SBA, PPP loans, and PPPFA guidance
Find out more about COVID-19 related business payroll protection program including rules for time to repay loans for employee retention credit purposes and business expenses
Paycheck Protection Program (PPP) loans: coordination of loan forgiveness and economic injury disaster loans (EIDLs)(Originally published in the August 19, 2020 edition of TAX in the News)
The Treasury Department has posted new FAQs explaining the interaction between forgiveness of PPP loans and EIDLs. If a borrower is eligible for PPP loan forgiveness and received an EIDL advance, the lender is required to deduct the advance from the forgiven amount. If the EIDL advance is more than the PPP loan, then no amount of the PPP loan can be forgiven. Borrowers must repay any PPP loan amount that is not forgiven per the terms of the PPP loan. See EIDL FAQs (starting on page 10)
Changes in the Paycheck Protection Program Flexibility Act impact repayments, deferrals, and loan forgiveness for small businesses (Originally published in the June 10, 2020 edition of TAX in the News)
Congress passed the Paycheck Protection Program Flexibility Act of 2020 (HR 7010) and the President signed the measure into law on June 5, 2020.
The Paycheck Protection Program (PPP) was introduced in the CARES Act in March 2020. It is a loan program intended to help small businesses (generally, those with 500 or fewer employees) keep their workers on the payroll. PPP loans can be forgiven if the borrower spends a minimum percentage of proceeds on payroll costs within a specified time frame called the “covered period” and meets other requirements.
The new law makes the following amendments to the PPP:
- Repayment period extended. New loans that have not been forgiven may be paid back for a period of up to five instead of two years. This change applies to PPP loans starting on June 5, 2020. However, if borrowers and lenders agree, the repayment period for existing loans may be extended from two to five years. The interest rate remains at 1%.
- Covered period for loan forgiveness extended. The covered period for new borrowers to pay required payroll costs is increased from 8 weeks to 24 weeks. The covered period cannot extend beyond December 31, 2020. Current PPP loan recipients may keep their original 8-week covered period or apply the new 24-week covered period. This provision is effective as if included in the CARES Act.
- Repayment deferral delay extended. Borrowers may delay repayment of a PPP loan, including principal, interest, and fees until the loan forgiveness determination date instead of 6 months after the loan’s funding date. Also, borrowers may seek forgiveness within 10 months after the end of their covered period (the earlier of 24 weeks from loan origination or December 31, 2020). A borrower who fails to apply for forgiveness must being making payments 10 months after the covered period. This provision is effective as if included in the CARES Act.
- Expenditure requirement relief. The payroll cost requirement decreases from the 75% threshold enforced by the SBA to 60%. Up to 40% of proceeds may be spent on mortgage interest, rent, and utilities. Under the new law, as under previous guidelines, if less than 60% of PPP funds are spent on eligible payroll costs borrowers may still seek PPP loan forgiveness but forgiveness will be limited. This provision is effective as if included in the CARES Act.
- Workforce restoration requirement relief. Borrowers may use the new extended 24-week covered period to restore their workforce levels and wages to February 15, 2020 (pre-pandemic) levels. The previous law allows employers to except employees who turned down good-faith offers to be rehired at the same hours and wages from this requirement. Under the new law, the restoration requirement can also be adjusted if employers cannot find qualified employees or are unable to restore business operations to pre-pandemic levels. This provision is effective as if included in the CARES Act.
- Payroll tax deferral. A CARES Act provision allows eligible employers to defer payment of their share of social security tax (6.2% of wages up to the 2020 wages base of $137,700). One-half of deferred taxes must be paid by December 31, 2021, and the other half must be paid by December 31, 2022. The new law allows employers with PPP loans to take advantage of the payroll tax deferral provision. Previously, borrowers were precluded from utilizing the payroll tax deferral after loan forgiveness. This provision is effective as if included in the CARES Act.
See the SBA’s Paycheck Protection Program for more details on PPP loans. The SBA’s guidance will soon be updated with the new law’s changes.
PPP loan forgiveness application available (Originally Published in the May 27, 2020 edition of TAX in the News)
The SBA and Treasury Department have released a Paycheck Protection Program (PPP) loan forgiveness application. Borrowers may seek loan forgiveness if at least 60% of proceeds are used for payroll costs, including certain health care expenses, paid or incurred during the “covered period,” generally, an eight-week or twenty-four-week period starting with the date the loan proceeds are disbursed or the beginning of the first pay period after the loan is received. Up to 40% of PPP loan proceeds used for eligible non-payroll costs (mortgage interest, rent, and utilities) may qualify for relief as well. Borrowers should submit loan forgiveness applications to their lender (or the lender that is servicing the loan).
