For borrowers with a straightforward PPP loan compliance environment, we have developed a self-service, Excel-based loan forgiveness calculator. But if your situation is more complex, or you have limited staffing available to support the loan requirements, we can provide an automated approach to forecasting eligible spend, monitoring specific payroll exceptions, and managing compliance with final documentation requirements.
Business owners have been strongly affected by COVID-19 and are left with many questions. The programs and initiatives in the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress are intended to assist them in overcoming the current challenges. Baker Tilly developed the below FAQs to guide business owners as well as certain not-for-profits and other employers during this uncertain time.
NOTICE: Baker Tilly is providing updated information as it becomes available. Due to the nature of the emerging and rapidly evolving information from government and non-government relief programs, some requirements and offerings may change before they are listed here. Please consult with your loan officer for the most current details.
The program provides cash-flow assistance through 100% federally guaranteed loans to employers who maintain their payroll during this emergency. If employers maintain their payroll, the loans are forgiven up to the full principal amount of qualifying loans guaranteed under the PPP, which would help your workers remain employed, as well as help your small businesses and our economy to snap back quicker after the crisis.
PPP has a host of attractive features, such as forgiveness of up to eight weeks of payroll based on employee retention and salary levels, no SBA fees and at least six months of deferral with maximum deferrals of up to a year. Small businesses and other eligible entities will be able to apply if they were harmed by COVID-19 between Feb. 15, 2020, and June 30, 2020. This program would be retroactive to Feb. 15, 2020, to help bring workers who may have already been laid off back onto payrolls.
Expand the section(s) below to view the FAQ.
PE-1: What types of businesses and entities may be eligible for a PPP loan?
PE-2: Does a sole proprietor, independent contractor or eligible self-employed individual need to provide anything to establish eligibility?
Yes, you must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship.
Note: For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
PE-3: What other requirements are necessary to obtain a PPP loan?
In addition to being one of the aforementioned businesses or entities, you need the following:
PE-4: What are affiliation rules?
They become important when SBA is deciding whether a business’s affiliations preclude them from being considered “small.” Generally, affiliation exists when one business controls or has the power to control another, or when a third party (or parties) controls or has the power to control both businesses. Please see this resource for more on these rules and how they can impact your business’s eligibility. For the small business compliance guide size and affiliation check here.
PE-5: How do the $10 million cap and affiliation rules work for franchises?
If a franchise brand is listed on the SBA Franchise Directory, each of its franchisees that meets the applicable size standard can apply for a PPP loan. (The franchisor does not apply on behalf of its franchisees.) The $10 million cap on PPP loans is a limit per franchisee entity, and each franchisee is limited to one PPP loan.
Franchise brands that have been denied listing on the Directory because of affiliation between franchisor and franchisee may request listing to receive PPP loans. SBA will not apply affiliation rules to a franchise brand requesting listing on the Directory to participate in the PPP, but SBA will confirm that the brand is otherwise eligible for listing on the Directory. (This was clarified in the April 13, 2020 FAQ document issued by the SBA in consultation with the Dept. of Treasury).
PE-6: How do the $10 million cap and affiliation rules work for hotels and restaurants (and any business assigned a NAICS code beginning with 72)?
Under the CARES Act, any single business entity that is assigned a NAICS code beginning with 72 (including hotels and restaurants) and that employs not more than 500 employees per physical location is eligible to receive a PPP loan.
In addition, SBA’s affiliation rules (13 CFR 121.103 and 13 CFR 121.301) do not apply to any business entity that is assigned a NAICS code beginning with 72 and that employs not more than a total of 500 employees. As a result, if each hotel or restaurant location owned by a parent business is a separate legal business entity, each hotel or restaurant location that employs not more than 500 employees is permitted to apply for a separate PPP loan provided it uses its unique EIN.
The $10 million maximum loan amount limitation applies to each eligible business entity, because individual business entities cannot apply for more than one loan. The following examples illustrate how these principles apply. For examples click here.
PE-7: Can I be ineligible even if I meet the aforementioned eligibility criteria?
