Updated as of 4/16/20
We understand we can get a Paycheck Protection Program loan for 2.5 times the monthly payroll in order to keep people working and it can be forgiven. It appears we have to keep a level that is the same as the prior year in order to have it forgiven, but is this based on dollars paid or on number of employees retained?
Sec. 1106 of the CARES Act provides for reductions in the forgiveness amount for reductions in workforce and payroll.
The workforce reduction is done by multiplying the otherwise forgivable amount by the ratio of employees during the 8 week covered period to the average of employees between either (at the election of the borrower) Feb 15, 2019-Jun 30, 2019 or Jan 1, 2020-Feb 29, 2020.
The payroll reduction is a 1 to 1 reduction in forgiveness amount for a reduction in any employee’s wage of more than 25% as compared to the most recent full quarter during which the employee was employed. Example: An employee made 10K during the first quarter of 2020 and the employer received a loan on May 1. During the 8-week period if the employee made $5K, the forgiveness reduction would be $2,500.
It is also important to keep in mind that SBA has indicated that not more than 25% of the loan forgiveness may be attributable to non-payroll costs.
What is the impact if small employers temporarily lay off employees waiting for the Paycheck Protection Loans, does this effect the amount or eligibility?
The temporary layoff of workers will not impact the amount of the Paycheck Protection Loan which is set based on employment prior to enactment, but could impact the amount of forgiveness. The amount of loan forgiveness is based on a comparison of the average number of FTEEs during the covered period, or 8-week period after the loan is disbursed.
When making the loan application SBA has indicated that borrowers may use their average payroll from the previous 12 months or from calendar year 2019. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application.
Sec. 1106 provides that the forgiveness reduction will not be based on employee or payroll reductions between February 15, 2020 and April 26, 2020 if no later than June 30, 2020 the business has returned the number of FTEEs to its Feb 15, 2020 level.
It is important to keep in mind that forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels above a certain level. Forgiveness will be reduced if full time headcount declines, or if salaries and wages decrease.
How are the Paycheck Protection Program loans calculated for sole owners and single member LLCs?
Wages for sole proprietors can include actual wages, commission, income, net earnings from self-employment, and similar compensation as long as it does not exceed $100,000 in one year, as prorated.
How does the $100,000 limitation work for the Paycheck Protection Program loans?
The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to certain non-cash benefits, including:
- Employer contributions to qualified defined-benefit or defined-contribution retirement plans;
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
- Payment of state and local taxes assessed on compensation of employees.
What timeframe is considered for employment count related to the forgiveness aspect of the loan?
The timeframe for determining the forgiveness reduction is at the borrower’s election. So this will be based on a comparison of average number of FTEEs during the covered period (8 weeks) by the number you elect which can be:
a. the average number of FTEEs per month for the period Feb. 15, 2019 to June 30, 2019
b. the average number of FTEES per month for the period January 1, 2020 to Feb. 29, 2020.
What if I need to hire a new employee? Can I include that in the Paycheck Protection Program for purposes of the forgiveness?
Generally, yes. Bear in mind that a newly hired employee will not factor into the amount of the loan received, which will be based on the 12-month period prior to the date of the loan for most employers. But, the new employee’s payroll would be an eligible cost for forgiveness. Keep in mind, Treasury has stated that 75% of forgiven costs must be payroll costs.
If a business has access to other loans from their bank, will they still be eligible for the Paycheck Protection Program or EIDL SBA loans?
Yes, the usual requirement that a borrower be unable to obtain loans from other sources is waived. However, you may not request a loan through the two SBA programs that covers the same costs.
Does the Payroll Protection Program apply to Tax Exempts 501(c)(3)?
Yes. Non-profits are eligible if they are either section 501(c)(3) or 501(c)(19) organizations.
Is there a gross revenue limit to qualify for the Paycheck Protection Program?
Eligible borrowers include those that satisfy existing statutory and regulatory definitions of a “small business concern” under section 3 of the Small Business Act, 15 U.S.C 632. A business can qualify if the meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. Go to www.sba.gov/size for the industry size standards.
