to EIDL loans, because they arise under section 7(b) of the Act (a different subsection).

Source: CARES Act

 

If I already received an SBA Economic Injury Disaster Loan (EIDL) then can I apply for a Paycheck Protection Program loan?

Yes.  EIDLs appear to arise under subsection 7(b) so they do not appear to interfere with the PPP program.  If you received an SBA EIDL loan between January 31, 2020 and April 3, 2020, then you can apply for a PPP loan.

If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan.

If your EIDL loan was used for payroll costs, then your PPP loan must be used to refinance your EIDL loan.  The EIDL features an option for an advance of up to $10,000 that does not need to be repaid (“advance”).  Proceeds from such an advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

Source: CARES Act, SBA PPP Regulations

 

If I already received an SBA loan then can I apply for a Paycheck Protection Program loan?

It depends on the type of loan and it may depend on reasons why you got the loan.

Part of the certification necessary when you apply for the Paycheck Protection Program is a certification that you haven’t received a loan under the same subsection (subsection 7(a)), that would duplicate the purpose of the Paycheck Protection Program.  So if you received a subsection 7(a) loan and it was meant to be applied to payroll, mortgage, rent, or any of the other allowable costs of the Paycheck Protection Program, then you may be precluded from applying for the Paycheck Protection Program.

But you received an SBA 7(a) loan for something outside the allowable costs of the Paycheck Protection Program, then you may be permitted to apply for the Paycheck Protection Program.  The CARES Act specifies that if you already received a 7(a) loan between January 31, 2020 and the date on which the Paycheck Protection Program is made available, then you can apply for the Paycheck Protection Program loan as long as the EIDL was for a purpose other than the alowable uses for the Paycheck Protection Program.  As an example, if you were in a declared disaster zone due to a tornado and received an EIDL to pay for tornado-damage to your facility, then that would not inhibit your efforts to secure a Paycheck Protection Program loan.

Source: CARES Act

 

What is the PPP Loan Interest Rate?

1%

The statute explained that interest will be charged in an amount set by SBA, not to exceed 4 percent.  SBA had revealed a plan to set the interest rate at 0.5%, but the final regulation set interest at one percent.

Source: CARES Act, SBA PPP Regulations

When Do I Start Repaying the PPP Loan?  What is the term?

Under the statute, repayment is deferred for between 6 months and one year, and the repayment period can be up to ten years.  The US Government guidance that has been released since the Act was passed states that the loans will be for only two years and the deferment period will be six months. This means that you will start repaying the loan six months after it was issued.

Interest will continue to accrue on PPP loans during this six-month deferment.

Only the amount remaining after loan forgiveness needs to be repaid.  This may be limited to interest if the principle is entirely forgiven.

Source: CARES Act, Treasury PPP Fact Sheet for Borrowers, SBA PPP Regulations

 

Do I Have to Repay the PPP Loan?

Not if you spend it on the right things and meet the right requirements! You can receive loan forgiveness for amounts spent, during the eight weeks after origination of the loan, on:

  • Payroll
  • Mortgage interest
  • Rent
  • Utilities

Note that this is a slightly shorter list than the list of things for which you can use the loan, so you can use the loan as a typical loan for the other eligible expenses, as well.  Money spent on allowable purposes outside this list will continue to be treated as a non-forgiven loan.

Source: CARES Act

 

How Much Loan Forgiveness Can I Get?

You can get up to 100% of the principle forgiven, as long as it is used for Payroll, Mortgage interest, Rent, and/or Utilities.  However, there are certain things that can reduce this amount.  The amount of loan forgiveness will also be reduced if your headcount goes down or if your payroll is substantially reduced:

Headcount Reduction: You compare the average monthly headcount during the eight weeks from the origination of the loan to the average monthly headcount during the period beginning on January 1, 2020 and ending on February 29, 2020. If headcount has gone down then you get a percentage of forgiveness correlative to the percent of remaining employees. For example, if you had 20 employees during the 2019 period, but only 18 during the eight weeks after origination of the loan, then you would only get 90% forgiveness (and the remaining ten percent of the loan would be subject to repayment).

Payroll Reduction: The amount of loan forgiveness is also reduced by the amount of any reduction in total salary or wages of any employee (except for employees who received more than $100,000 pay in 2019). This applies if the employee’s wages during the eight weeks after origination of the loan are reduced in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period. I think this clause may have been improperly drafted by the Senate, because we are comparing wages over an eight week period to wages over a thirteen week period; but it is clearly meant to be an incentive to continue wages at (or near) their pre-loan amounts.

To get loan forgiveness, you will have to submit an application to the lender the proves what you spent the money on, so keep good records.

Source: CARES Act

What if I have already terminated employees before I realized that I could get the PPP?

