Paycheck Protection Program
The Paycheck Protection Program (PPP) is a Small Business Administration (SBA) loan made available to businesses with fewer than 500 employees (including sole proprietors, independent contractors and self-employed persons). Businesses in the hospitality and food industry with more than one location were also eligible if at the store and location level the business employed fewer than 500 workers. Following is a brief summary:
- Lenders began processing loan applications on April 3, 2020 (April 10th for the self-employed: sole proprietors, independent contractors). The original deadline for PPP loan applications was June 30, 2020; however, on July 4th President Trump signed legislation that extended the application due date to August 8, 2020.
- On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) was signed into law. The impact of the PPPFA on the original loan program is as follows:
The covered period for loan forgiveness has been extended from eight weeks to 24 weeks or December 31, 2020, whichever is earlier. The covered period begins on the date loan is funded. Borrowers who received loans prior to June 5, 2020 can choose either the 8-week or 24-week covered period, while those who received loans on June 5, 2020 or thereafter have the 24-week covered period.
Previously set at 75%, the percentage of the loan amount required to be used for payroll costs is now 60%. Payroll costs are capped as follows:
Employee Non-Owner. For borrowers who elect the eight-week covered period the amount is capped at $15,385 per employee. For borrowers electing or subject to the 24-week covered period the amount is capped at $46,154 per employee. Employer non-owner payroll costs may include group health and retirement plan expenses.
Owner-Employees and Self-Employed. For borrowers who elect the eight-week covered period the amount is capped at $15,385 or 8/52 of 2019 compensation per individual, whichever is less, in total across all businesses. For borrowers electing or subject to the 24-week period the amount is capped at $20,833 or 2.5/12 of 2019 compensation per individual, whichever is less, in total across all businesses. Health insurance for both owner employees and self-employed individuals is considered to be included in compensation. Retirement plan contributions for self-employed individuals are excluded; however, owner-employee retirement expenses may be included, but are capped at 2.5 months of the 2019 contribution amount.
Up to 40% (previously 25%) of PPP Loan funds may be used for qualifying non-payroll expenses, specifically: mortgage interest, rent, and utility payment obligations in existence prior to February 15, 2020. Per the CARES Act, utility payments include electricity, gas, water, transportation, telephone or internet access.
Safe Harbor rules were expanded for borrowers that have experienced difficulty meeting the full-time equivalent (FTE) requirements despite a good faith effort to do so. The FTE Reduction Safe Harbor rules are as follows:
Borrowers may exclude any reduction in the FTE employee headcount attributable to an individual employee as long as written documentation can be provided that shows a good faith, written offer was made to the employee and the offer to return to work was rejected by the employee. The offer must be for the same wage or salary and number of hours as that of the pay period immediately prior to the employee’s layoff or reduction in hours. Borrowers are now required to inform the state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the rejection.
Borrowers will be exempt from a reduction in loan forgiveness due to a proportional reduction in FTE employees as long as documentation is provided which shows a good faith effort was made, but the borrower was unable to hire similarly qualified individuals for unfilled positions on or before December 31, 2020.
Borrowers will also be exempt from a reduction in loan forgiveness due to a reduction in the number of FTE employees if they are able to document in good faith that, as a result of COVID-19 requirements and guidance, they were unable to return to the same level of business activity at which they were operating before February 15, 2020. Documentation must include copies of state and local government shutdown orders based on guidance from the Department of Health and Human Services, CDC, and OSHA. Relevant business financial records will also be required.
The loan deferral period has been increased from six months to ten months. In the event the borrower fails to apply for loan forgiveness during the ten month period following the last day of the covered period, the loan will not be eligible for forgiveness and the borrower will be required to begin paying principal and interest.
The time frame to repay any portion of the loan not forgiven has been extended to five years for loans made on or after June 5, 2020. The term for loans made prior to June 5, 2020 remains at two years unless the lender agrees to an extension.
Borrowers are now permitted to submit the application for loan forgiveness prior to the end of the covered period as long as all of the funds for which they are requesting forgiveness have been used. The lender has 60 days from receipt of the application to issue its decision on the forgivable and non-forgivable portion of the loan amount and submit it to the SBA. All loan forgiveness decisions submitted by the lender may be subject to further review by the SBA.
On August 10, 2020, the SBA began accepting PPP loan forgiveness from lenders. On June 30, 2020, a bipartisan bill called The Paycheck Protection Small Business Forgiveness Act was introduced into the Senate. If passed, this legislation would benefit small businesses that received PPP loans of $150,000 or less by allowing them to receive automatic forgiveness after submitting a one-page attestation form. The business would attest that they have complied with PPP requirements and that the loan is eligible for forgiveness.