In short, yes, if your situation meets any of the below scenarios:
PE-8: Under the CARES Act, there appears to be a 500-employee limit and also revenue limits. What is the ramifications if a business fails one or both of the requirements? As it relates to eligibility, if a business has gross receipts in excess of their threshold, per the SBA chart, and fewer than 500 employees, are they eligible to participate?
For eligibility, see question PE-3. Unlike traditional SBA loans, there is no longer a mandatory revenue requirement for eligibility. See question PB-1 for loan borrowing limits.
PE-9: I have income from self-employment and file a Form 1040, Schedule C. Am I eligible for a PPP Loan?
A: You are eligible for a PPP loan if:
In addition, you should be aware that participation in the PPP may affect your eligibility for state administered unemployment compensation or unemployment assistance programs, including the programs authorized by Title II, Subtitle A of the CARES Act, or CARES Act Employee Retention Credits. SBA will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.
PE-10: If I am a partner in a partnership, can I submit a separate PP loan application?
No, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership. Partnerships are eligible for PPP loans under the Act, and the Administrator has determined, in consultation with the Secretary of the Treasury (Secretary), that limiting a partnership and its partners (and an LLC filing taxes as a partnership) to one PPP loan.
PE-11: Do businesses owned by large companies with adequate sources of liquidity to support business’s ongoing operations qualify for a PPP loan?
In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
Update: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
PE-12: What happens if I requested and received a loan but determine after further review I do not meet the requirements?
Consistent with section 1102 of the CARES Act, the Borrower Application Form requires PPP applicants to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Any borrower that applied for a PPP loan prior to the issuance of this regulation and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
The Administrator, in consultation with the Secretary, determined that this safe harbor is necessary and appropriate to ensure that borrowers promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.
Update: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
PE-13: Is a hedge fund or private equity firm eligible for a PPP loan?
No. Hedge funds and private equity firms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan. The Administrator, in consultation with the Secretary, does not believe that Congress intended for these types of businesses, which are generally ineligible for section 7(a) loans under existing SBA regulations, to obtain PPP financing.
PE-14: Do the SBA affiliation rules prohibit a portfolio company of a private equity fund from being eligible for a PPP loan?
Borrowers must apply the affiliation rules that appear in 13 CFR 121.301(f), as set forth in the Second PPP Interim Final Rule (85 FR 20817). The affiliation rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control.2 However, in addition to applying any applicable affiliation rules, all borrowers should carefully review the required certification on the Paycheck Protection Program Borrower Application Form (SBA Form 2483) stating that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
PE:15: Is an employer that repays its PPP loan by the safe harbor deadline (May 14, 2020) eligible for the Employee Retention Credit?
Yes. An employer that applied for a PPP loan, received payment, and repays the loan by the safe harbor deadline (May 14, 2020) will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer for purposes of the credit.
PE-16: Do student workers count when determining the number of employees for PPP loan eligibility?
Yes, student workers generally count as employees, unless (a) the applicant is an institution of higher education, as defined in the Department of Education’s Federal Work-Study regulations, 34 C.F.R. § 675.2, and (b) the student worker’s services are performed as part of a Federal Work-Study Program (as defined in those regulations) or a substantially similar program of a State or political subdivision thereof. Institutions of higher education must exclude work-study students when determining the number of employees for PPP loan eligibility, and must also exclude payroll costs for work-study students from the calculation of payroll costs used to determine their PPP loan amount.
PB-1: How much can I borrow?
Depending on your business situation, the loan size will be calculated in different ways (see below). The maximum loan size is always $10 million.
Note: If you’re seasonal business is such that it increases from April to June and was not fully ramped up on Feb. 15, 2020, a lender may consider whether a borrower was in operation on Feb. 15, 2020, or for an eight-week period between Feb. 15, 2019 and June 30, 2019.
