16 Apr Coronavirus Legislation–Important Guidance on PPP Loans
Key Updates on Recent Legislation
The Family First Coronavirus Response Act requires certain size employers to provide paid sick leave as well as paid family and medical leave to employees. The government then provides a fully refundable credit against payroll taxes to offset the qualified amounts paid to employees. These new rules are mandatory for employers with less than 500 employees. Small businesses with less than 50 employees may be exempt from the rules if following them would jeopardize the viability of the business and they receive advance approval for the exemption. Anyone who has been employed for at least 30 days would be covered. The new rules are effective April 1, 2020 and will be in effect until December 31, 2020.
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) allocated approximately $350 billion to help small businesses keep workers employed and cover certain expenses while dealing with the impact the pandemic has had on the United States’ economy and its citizens’ health. The CARES Act established the Paycheck Protection Program (“PPP”) that enables qualifying small businesses to borrow up to $10 million. These loans are eligible to be forgiven, if the loan proceeds are used pursuant to criteria as defined in the CARES Act, and other requirements are met. Even better, the forgiveness is not taxable income. Loans are available to eligible borrowers under this program through June 30, 2020.
The following organizations (“Small Businesses”) are eligible for a PPP Loan:
- Businesses with 500 or fewer employees
- A business that meets the SBA’s size standard (certain industries may have a higher cap on the number of employees in order to qualify as a small business) See link to SBA.gov for Small Business Size Standards Chart.
- Section 501(c)(3) qualifying nonprofit organizations
- Sole proprietorships
- Independent contractors
- Self-employed individuals
Paycheck Protection Loan program – Download the Coronavirus Emergency Loans Small Business Guide and Checklist from the U.S. Chamber of Commerce (PDF)
SBA Issues Interim Final Rule on PPP Loan Program
Last evening, the Treasury Department issued its first formal Rule related to the PPP Loan Program created by the CARES Act. In it, the SBA has waived the comment period and the normal 30-day delayed effective date, making this Rule effective immediately. The Interim Final Rule clarifies certain key components while other items remain unclear. Borrowers will need to carefully evaluate direction from the CARES Act, the Interim Final Rule and the Loan Application Instructions to determine the position that best fits their circumstances.
To assist you, we are providing several key updates:
The lack of clarity on the period used to measure “Average Monthly Payroll Costs” seems to offer two alternatives to borrowers. The Application instructions indicate that most Applicants will use their calendar year 2019 average monthly payroll. The calendar year method would likely be easier for most borrowers based on the correlation with payroll records and filings. However, other guidance appears to allow use of the 52-week period ending with the last payroll before the application is filed. This method may not only be more time consuming for most borrowers but also likely requires a reduction to payroll for federal withholding taxes for payroll periods occurring in the computation on or after February 15, 2020. Borrowers should carefully evaluate which period best fits their situation. Seasonal businesses and new businesses still have additional options for measuring payroll.
It appears that total payroll costs for each employee are capped at $100,000 including employee benefits and certain state and local taxes based on compensation. While the language between the various guidance is not completely consistent, the instructions to the Application Form guide borrowers to limit “payroll costs” per employee to $100,000 on an annualized basis.
There does not seem to be a provision for including the self-employment income of partners of a partnership in the calculation of Average Monthly Payroll. The various guidelines seem to only refer to employee payroll or self-employment income of sole proprietors or independent contractors.
The Rule also clarifies that loan balances under an SBA Economic Injury Disaster Loan (EIDL) are eligible to be added to your PPP loan amount for EIDL received from January 31 through April 3, 2020. If the EIDL loan was based on payroll costs, you must refinance your EIDL with PPP.
The Rule clarifies that a company’s payments to 1099 independent contractors are EXCLUDED from payroll costs. The SBA has determined this is duplicative since the recipients are also eligible for PPP. This is a clear change from prior guidance.
The interest rate on the loan balance has been increased from 0.5% to 1%.
Keep in mind that the Application and process to request Loan Forgiveness eight weeks after the receipt of loan proceeds are still to be prescribed by the SBA. More details will be shared when they become available.
Applications for most businesses will be accepted starting April 3rd, and independent contractor and sole-proprietors can apply starting April 10th.
Whether we can assist you directly, or connect you to resources who can, we are here to help.