Information of Note:
- On April 30, 2020, the IRS answered the question as to whether PPP loan borrowers would be allowed to exclude forgiven loan amounts from taxable income and deduct covered expenses as ordinary business expenses. In Notice 2020-32 the IRS applied Internal Revenue Code (IRC) Section 265(a)(1), which disallows a deduction for expense amounts that would otherwise be deductible if the amounts are allocable to one or more classes of tax-exempt income. The IRS concluded that the CARES Act exclusion from income for forgiven PPP loan amounts results in a “class of exempt income” under federal tax laws and regulations. As a result, any permitted payments qualifying for PPP loan forgiveness will not be deductible for federal income tax purposes.
- The AICPA along with more than 170 other organizations have joined together in asking Congress to address the federal tax treatment of loan forgiveness under the Paycheck Protection Program. The AICPA and other organizations argue that IRS Notice 2020-32 goes against the CARES Act. In a letter dated August 4, 2020 they wrote:
When the PPP was adopted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, Congress made clear that any loan forgiveness under the program would be excluded from the borrower’s taxable income. Specifically, a recipient of a PPP loan was eligible for forgiveness of indebtedness for amounts equal to certain payroll, mortgage interest, rent, and utility payments made during a prescribed period, with any resulting cancelled indebtedness excluded from the borrower’s taxable income.
The IRS claims the basis for its decision in Notice 2020-32 was to prevent taxpayers from receiving a double benefit. However, the coalition letter states this is simply not true and that Congress intended for the loan forgiveness under PPP to be tax-free. The letter noted:
The IRS Notice reverses that position and eliminates any benefit, let alone a double benefit. If a business has $100,000 of PPP loans forgiven and excluded from its income, but then is required to add back $100,000 of denied business expenses, the result is the same as if the loan forgiveness were fully taxable. Section 1106(i) of the CARES Act becomes moot if Notice 2020-32 is allowed to stand.
The letter went on to state that in addition to the approximate $100 billion tax increase that that many struggling businesses will face as a result of the IRS decision, the inability of businesses to deduct these expenses could result in a number of other complications. Those issues include how the denial of deductible wages would affect the 199A deduction or the work opportunity tax credit; how taxpayers would offset expenses incurred in 2020 with loan forgiveness realized in 2021; and how disallowed interest expense would be treated under the excess business interest expense limitation under Sec. 163(j).
Economic Injury Disaster Loan
The Economic Injury Disaster Loan (EIDL) is designed to provide economic relief to businesses that are experiencing a temporary loss of business. The EIDL is available to small business owners with not more than 500 employees and qualified agricultural businesses in all U.S. states and territories. Qualified agricultural businesses are those with 500 or fewer employees and includes those businesses engaged in the production of food and fiber, ranching, and raising of livestock, aquaculture, and all other farming and agricultural related industries (as defined by section 18(b) of the Small Business Act (15 U.S.C. 647(b)). After a brief suspension, the SBA resumed accepting new EIDL applications on June 15th. Following is a brief summary:
- Loans are available in an amount of up to $2 million. The actual loan amounts are based on the size of the business and the amount of economic injury suffered. The loan proceeds may be used to cover necessary day-to-day expenses which the business would have been able to cover if not for COVID-19. Examples of eligible expenses include:
Providing paid sick leave to employees;
Covering increased costs to obtain materials;
Rent or mortgage payments; or
Other obligations that cannot be met due to revenue loss.
- The EIDL is NOT intended to replace lost sales or profits or for expansion, and may NOT be used for the following purposes:
Refinance indebtedness which incurred prior to the disaster event;
Make payments on loans owned by another federal agency (including SBA) or a Small Business Investment Company licensed under the Small Business Investment Act;
Pay, directly or indirectly, any obligations resulting from a federal, state or local tax penalty as a result of negligence or fraud, or any non-tax criminal fine, civil fine, or penalty for non-compliance with a law, regulation, or order of a federal, state, regional, or local agency or similar matter;
Repair physical damage; or
Pay dividends or other disbursements to owners, partners, officers or stockholders, except for reasonable remuneration directly related to their performance of services for the business.
- The interest rate is 3.75% for small businesses and 2.75% for private non-profits; businesses with credit available elsewhere are not eligible.
- Long-term repayment plans (up to a maximum of 30 years) are being offered. The term of the loan is determined on a case-by-case basis, and will be set based on each borrower’s ability to repay.
Information of Note:
- Unlike Paycheck Protection Program (PPP) loans, EIDL loans are NOT forgivable and applicants apply for the EIDL directly from the SBA.