Changes to the PPP loan forgiveness were made by the Paycheck Protection Program Flexibility Act (PPPFA) of 2020. The SBA also released an interim final rule on PPP loan forgiveness with further details.
Employee retention credit and PPP loan repayment (Originally published in the May 13, 2020 edition of TAX in the News)
Employers have been given a short extension to repay PPP loans and receive the employee retention credit. An eligible employer who repays the PPP loan by May 18, 2020 (originally, May 7, 2020 and then May 14, 2020 under earlier guidance) will be treated as through the employer did not receive a covered loan for purposes of employee retention credit eligibility.
Employee retention credit FAQs (see FAQ 79)
Business expenses and PPP loans (Originally published in the May 6, 2020 edition of TAX in the News)
IRS Notice 2020-32 provides guidance on the deductibility of business expenses paid with proceeds of Paycheck Protection Program (PPP) loans. The program was established under the CARES Act and PPPFA to help business owners cover payroll and other costs. Business that pay for certain “covered expenses” can receive debt forgiveness equal to expenses paid during the 8-week or 24-week period beginning on the loan’s origination date. Covered expenses include:
- Payroll costs
- Interest on mortgage loans
Ordinarily, taxpayers must include forgiven debt in gross income. The CARES Act in §1106(i) specifically provides that forgiven PPP loan debt is not taxable. However, the CARES Act does not address whether expenses paid with proceeds of a PPP loan that is forgiven are also deductible.
Although the covered expenses listed above are ordinary and necessary business expenses, §265(a)(1) disallows otherwise allowable deductions paid with tax-exempt income. Notice 2020-32 concludes that PPP forgiven debt meets the definition of a “class of exempt income” under Reg. §1.265-1(b)(1). Accordingly, under IRS guidance in Notice 2020-32, expenses paid with proceeds from a forgiven PPP loan are not deductible.
Note: Ordinary and necessary business expenses paid with proceeds of a PPP loan or other SBA loan that is not forgiven would be fully deductible.
An Economic Injury Disaster Loan (EIDL) Emergency Advance of up to $10,000 is available to provide relief to businesses currently experiencing a temporary loss of revenue. Like the PPP it is available to any type of small business with fewer than 500 employees, including sole proprietorships, etc., affected by COVID-19. Businesses applying for an EIDL may apply for the advance. The advance can be made available quickly following a successful loan application and does not have to be repaid.
An Express Bridge Loan Pilot Program is available to small businesses who already have a relationship with an SBA Express Lender. Businesses may quickly borrow up to $25,000 while waiting for a decision on the EIDL. The express loan can be repaid through EIDL proceeds.
Various types of SBA Debt Relief are available to small businesses. The SBA will automatically pay principal, interest and fees on 7(a), 504, and micro- loans. This will apply to new loans issued prior to September 27, 2020 and will apply for six months to existing loans. Also, automatic deferral through December 31, 2020 will be applied to SBA home and business disaster loans in “regular servicing” as of March 1, 2020. Interest will accrue during the deferral period and borrowers may continue to make regular payments.
SBA business assistance programs for temporary business assistance (Originally published in the April 8, 2020 edition of TAX in the News)
In addition to traditional Small Business Administration (SBA) loan programs, including Economic Injury Disaster Loans (EIDLs), the CARES Act established four temporary programs to expedite assistance to small businesses during the COVID-19 outbreak.
The Paycheck Protection Program (PPP) is a direct incentive to keep workers on the payroll. The program is available to small businesses with fewer than 500 employees (higher numbers may be allowed for some industries). Eligible businesses include sole proprietorships, independent contractors and self-employed persons, private non-profit organizations or 501(c)(19) veterans organizations affected by COVID-19. The loan has a maturity date of two or five years with a 1% interest rate. Payments may be deferred until the loan forgiveness due date. The loan will be forgiven if at least 60% of proceeds are used for payroll costs and the rest for mortgage interest, rent, and utilities.
Loan guidance and resources (CARES Act) (Originally published in the April 1, 2020 edition of TAX in the News)
The Small Business Administration (SBA) has provided the following loan guidance and resources available to small businesses during the pandemic: