Many small business owners are working furiously to try to qualify for the new Paycheck Protection Program loans that were part of the Coronavirus stimulus, or CARES Act.
The Paycheck Protection Program provides small businesses with loans meant to help support payroll during the period February 15, 2020 through June 30, 2020 through 100 percent federally guaranteed loans if they maintain their payroll and employees during this emergency.
If the employer maintains its payroll and employees, then the portion of the loan used during the covered period for eligible payroll costs, interest on mortgage obligations, rent, and utilities would be potentially forgiven on a tax-free basis.
Read on below to get answers to some frequently asked questions about the new loans, which became available April 3.
Which Businesses Can Qualify?
- Small employers with 500 employees or fewer, as well as those that meet the current Small Business Administration (SBA) size standards;
- Self-employed individuals and “gig economy” individuals; and
- Certain nonprofits, including 501(c)(3) organizations and 501(c)(19) veteran organizations, and tribal business concerns with under 500 employees.
What Documentation is Needed?
In addition to meeting the 500-employee threshold, the borrower must 1) be in operation on February 15, 2020 and have employees for whom it pays salaries and payroll taxes and 2) provide a signed certification attesting:
- The loan is necessary due to current economic conditions,
- The loan proceeds will be used to retain workers and/or to pay mortgage interest, rent, and utility payments.
- The borrower hasn’t already received a loan and will not seek a loan for the same payments
- There is no “credit elsewhere” test
How Much Money Can be Sought?
The amount of the loan is equal to the sum of:
- 2.5 times the borrower’s average monthly payroll costs (for the immediately preceding 12 months, although many banks are using payroll costs from calendar year 2019)
- Plus any qualified disaster loan taken out since January 1, 2020 that the borrower wants to refinance as part of the payroll protection loan
- The total loan cannot exceed $10 million
How Can My Business Ensure Our Loan is Forgiven?
To the extent that the proceeds are used for qualifying costs, the loan principal will be forgiven on a tax-free basis, meaning it will not be treated as forgiveness of debt income. The SBA issued additional guidance on April 2 indicating that not more than 25% of the forgiveness amount may be for non-payroll costs. SBA loan applications have been updated to reflect this change.
- In order to be forgiven, the costs must be paid or accrued within 8-week period after the loan proceeds are received.
- Qualifying costs are all “payroll costs” and payments made for mortgage interest related to a mortgage on real or personal property, rent, and utilities. Utilities in this case include gas, water, electric, telephone, internet, and transportation costs.
- You can’t use the loan for any prepayments or new costs – obligations must have existed on February 15, 2020.
What’s the Definition of Payroll Costs for these Loans?
For these loans, payroll costs include all wages, commissions, salaries, tips, vacation, allowance for dismissal or separation, group health benefits and premiums, retirement benefits, payment of state or local taxes on employee compensation, family, medical, and sick leave (other than the required paid leave under the Families First Coronavirus Response Act. Get more details on that new Coronavirus-related leave in this article.)
What’s Not Included in Payroll Costs?
Payroll costs do not include:
- Any paid sick leave or family medical leave paid under the FFCRA for which a payroll tax credit is claimed
- Compensation to any employees who reside outside of the United States
- Compensation to any individual employee in excess of an annual salary of $100,000 – instead you can include the amount that would result in $100,000 or less on an annual basis (i.e., $8,333 per month)
How Can My Business Seek Loan Forgiveness?
In order to claim forgiveness, businesses must submit an application with the lender and the lender has 60 days to make a decision on the forgiveness amount.
Remember: Carefully document all of those qualifying costs either paid or incurred during the 8-week period following the receipt of the loan proceeds.
How Might My Business Lose Loan Forgiveness?
The amount forgiven will be reduced if the employer:
- Reduces its workforce; or
- Reduces the compensation of any of its employees who make less than $100,000 per year by more than 25%.
How is Workforce Reduction Calculated?
The reduction in forgiveness due to a reduction in the number of employees is based on a comparison of the full-time equivalent workers that existed during the 8-week period following receipt of loan proceeds to the number of FTE workers that existed between the measurement dates of either:
- February 15, 2019 - June 30, 2019, or
- January 1, 2020 - February 29, 2020.
- The borrower may choose which date range to use, except in the case of seasonal employers, who must use the dates February 15, 2019 – June 30, 2019.
How is Reduced Compensation Calculated?
The reduction in forgiveness due to a greater than 25% reduction in the salary is based on a comparison of the salaries (of employees making less than $100,000 per year) during the 8-week period following receipt of loan proceeds to the salaries of those employees during the most recent full quarter that the employee was employed prior to the start of the 8-week period.
How Can My Business Apply for a Loan Forgiveness Exemption?
Companies that have already reduced employees or wages can seek a loan forgiveness exemption if they meet the qualifications below:
- The exemption only applies if there is a reduction in the number of FTE employees or wages during the period February 15, 2020 – April 26, 2020 (30 days after enactment of the CARES Act).
- The exemption allows the borrower to ignore any reductions in number of the employees/salaries that occur between February 15, 2020 – April 26, 2020 if those reductions are restored by June 30, 2020.
What are the Terms for Any Portion Not Forgiven?
For any amount not forgiven, the SBA has issued final guidance that provides that the loan term will be 2 years and will accrue interest at a rate of 1%. Also, the Small Business Administration will allow the business to defer payment for 6 months (although prepayments are allowed without penalty).
While these are some of the most common questions we’ve received about the new Paycheck Protection Program loans, we’re sure more will arise as you dig into the details or are new rules are announced. It’s best to work with your trusted professionals, including your CPA and banker, to get custom advice for your business’s financial situation. Please contact us with any questions.
Looking for more guidance for your business regarding the financial impact of the Coronavirus? Check out our comprehensive COVID-19 Resource Center for tax, accounting and advisory information.