Examples of calculation
Example 1 – No employees make more than $100,000
Example 2 – Some employees make more than $100,000
Example 3 – No employees make more than $100,000, outstanding EIDL loan of $10,000
Example 4 – Some employees make more than $100,000, outstanding EIDL loan of $10,000
Contact a Baker Tilly specialist to determine your specific loan and forgiveness amount.
PB-2: What costs are eligible for payroll loan computation?
The following are eligible:
PB-3: What costs are not eligible for payroll?
The following are NOT eligible:
PB-4: Do independent contractors count as employees for purposes of PPP loan calculations?
No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation. Also, independent contractors do not get factored into the loan forgiveness calculation for the same reasons.
PB-5: What is the interest rate on the PPP loan?
100 basis points or 1% (per final interim rules provided on April 2, 2020, from the Treasury, a fixed 1% rate was used which is a change from a 4% capped rate in the final bill issued on March 27, 2020)
PB-6: What is the maturity date on the PPP loan?
Two years (per final interim rules provided on April 2, 2020, from the Treasury, a two-year maturity was used which is a change from a maximum of 10 years in the final bill issued on March 27, 2020)
PB-7: Can I apply for more than one PPP loan?
No, an entity is limited to one PPP loan. Each loan will be registered under a Taxpayer Identification Number at SBA to prevent multiple loans to the same entity.
PB-8: Can I use e-signatures or e-consents if a borrower has multiple owners?
PB-9: Is the PPP loan “first-come, first served?”
PB-10: When will I have to begin paying principal and interest on my PPP loan?
You will not have to make any payments for six months following the date of disbursement of the loan. However, interest will continue to accrue on PPP loans during this six-month deferment. Additionally, the CARES Act authorizes the administrator to defer loan payments for up to one year. A six-month deferment period is appropriate in light of the modest interest rate (1%) on PPP loans and the loan forgiveness provisions contained in the Act.
PB-11: Is there any guidance as to the interpretation of the definition of being “in business” from Feb. 15, 2019 through June 30, 2019. Specifically, if a client had a project placed in service after June 30, 2019 (not generating revenue but had payroll costs) and would be better served to use average payroll from Jan. 1, 2020 through Feb. 29, 2020 (generating revenue and had higher payroll costs), is there flexibility in implementing a determination period?
You should consider starting with the presumption of the 12-month period if they were a legal entity. This is not performance-based, so the existence of revenue is not likely to be relevant. See question PB-1
PB-12: Should both part-time equivalents (PTE) and full-time equivalents (FTE) be counted to determine past average payroll costs that are used to determine the loan size?
Yes, for purposes of loan eligibility, the CARES Act defines the term employee to include “individuals employed on a full-time, part-time, or other basis.” A borrower must therefore calculate the total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold. For example, if a borrower has 200 full-time employees and 50 part-time employees each working 10 hours per week, the borrower has a total of 250 employees.
By contrast, for purposes of loan forgiveness, the CARES Act uses the standard of “full-time equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions.
PB-13: What would happen if the application I submit has an error?
Providing an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower attests to the accuracy of those calculations on the application form. Lenders are expected to perform a good faith review including supporting documentation of the average monthly payroll costs. If the lender identifies errors in the calculation or material lack of supporting documentation, the lender should work with you to remedy the issue.
PB-14: With all the new guidance issued by the government, can I re-submit my application?
If a submitted loan application has not been processed, the applicant may revise its application and should work with its lender to determine how to do this.
We expect the updates to the payroll calculation tool may result in a slightly higher benefit cost in some cases.
PB-15: How should we factor in guaranteed payments within a partnership?
This remains to be determined. The AICPA has had the guaranteed partner issue on the list from day one and the Treasury has yet to answer for the application or forgiveness side.
PB-16: Can a borrower take multiple draws from a PPP loan and thereby delay the start of the eight-week covered period?