Additionally, a business can qualify for the Paycheck Protection Program as a small business concern if it met both tests in SBA’s alternative size standard as of March 27, 2020:
- Maximum tangible net worth of the business is not more than $15 million; and
- The average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.
Will these SBA Loans require business valuations?
Borrower requirements posted on the Treasury site for the PPP program make no mention of a business valuation being needed. As for the EIDL Grants, it states that for small dollar loans an applicant may be approved based solely on the credit score of the applicant. However, it also states that the Administrator may use alternative appropriate methods to determine an applicant’s ability to pay.
How does the payroll tax deferral work? Who is eligible and who isn’t?
In general, all businesses are eligible to defer the employer portion of social security taxes for the period between March 27, 2020 and January 1, 2021. Thus, the employee share of OASDI and all Medicare HI payments are not deferred. Self-employed individuals can similarly defer half of SECA taxes for this period. The taxes may be paid 50% on December 31, 2021 and 50% on December 31, 2022. The employer is treated as having made all applicable deposits such that there is no penalty or interest.
Taxpayers who elect to defer payroll taxes may participate in the PPP loan program, but are not eligible for forgiveness. Taxpayers may participate in both payroll deferral and the employee retention credit, but the retention credit may result in the nullification of some or all of the payroll taxes that would be deferred.
Do these credits apply to S Corporation Shareholders that are also employees?
Yes. The relief provided thus far in terms of payroll credits has been for employers and applies to all wages, subject to the $100,000 annual limitation. The S-Corp would be able to avail itself of these credits related to shareholder salaries if they choose.
How do the SBA loans interact with the Refundable Employee Retention Credit and Phase II Families First Coronavirus Response Act (concerning sick leave and family leave)?
Taxpayers cannot receive both a PPP loan and an employee retention credit. However, taxpayers claiming either of the above provisions may receive tax credits for qualified sick leave and qualified family leave wages. Caution is suggested however in that if the payroll tax credit for the required sick and family leave is taken, the sick wages are not treated as payroll costs or creditable wages for the employee retention credit.
Does the employee retention credit apply only to those employees retained? Assuming you cannot retain all of them.
Yes. It applies only to wages paid as of a given date to retained employees.
This credit applies to employers that are subject to full or partial closure due to COVID-19 or meet a gross receipts reduction test, and that continues to pay employees. The maximum amount of qualifying wages for any employee, for all quarters of 2020, shall not exceed $10,000. So a credit of $5,000 per employee for all calendar quarters is available.
If an employer participates in the Paycheck Protection Program and determines the employee retention credit is better, can they use the employee retention credit if they do not utilize the forgiveness portion of Paycheck Protection Program?
No. Once the employer has participated in PPP, forgiveness or no, they cannot claim a retention credit.
New York forces all “non-essential” businesses to close. Company X is an essential business, so Company X is not forced to close. Company X chooses to close over coronavirus concerns. Is Company X still eligible to claim any of the benefits?
There are a variety of potential circumstances that could lead to benefits under these facts. The biggest question is whether and to what extent X continues to keep employees on the payroll. If they maintain full employment (and are under 500 employees), they could participate in the PPP loan/forgiveness program (depending on the size of employee reduction, a loan may still make sense without full employment). EIDL grants or loans should also be considered. If they are over 500 employees, or are not going to maintain full employment, the employee retention credit may become available once revenue drops below 50% for a quarter. Payroll tax deferral is also an option. Even if Company X does not keep people on the payroll, the extended NOL carrybacks could be useful or other available credits may be helpful.
Do the programs included in the CARES Act cover only W-2 employees, or do they also cover contractors?
The SBA loan program covers independent contractors and they are eligible to apply for and EIDL or a PPP loan on their own. Facts would determine whether they are eligible for other programs, such as the employee retention credit or payroll credits.
Sec. 1102 (a)(2)(A)(viii)(bb) states the term payroll costs means “the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period…”
Do guarantee payments count as payroll costs for PPP?
Yes. Under guidance issued by the SBA, partners’ self-employment income, including guaranteed payments, may be treated as payroll costs by the partnership.