The following is based on new guidance released on the evening of April 6, 2020, and questions asked during FML’s recent CARES Act & Other SBA Resources Webinar on the morning of April 6, 2020.
Eligibility – how will foreign owners / operations impact my application?
- 20%> foreign owners will not prohibit a PPP application from being approved, however, businesses must have its principal place of residence in the U.S. Also, employees with foreign residence are not includible in the payroll cost calculation. Lastly, businesses with foreign ownership must abide by the affiliation rules.
Payroll costs – Do I use 2019 or prior 12 months?
- New guidance issued after the webinar provides that applicant can choose either 2019 OR prior 12 months. Seasonal businesses can use 2/15/19-6/30/19 or 3/1/19-6/30/19 as measurement period or can use the 1/1/20-2/29/20 measurement if not in business from 2/15/19-6/30/19 which applies to all businesses not in operation between 2/15/19-6/30/19.
Payroll costs – Do I include withholding or employment taxes including FICA federal or state payroll taxes?
New guidance issued after the webinar provides: include withheld taxes to the employee (i.e. gross payroll) but do not include Employer portion of employment taxes (i.e. FICA).
Payroll costs – can I include payments to independent contractors?
- New guidance issued after the webinar provides that applicant payments to independent contractors are not included in payroll costs for purposes of the PPP loan application.
Payroll costs measurement period – what if I wasn’t in business 2/15/19 – 6/30/19?
- If you weren’t in business between 2/15-6/30/19, then the PPP allows the borrower to utilize average monthly payroll between 1/1/20-2/29/20 as measurement period.
- The question has come up, what if I started my business on 6/15/19? We believe a reasonable interpretation of that criteria would require the borrower be in business for the entire period 2/15/19-6/30/19 to use prior 12 months (or 2019), while only being in business for part of the period would allow the borrower to use Jan/Feb-2020.
Banks – where do I reach out if my bank won’t accept my application?
- Many businesses are finding that banks will not accept their application if they are not an existing lender. The federal gov’t has extended this program of additional SBA lenders and even 3rd parties. T gov’t has discouraged banks from denying applicants based on that criteria.
Timing – when can I expect the funds?
- Treasury intends for funds to be dispersed ASAP. Initial guidance indicated 30 days from application date, however, some banks are telling FML they are already to disperse.
Loan amount – can I receive a loan for less than 2.5x payroll costs?
- This question has not been specifically addressed to our knowledge, however, our advice would be just get MAX and prepay any amounts you don’t want (no prepay penalty).
Loan forgiveness – what happens if I terminate/furlough employees but bring them back?
- The CARES ACT provides that loan forgiveness reduction will NOT occur in instances where the employer reduces FTE headcount between 2/15/20 and prior to 30 days after passage of the ACT (4/26/20) and brings back FTE headcount by 6/30/20.
Loan forgiveness – what does the 25% rule mean?
- While the CARES Act does not provide such language, the Treasury Department has stated that no more than 25% of the loan amount can be utilized for non-payroll costs and be eligible for forgiveness. This is noted in SBA 2020-0015. We believe this is the basis for computing the loan amount by monthly payroll costs * 2.5 but only allowing an 8-week period following loan origination to utilize such funds. The balance is intended to be used for rent, utilities, mortgage interest. However, it is NOT required to be used for such amounts.
General – if I make a mistake, what will the bank do with my application?
- We are aware of an instance where a bank allowed the applicant to ‘fix’ an item that was submitted in error with regards to the calculation of payroll costs. While this isn’t a specific rule in the CARES Act or SBA 2020-0015, we believe Banks will be reasonable and applicants will NOT lose their place in the queue. We strongly advise you contact your individual lender though to confirm. New guidance following the webinar provides that applicants can rely on previously issued Guidance (SBA other official Gov’t guidance) if they already submitted an application. If you want to adjust based on the new Guidance, the SBA has advised that applicants can revise their application if it has not been processed.
Tax Credits – if I receive a PPP loan, am I eligible for the payroll retention credit or payroll tax deferral?
- No, however, we believe taxpayers/applicants can take advantage of either program until
- with regard to the Retention Tax Credit – PPP loan is received; and
- with regard to Payroll Tax Deferral – the PPP loan forgiveness is approved. There are three basic situations that the IRS can take:
- Best Case – IRS allows deferral until date of PPP loan forgiveness. Deferral is not permitted from date of loan forgiveness forward. Deferred payroll taxes are due 12/31/21 (50%) and 12/31/22 (50%).
- Middle Case – IRS does not allow deferral if loan if forgiven but allows taxpayer to make a ‘catch-up’ payment of taxes previously deferred without penalty or interest.
- Worst Case – IRS does not allow deferral if loan if forgiven and assesses penalty and interest on unpaid taxes until date deferred taxes are paid.
- We believe the worst case outcome would be an unreasonable interpretation by the IRS as it would require taxpayers to make a guess as to whether they will (1) get a loan and (2) have the loan forgiven, during a critical time when they need to manage cash (which the payroll tax deferral was supposed to address).