No. The lender must make a one-time, full disbursement of the PPP loan within ten calendar days of loan approval; for the purposes of this rule, a loan is considered approved when the loan is assigned a loan number by SBA.1 For loans that received an SBA loan number prior to the posting of this interim final rule but have not yet been fully disbursed, the following transition rules apply:
Notwithstanding this limitation, lenders are not responsible for delays in disbursement attributable to a borrower’s failure to timely provide required loan documentation, including a signed promissory note. Loans for which funds have not been disbursed because a borrower has not submitted required loan documentation within 20 calendar days of loan approval shall be cancelled by the lender, subject to the transition rules above. When disbursing loans, lenders must send any amount of loan proceeds designated for the refinance of an EIDL loan directly to SBA and not to the borrower.
PL-1: What are the allowable uses of PPP loan proceeds for businesses?
Uses of loan proceeds:
Note: Section 1102 allows a borrower to use the funds to pay “interest on any other debt obligations that were incurred before the covered period.” This is in addition to payroll costs, mortgage interest, rent, and utilities. However, Section 1106 of the Act, which addresses items eligible for forgiveness, does not include this item. Consequently, it appears Congress will allow a borrower to use the funds to pay interest on a non-mortgage debt during the covered period, but will not allow that amount to be forgiven.
PL-2: Can PPP loans be used by individuals with income from self-employment who file a 2019 Form 1040, Schedule C?
The proceeds of a PPP loan are to be used for the following:
PL-3: Are there any other restrictions on how I can use PPP loan proceeds?
Yes. At least 75 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced EIDL will be included.
Pursuant to the Interim Final Rule concerning the PPP 75% of the loan proceeds are required to be used for payroll and payroll related costs, as defined, including allowable employee benefits. This requirement refers to the use of proceeds for any period beginning from the origination date of the PPP loan, including periods that may extend beyond the eight-week covered period. Accordingly, if a loan recipient does not use at least 75% of the original proceeds on payroll costs during the eight week covered period it must demonstrate that any remaining amounts were used for payroll costs subsequent to the covered period. This is consistent with the requirement that no more than 25% of the forgiven amount of the loan proceeds may be attributable to non-payroll payments (interest, rent, utilities) made during the eight-week covered period.
PF-1: Can my PPP loan be forgiven in whole or in part?
Yes, the amount of loan forgiveness can be up to the full principle 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 and employee and compensation levels are maintained.
PF-2: How is the forgiveness amount calculated for businesses?
Forgiveness on a covered loan is equal to the sum of the following payroll costs incurred during the covered eight-week period compared to the previous year or time period (see update 2 below for clarity on the eight-week period), proportionate to maintaining employees and wages (excluding compensation over $100,000):
PF-3: What amounts shall be eligible for forgiveness if you are an individual with self-employment income who files a Form 1040, Schedule C?
The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on:
Contact a Baker Tilly specialist to determine your specific loan and forgiveness amount. There are nuances in what and how much of the proceeds can be forgiven and it is important to consider those at time of origination.
PF-4: How do I get forgiveness on my PPP loan?
You must apply through your lender for forgiveness on your loan and you must include:
PF-5: What certifications need to be made?
On the PPP application (here) an authorized representative of the applicant must certify in good faith to all of the below. (Note: A representative of the applicant can certify for the business as a whole if the representative is legally authorized to do so.)
PF-6: What documentation will I be required to submit to my lender with my request for loan forgiveness; if I am an individual with self-employment income who files a Form 1040, Schedule C?
In addition to the borrower certification (as described in Q PF-5), to substantiate your request for loan forgiveness, if you have employees, you should submit Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions). Whether or not you have employees, you must submit evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period if you used loan proceeds for those purposes.
The 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the eight-week covered period.
PF-7: What happens after the forgiveness period?
Any loan amounts not forgiven are carried forward as described in question PB-11.
PF-8: When determining debt forgiveness amounts, should you only include FTEs?
PF-9: The forgiveness language has provisions for pro-rata reduction if you fall below full-time headcount and compensation levels during the eight weeks covered period post-loan origination. How does this process work in practice? (i.e., stack this on top of the flat dollar amount calculation applied to “covered costs” like payroll, mortgage, rent and utilities?)
This is pending further guidance, but in general, these are going to have to be actually incurred costs.