If I have already terminated workers before the PPP, then you may be able to secure the full amount of loan forgiveness by rehiring them.

If you reduced headcount and/or salaries between February 15, 2020 and April 26, 2020, but you remedied headcount/salaries by eliminating the reduction in employees/salary by June 30, 2020, then the loan forgiveness will be calculated without any reduction.

Source: CARES Act

 

Is it easier to apply for the PPP than for other SBA programs?

Yes.  Some of the normal small business loan preconditions are waived for these Paycheck Protection Program loans. The most important ones are:

Source: CARES Act

 

If I seek loan forgiveness, then is the forgiveness treated as taxable income?

The amount forgiven will be treated as cancelled debt but is NOT included in gross income.

Typically, some cancelled debt is considered taxable income under federal tax standards.  But another clause in the CARES Act would exclude this forgiveness amount from gross income so this may mitigate subsequent tax consequences.

Source: CARES Act

 

What happens if PPP loan funds are misused?

If you use PPP funds for unauthorized purposes, then SBA will direct you to repay those amounts.

If you knowingly use the funds for unauthorized purposes, then you may be subject to additional penalties through mechanisms such as government fraud charges.

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Senate Proposes Paycheck Protection Program

March 26, 2020 by 2 Comments

The Senate has passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and it is expected to go to the House tomorrow for a vote.  This bill includes a “Paycheck Protection Program.”  The Program is “loan” issued by the SBA to an eligible business.  “Loan” is in quotes because you may be able to get all or part of the loan “forgiven” (so it functions like a grant).

What is the Maximum Loan Size?

The maximum loan size is two and half times of your average monthly payroll for the prior year (so, 2.5 months-worth of payroll).  If you’ve already received a disaster assistance loan between January 31, 2020 and the date on which these loans are made available, then you can also refinance that prior loan under this new program (this amounts to an increase in the maximum loan authority).  There is an additional cap of $10,000,000 for the loan amounts.

What Can I Use the Loan For?

You can use the loan for

  • Payroll costs for US residents (which include compensation up to $100,000 annual salary)
  • Group health care costs and insurance premiums
  • Employee salaries and commissions
  • Mortgage interest (but not principal)
  • Rent
  • Utilities
  • Interest on pre-existing debt

Only some of these uses are eligible for loan forgiveness.

What is the Loan Interest Rate?

An amount set by SBA, not to exceed 4 percent.

When Do I Start Repaying the Loan?

Repayment is deferred for between 6 months and one year.  The period for repayment can be up to ten years, and only the amount remaining after loan forgiveness needs to be repaid.

Do I Have to Repay the Loan?

Not if you spend it on the right things and meet the right requirements!  You can receive loan forgiveness for amounts spent, during the eight weeks after origination of the loan, on:

  • Payroll
  • Mortgage interest
  • Rent
  • Utilities

Note that this is a slightly smaller list than the list of things for which you can use the loan, so you can use the loan as a typical loan for the other eligible expenses, as well.

Another important element is that the amount of forgiveness is reduced if your headcount goes down or your payroll goes down.

Headcount Reduction: You compare the average monthly headcount during the eight weeks from the origination of the loan to the average monthly headcount during the period beginning on January 1, 2020 and ending on February 29, 2020.  If headcount has gone down then you get a percentage of forgiveness correlative to the percent of remaining employees.  For example, if you had 20 employees during the 2019 period, but only 18 during the eight weeks after origination of the loan, then you would only get 90% forgiveness (and the remaining ten percent of the loan would be subject to repayment).

Payroll Reduction: The amount of loan forgiveness is also reduced by the amount of any reduction in total salary or wages of any employee (except for employees who received more than $100,000 pay in 2019).  This applies if the employee’s wages during the eight weeks after origination of the loan are reduced in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.  I think this clause may have been improperly drafted by the Senate, because we are comparing wages over an eight week period to wages over a thirteen week period; but it is clearly meant to be an incentive to continue wages at (or near) their pre-loan amounts.

To get loan forgiveness, you will have to submit an application to the lender.

Is There Anything Else I Should Know?

Some of the normal small business loan preconditions are waived for these loans.  The most important ones are:

  • Waiver of the requirement to show that the small business concern is unable to obtain credit elsewhere
  • Waiver of the requirement for a personal guarantee
  • Waiver of any requirement for collateral

The amount forgiven will be treated as cancelled indebtedness (but another clause in the Bill would exclude this forgiveness amount from gross income so this may mitigate subsequent tax consequences).

This is merely a bill – not yet a law – so look at the final Public Law language before acting in reliance on this program!

 

UPDATE: The House took up debate on this bill at 9:05 am on March 27, 2020

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