Receive a PPP loan? What’s the next step?
It now seems like decades ago, but it has been only a matter of weeks since the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law (March 27). When we first talked about the act, legislators were hearing from small-business owners who were anxious about the future of their businesses — and that’s what led Congress to set up the Paycheck Protection Program. Since then, the Small Business Administration has processed more than 3.8 million loans, totaling more than half a trillion dollars of economic support.
Some of those businesses that received loans will be complying with rules allowing for forgiveness of up to 100 percent of the loan.
The rules are pretty rigid. According to the SBA, the loan proceeds must go to payroll costs, rent, utilities and interest on mortgages, with 75 percent of the forgiven amount having been used for payroll. In addition, the employer must be able to show that the business maintained or quickly rehired employees, maintaining salary levels. The amount of forgiveness will also depend on fulltime headcount and salaries and wages; if those amounts decrease, forgiveness decreases.
Business owners are asking about what counts as “payroll costs.” The SBA issued guidance on that question and many others, which can be found at tinyurl.com/ydy4rtxm.
The list of payroll costs includes: “compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.”
What’s excluded from the definition of payroll costs? The CARES Act excludes the following:
“i. Any compensation of an employee whose principal place of residence is outside of the United States;
“ii. The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
“iii. Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
“iv. Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Pub. L. 116-127).”
So, understanding how the PPP loan can be used in order to qualify for forgiveness, like many other things, is a matter of following the rules.
Some new issues have arisen. According to a notice (tinyurl.com/yakbptcl) issued last week, the IRS has concluded that business expenses paid for by a PPP loan that is forgiven cannot be deducted as business expenses. Sen. Ron Wyden called this a “gut punch” for businesses struggling to stay afloat.
In response, Sen. Marco Rubio, chairman of the Senate Committee on Small Business and Entrepreneurship, joined by Sens. John Cornyn, Senate Finance
Committee Chairman Chuck Grassley, Finance Committee ranking member Ron Wyden, and Tom Carper, introduced new legislation (Small Business Expense Protection Act) to clarify that small businesses can deduct expenses paid with a forgiven PPP loan from their taxes.
“The congressional intent of the PPP program was to keep workers connected to their jobs and to ease the financial burden on small businesses so they could weather this pandemic,” Rubio said. “Borrowers should not be penalized by new taxes because they sought help during this unprecedented crisis.”
We’ll see whether the bill will be passed.
In the meantime, to keep current on developments, which I’m sure will be coming, check out the SBA’s website (sba.gov). If you have questions about a PPP loan that you have already received, I highly recommend contacting the Lender Relations Specialist in the local SBA Field Office. A list of offices can be found here: tinyurl.com/ndzg4r4.
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Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2018 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.