Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) the Small Business Administration (SBA) is tasked with administering the Paycheck Protection Program (PPP), a newly created loan program intended to allow employers to continue to pay their employees and assist with certain other expenses.
Beginning on April 16, 2020, the SBA issued a notice on its website that funding for the PPP has lapsed and it is no longer accepting new loan applications. Congress has recently authorized an additional $310 billion of funds for the program and the President is expected to approve the funding shortly.
PPP loans can be forgiven, on a federally tax-free basis, up to 100% of the amount borrowed if the borrower meets certain conditions, including:
Clients have requested guidance on how to treat lease payments made to an affiliated entity that owns the property. We await further guidance from the SBA whether the lease payment should be treated as the qualified expense, or the interest on the mortgage that is paid by the property owner.
Reduction in Loan Forgiveness
While the full amount of the PPP loan is eligible for forgiveness, it is subject to reduction based on the following:
We have received inquiries from a number of clients regarding reductions in headcount due to employees not returning to work because they wish to avail themselves of the enhanced unemployment benefits (i.e., the additional $600/week). The PPP simply provides that if your average monthly FTEs during the covered period is less than your average monthly FTEs during the comparison period your forgiveness will be reduced proportionately – employers may either hire additional employees or a portion of their loan will not be forgiven.
A decrease in wages of more than 25% for employees who earned annualized wages during 2019 of more than $100,000 will not affect eligibility for loan forgiveness.
Clients have inquired whether they can pay employees even if there is no work for them – based on the guidance that has been issued to date the answer is a resounding “Yes” as forgiveness is based on the use of 75% of the PPP loan proceeds may be used for payroll costs – there is no requirement that the employees actually do work.
PPP Loan Forgiveness Application
After the covered period ends a PPP loan recipient may request that the loan be forgiven. The borrower will be required to submit the following to their lender:
After submitting the application for forgiveness, the lender has 60 days to provide a decision on forgiveness – to the extent any portion of the loan is not forgiven it must be paid back within two years from the funding date at a 1% interest rate, payment is deferred for a period of six months and the loan can be repaid early without penalty.
Remember, the PPP is newly created, and no borrower has been through a request for forgiveness nor has the SBA issued all the guidance that borrowers require. To the extent you have specific questions regarding your PPP loan please contact your lender, as they will ultimately determine forgiveness eligibility.
We have suggested to our clients that they have their PPP loan proceeds funded to a segregated account in order to make tracking payments easier.
Note that employers who receive any loan forgiveness are not eligible for the employer payroll tax deferral. However, the IRS has stated that employers that deferred payment of the employer’s share of Social Security tax prior to the date that the loan is forgiven can retain the benefit of deferral on the employer’s portion of tax that was due prior to loan forgiveness.
|Ben-Ami, Andrew R. Partner and Chair of Tax Practice||Partner and Chair of Tax Practice||212.216.8025|
|Chu, Justin Y.K. General Counsel and Partner||General Counsel and Partner||212.216.1160|
|Lydell, Sherri D. Partner||Partner||212.216.1151|
|Molinari, Guy Partner and Chair of Corporate and Securities Group||Partner and Chair of Corporate and Securities Group||212.216.1188|
|Rudolph, Elishama A. Associate||Associate||212.216.1145|
|Smith, James G. Partner||Partner||212.216.8060|