PF-10: Under Baker Tilly’s small business owner’s guide, the time for debt forgiveness is the period from Feb. 15, 2019 through June 30, 2019. Why does that appear different from what I read when I see things stating “one-year period before the date on which the loan is made”?
The “one-year period before the date on which the loan is made” refers to one of the options in determining the forgiveness reduction ratio (as compared to the average FTEs during the covered period) noted in a previous FAQ.
PF-11: For the portion of loan that can be forgiven under the CARES Act, can it be excluded from taxable income for the year?
Federal taxes are excludable, however, state is still unclear. It has not yet been addressed under the CARES Act is if the wages or expenses which allow for the forgiveness of the loan will be deductible. If they are, then this will become a permanent difference.
PF-12: Do PPP loans cover paid sick leave?
Yes. PPP loans covers payroll costs, including costs for employee vacation, parental, family, medical and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127). Learn more about the paid sick leave refundable credit here.
PF-13: How should miscellaneous payments (i.e. Retention bonuses, “combat pay” profit sharing, high performance, discretionary bonuses, etc.) be factored into the eight week period of forgiveness as it relates to the calculation?
As of April 14, 2020, there are no known rules limiting these types of payments.
PF-14: What differences may be included in 8 week period for cash basis vs accrual basis taxpayers?
The act specifies “Costs incurred and payments made during the covered period”.
The forgiveness clause – SEC. 1006. LOAN FORGIVENESS
(b) FORGIVENESS.—An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:
(1) Payroll costs.
(2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).
(3) Any payment on any covered rent obligation.
(4) Any covered utility payment.
One of the above is labeled “costs” and three are labeled as “payments”. This should be interpreted as whatever is labeled “costs” should be treated as “costs incurred”, and whatever is listed as a “payment” should be treated as “payments made”. Therefore, “payroll costs” should be whatever is incurred during the 8-week period, and all the other “payments” are whatever payments are actually made in the 8-week period. These “payments” are also all non-payroll costs, and therefore cannot exceed 25% of the loan forgiveness amount, which will prevent businesses from excessive behaviors such as prepaying 6 months of rent or utilities, or whatever. This interpretation also prevents prepaying wages or salary, or doing a large 401K match that covers more time than the 8-week period.
PF-15: Does the requirement that 75% of PPP proceeds be used on payroll costs to be eligible for forgiveness create a cliff effect?
PPP loans will be forgiven under Section 1106 of the Act to the extent the proceeds are used to fund payroll costs, interest on a covered mortgage obligation, covered rent obligations or covered utilities. However, the interim rule issued by the SBA on April 2, 2020 provides that:
It is unclear whether these requirements in concert create a cliff effect, and if not, how the forgivable amount of the loan would be calculated if less than 75% of the proceeds were used for payroll costs.
Consider a business that receives a $100K PPP loan, and uses $50K on payroll costs, the remainder on qualifying rent expense. Since only 50% of the proceeds were used to fund payroll costs, is any of the loan forgivable? This would seem to be an unusually harsh result, especially considering the Congressional intent of the law. Further, reading the language that “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs” on its own would suggest forgiveness is not an all-or-nothing proposition.
Assuming the absence of a cliff effect, the calculation of the amount of the loan eligible for forgiveness is unclear. A reasonable approach would be to divide the $50K of payroll costs by 75% to arrive at $66,667 of total forgiveness, meaning all $50K of the payroll costs and $16,667 of the qualifying rent expense is forgiven. This satisfies the 25% test, but the result is that 2/3 of the qualifying rent, which is use eligible for forgiveness by the statute, must be paid back.
The above-mentioned interim rule notes that future guidance on the loan forgiveness will be forthcoming, however, in the meanwhile, clients considering spending more than 25% of their PPP loan proceeds on non-payroll costs must be made aware of these issues.
PF-16: Are expenses paid after June 30th eligible for the loan forgiveness program?
Section 1102 of the CARES Act provides that PPP loans are only available during the “covered period” of Feb. 15 – June 30, 2020, and during that time, may only be used to pay payroll costs, mortgage interest, rent, utilities, and interest on other debt during the “covered period”.