- If an EIDL borrower has also obtained a PPP loan, the EIDL funds must be used for different purposes.
The EIDL Advance program has been discontinued, as all available funds have been allocated. By law, the SBA is not able to issue EIDL advances once program funding has been obligated and no longer available. EIDL loan applications will still be processed even though the advance is no longer available. Background on the EIDL Advance:
- Small business owners (including individuals operating as sole proprietorships, with or without employees and independent contractors) who were experiencing a temporary loss of revenue were able to apply for an EIDL advance in an amount of up to $10,000.
- The amount of the EIDL loan advance was determined by the number of employees indicated on the application at $1,000 per employee, up to a maximum of $10,000.
- Recipients did not have to be approved for an EIDL loan in order to receive the advance, but the amount of the loan advance is to be deducted from total loan eligibility.
- If the recipient has also received a PPP loan, the amount of the EIDL Advance will be deducted from the forgivable portion of their PPP loan.
- The loan advance does not have to be repaid.
SBA Express Bridge Loans
The Express Bridge Loan Pilot Program allows small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 to help overcome a temporary loss of revenue. This loan can be a term loan or can be used to bridge the gap while applying and waiting for a decision and disbursement on an EIDL. If used as a bridge while waiting for EIDL it can be repaid in full or in part by proceeds from the EIDL.
Employee Retention Tax Credit
Provided for under the CARES Act, the Employee Retention Tax Credit (ERTC) is a fully refundable tax credit available to all non-governmental eligible employers, regardless of size, who retain and pay qualified wages and compensation (including qualified health plan expenses) to their employees between March 12, 2020 and January 1, 2021. Eligible employers are those that carry on a trade or business during calendar year 2020, that either:
- Fully or partially suspend operations during any calendar quarter in 2020 as a result of orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for social, religious, or other purposes) due to COVID-19; or
- Show a significant decline in gross receipts during a calendar quarter. To qualify under this requirement gross receipts must fall below 50% of the comparable quarter in 2019. Once gross receipts rise above 80% of a comparable quarter in 2019, the employer no longer qualifies after the end of that quarter.
The maximum amount of qualified wages considered with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000. The definition of qualified wages depends, in part, on the average number of full-time employees employed by the eligible employer during 2019:
- If employing fewer than 100 employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer will still receive the credit.
- If employing more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
Information of Note:
- Employers who receive a PPP loan cannot claim the ERTC tax credit.
- The ERTC cannot be combined with other tax credits, for example, the paid family and medical leave tax credit provided under Families First Coronavirus Act (FFCRA) discussed below.
- To claim the refundable tax credit, the total qualified wages and related health insurance costs for each quarter must be reported on your quarterly tax returns beginning with the second quarter.
- In anticipation of receiving the credits, qualified wages can be funded by accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS, or by requesting an advance of the credit from the IRS using Form 7200 – Advance Payment of Employer Credits Due to COVID-19.
Employer Tax Credit for Paid Family and Medical Leave
Established under the Families First Coronavirus Response Act (FFCRA), eligible employers are entitled to a tax credit equal to 100% of the amount paid for qualified family and medical leave from March 18, 2020 through December 31, 2020. The tax credit includes amounts paid to provide and maintain group health plan allocable to the employee (to the extent the amount is excluded from employee gross income). The tax credit is limited to the following established per-employee wage caps:
- Wages for employees on sick leave for the own illness is capped at $511 per day for a maximum of ten days, or $5,110 in the aggregate.
- Wages for employees who take sick leave for the care of others is capped at $200 per day for a maximum of ten days, or $2,000 in the aggregate.
- Wages paid to employees for family leave is capped at $200 per day for a maximum of 50 days (10 weeks) or $10,000 in the aggregate. Eligible employees, those employed for at least 30 days, may take up to 12 weeks of job protected family leave. However, the first ten days will be unpaid unless the employee has accrued vacation, personal, or medical/sick leave time and elects to use it.
Employers who pay qualifying sick leave or family leave for childcare are able to retain taxes equal to the amount of qualified leave paid. Payroll taxes available for retention are as follows:
- Federal income taxes
- The employer’s share of Social Security and Medicare taxes for all employees
- The employees share of Social Security and Medicare taxes
Information of Note:
- In order to claim the tax credit, employers must be able to demonstrate that the amounts paid to employees for emergency paid sick leave and emergency paid family and medical leave were for qualifying reasons under, and subject to the limits of, the FFCRA. Any leaves provided over and above the requirements of the FFCRA are not eligible for the tax credit.
- To the extent there are not sufficient payroll taxes to cover the cost of the paid leave, employers will be able to file a request for an accelerated payment from the IRS.