Update on the PPP Loans 4/4/2020

I subscribe to taxspeaker.com and often attend seminars put on by this organization. I trust their information and received an email Saturday which I feel contains good information for anyone applying for the Payroll Protection Program Loan.

Cynthia Harelson, CPA

From Bob Jennings at the Taxspeaker.com:

On Friday April 3, the SBA modified the PPP loan application for a third time, and if your client had previously prepared an application using the older version, it must be resubmitted-the link is in my summary below. Similarly, no one has yet received the $10,000 grant that was supposed to be paid within 3 days of application. On April 2 the SBA released more interim guidance which did not become available until April 3^rd. On April 4^th the SBA changed their website to reflect the advances will be paid in about a week.

I understand we are all clamoring for information and have questions. I received over 1,000 questions each on Thursday and Friday, as did our moderators at the office. We find 90% of the questions were answered in our webinar-you must pay attention and we cannot spend 40 hours out of a 24-hour day answering questions that were already answered in the webinar. On the other hand, we are trying to answer as many questions as we can and are doing a couple of special YouTube videos that we are making available to everyone, not just our normal Q&A subscribers.

The first video is my recording of the letter written to Congress from Friday. You have our permission to forward it to whomever you wish. I will warn you I get quite agitated by the end if you have never heard me speak.

The second video is my recording of answering as many questions as I can this week. Thanks everyone for your patience, and our office is working every minute, as I am sure is yours, to try to understand and explain these new rules. There is a very good chance I will put out a 2^nd and even 3^rd newsletter this week to help you.

PPP Loans-SBA Interim Guidance April 2

Businesses eligible for the up to $10 million PPP loan include those with 500 or fewer employees with a principal place of residence in the United States, or other businesses, including 501(c)(3) entities in certain industries that meet applicable employee-based standards.

The businesses must have been in operation on February 15, 2020, and must have paid employee salaries and payroll taxes or independent contractors on a Form 1099-MISC.

The interim rules also state that independent contractors don’t qualify as employees under the program because independent contractors and sole proprietors can apply for the loans on their own.

Illegal activities, household employers, current/previously delinquent SBA loans, and businesses who are owned 20% or more by people in jail, probation, parole, indictment or conviction of a crime in the last five years are also not eligible.

Under the loan program, the lesser of $10 million or a specified amount under a payroll-based formula can be borrowed. The formula is mechanical, and the interim rules explain how it works:

From the aggregate payroll costs for the last 12 months, subtract compensation in excess of an annual amount paid of $100,000, divide that amount by 12, and then multiply the average monthly payroll costs by 2.5. Then add any EIDL loans made between 1/31/20 and 4/3/20 and subtract any EIDL advance.

But the benefit is that the loan can be forgiven if at least 75 percent of the proceeds are used for payroll costs in the eight-week period after the loan was made and if employee and compensation levels are maintained.

The statute defines payroll costs broadly as any compensation to include items such as salary, wages, cash tips group health insurance, retirement, and commissions. However, the definition also includes “payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, net earnings from self-employment, or similar compensation.”

There is no clear guidance on guaranteed payments, but based on the above definition, and absent guidance to the contrary, we believe guaranteed payments, because they are subject to self-employment tax, should be treated as wages for the PPP loan.

Non-qualifying wages include for those who live outside the US, wages in excess of $100,000 to one person, federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including FICA and income tax,and wages/sick leave that used the credits from the Families First Act.

The rules say that federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including FICA and income taxes, don’t count as payroll costs.

I have no idea what this means or what you do with these numbers or why February 15 is important. None of the national experts understand it either!

The maturity date of the loan is two years under the interim guidance, even though the law granted ten years. Prepayments are allowed. Payments will begin six months after disbursement, although interest will accrue during that time period. The amount of money available is limited and is supplied under a “first come, first served” rule.

The amount of loan forgiveness can be up to the full principal amount of the
loan and any accrued interest. That is, the borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes described below and employee and compensation levels are maintained.

The amount of loan forgiven IS NOT TAXABLE-citation is in the 45 Q&A recording link above,

The actual amount of loan forgiveness will depend, in part, on the total amount of (1) payroll costs, (2) payments of interest on mortgage obligations incurred before February 15, 2020, (3) rent payments on leases dated before February 15, 2020, and (4) utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan. However, not more than 25 percent of the loan forgiveness amount may be attributable to nonpayroll costs.

Comment from Bob:  Loan proceeds used for anything other than the 5 items I listed below will not qualify for reimbursement. During the measurement period make sure to pay wages, even prepaying wages for periods beyond the measurement period because that also appears to qualify. I would recommend to not pay anything during the 8 week period other than these 5 items, particularly inventory, advertising, etc.

Use SBA Form 2483 (version 3 re-designed 4/3/20) to apply, and if the taxpayer applied with an earlier version, re-submit using the new version. The loan may be used for:

1. Payroll costs
2. Group health care benefits
3. Mortgage interest (but not principal)
4. Rent and utility payments
5. Interest on any debt from before 2/15/20

The borrower will have to document these costs for the lender at the end of 8 weeks to apply to the lender for loan forgiveness.

We are being told that lenders are asking for the following items. Use them as a checklist so you only submit once:

1. Latest PPP application,
2. Articles of incorporation or organization,
3. Bylaws or operating agreements of entity,
4. 2019 and 1^st quarter 2020 (if completed) 941’s, 940, state withholding and even state unemployment forms (and no, I don’t understand this either),
5. Bank statements from 1/2019 through and including 2/2020,
6. 12 month trailing P&L,
7. Payroll summary reports
   • Include documentation of health insurance premiums paid
   • Include documentation of pension benefits paid to administrator
   • Breakdown of payroll if vacation, dismissal, health care and/or retirement
8. Current identification for the borrowers.