Then, Section 1106 provides that only amounts spent during the “covered period” are eligible for forgiveness. But for these purposes, the covered period is separately defined as the 8-week period following the receipt of the loan proceeds.
The issue then arises as to what happens to a borrower who receives a PPP less than eight weeks before the June 30th deadline, but with the covered period for forgiveness ending at the end of July. Will payments made post-June 30th be eligible for forgiveness?
To date, no guidance has been provided on this issue. Hopefully, either Treasury or the SBA will clarify this in the near term. However, we should be advising clients that receive PPP loans after May 1st of this potential trap in the loan forgiveness program.
PF-17: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness. To qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
PM-1: Where should I go to get a PPP loan from?
All current SBA 7(a) lenders are eligible lenders for PPP. The Department of the Treasury will also be in charge of authorizing new lenders, including non-bank lenders, to help meet the needs of small business owners. Our recommendation is to start with your existing bank. From discussions we have had with bankers and clients, this appears to be the best route to obtaining your loan quickly and easily.
PM-2: How does the PPP loan coordinate with SBA’s existing loans?
Borrowers may apply for PPP loans and other SBA financial assistance, including Economic Injury Disaster Loans (EIDLs), 7(a) loans, 504 loans and microloans, and also receive investment capital from Small Business Investment Corporations (SBICs). However, you cannot use your PPP loan for the same purpose as your other SBA loan(s). For example, if you use your PPP to cover payroll for the eight-week covered period, you cannot use a different SBA loan product for payroll for those same costs in that period, although you could use it for payroll not during that period or for different workers.
PM-3: What happens if PPP loan funds are misused?
If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member or partner for the unauthorized use.
PM-4: How does the PPP loan work with the temporary Emergency Economic Injury Grants and the Small Business Debt Relief program?
Emergency Economic Injury Grant recipients and those who receive loan payment relief through the Small Business Debt Relief Program may apply for and take out a PPP loan as long as there is no duplication in the uses of funds. Refer to those sections below for more information.
PM-5: Are there any fee waivers?
PM-6: Who pays the fee to an agent who assists a borrower?
Agent fees will be paid by the lender out of the fees the lender receives from SBA. Agents may not collect fees from the borrower or be paid out of the PPP loan proceeds. The total amount that an agent may collect from the lender for assistance in preparing an application for a PPP loan (including referral to the lender) may not exceed:
PM-7: Can PPP loans be sold into the secondary market?
Yes, a PPP loan may be sold on the secondary market after the loan is fully disbursed. A PPP loan may be sold on the secondary market at a premium or a discount to par value. SBA will issue guidance regarding any advance purchase for loans sold in the secondary market.
PM-8: Does refinancing of debt held prior to February 15, 2020 in current or measurement period impact allowed interest expense on this debt?
As of April 14, 2020, there are no known rules prohibiting these expenses.
PM-9: When does the repayment of loan start? Date the loan is received or at the end of the 8 weeks?
There is nothing specified in the guidance answering this question, however, we have seen in the loan documents of current borrowers that it is starting on the date the loan is received.
PM-10: Is loan forgiveness included in taxable income?
Section 1106 of the Act says the debt forgiveness “shall be excluded from gross income”. Generally, debt cancellation (COD) income) is taxable unless it’s eligible for exclusion under IRC §108. In exchange for the escaping current taxation under the §108 exceptions, taxpayers are required to reduce their tax attributes (NOLs, depreciable basis, etc.). However, the CARES Act does not amend the IRC or specifically address this exclusion.
Arguably, the phrase “shall be excluded from gross income” can be read to mean the forgiveness is not included in income under the gross income provisions of IRC §61. As such, it would not need an exception under §108, and if not excluded under §108, it would not be subject to attribute reduction.
Even if the cancellation is not included as gross income for federal purposes, the treatment at the state level could vary. While loan forgiveness is not included in taxable income, it is unclear whether any attribute reduction would be required on the part of the loan recipient. We believe that since the exclusion is not specifically codified as an §108 exclusion, absent further guidance, the attribute reduction rules should not apply. Further, the tax treatment of the cancellation at the state level could vary.
PM-11: Are expenditures related to loan amounts that are forgiven tax deductible?
An issue has arisen as to whether such expenditures would be treated as related to tax-exempt income and a deduction denied under §265.
In general, under §265, expenses that are allocable to the generation or collection of tax-exempt income are not deductible. The expenditures permitted under the PPP program do not relate to the generation of tax-exempt income; rather, they directly relate to the operation of the borrower’s trade or business. Further, these expenses are being funded out of loan proceeds that are not inherently exempt from tax (such as municipal bond interest), so arguably they are not directly allocable to tax-exempt income. The IRS has previously stated that §265 “is intended to reach only those situations in which all the income of a particular type or from a particular source is exempt from tax.” See GCM 38658.
A similar situation arose during the savings and loans crisis of the late 1980s and early 1990s. Legislation enacted in response to that crisis provided for government payments to incentivize healthy financial institutions to take over distressed savings and loan institutions. The legislation made clear that these “make-whole payments” to the acquiring institutions were nontaxable, but did not specify whether the acquiring banks were entitled to deduct losses when they disposed of or wrote down the assets for which the make-whole payments were provided to take over. Similarly, and important to note, the CARES Act is silent as to whether expenses funded by forgiven PPP loan proceeds are deductible.
In subsequent litigation, the government took the position that the deductions claimed by the acquiring financial institutions should be disallowed as the make-whole payments subsidized the acquisitions, citing general tax law principles. However, in Centex Corp. v. United States, 395 F.3d 1283 (Fed. Cir. 2005), the court held that the banks were in fact entitled to these deductions as the relevant statutory regime did not include any provisions to deny them. Ultimately, the acquiring financial institutions received in essence a double benefit: both 1) the exclusion of the make-whole payments from taxable income and 2) a deduction for the losses for which those make-whole payments provided compensation.
PM-12: Section 1102 of the CARES Act provides that PPP loans are available only to applicants that were “in operation on February 15, 2020.” Is a business that was in operation on February 15, 2020 but had a change in ownership after February 15, 2020 eligible for a PPP loan?
Yes. As long as the business was in operation on February 15, 2020, if it meets the other eligibility criteria, the business is eligible to apply for a PPP loan regardless of the change in ownership. In addition, where there is a change in ownership effectuated through a purchase of substantially all assets of a business that was in operation on February 15, the business acquiring the assets will be eligible to apply for a PPP loan even if the change in ownership results in the assignment of a new tax ID number and even if the acquiring business was not in operation until after February 15, 2020. If the acquiring business has maintained the operations of the pre-sale business, the acquiring business may rely on the historic payroll costs and headcount of the pre-sale business for the purposes of its PPP application, except where the pre-sale business had applied for and received a PPP loan. The Administrator, in consultation with the Secretary, has determined that the requirement that a business “was in operation on February 15, 2020” should be applied based on the economic realities of the business’s operations.
PM-13: Will SBA review individual PPP loan files?
Yes. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming. The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which the lender complied with the lender obligations set forth in the Paycheck Protection Program Rule (April 2, 2020).
PM-14: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
For these reasons, unless guidance is issued to the contrary, we do not believe the expenditures associated with PPP debt forgiveness should be treated as non-deductible expenses under §265.
This program will provide immediate relief to small businesses with non-disaster SBA loans, in particular 7(a), 504 and microloans. Under it, SBA will cover all loan payments on these SBA loans, including principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out loans within six months of the president signing the bill into law.
DR-1: Which SBA loans are eligible for debt relief under this program?
7(a) loans not made under the PPP, 504 loans and microloans. Disaster loans are not eligible.
DR-2: How does debt relief under this program work with a PPP loan?
Borrowers may separately apply for and take out a PPP loan, but debt relief under this program will not apply to a PPP loan.
DR-3: How do I know if I’m eligible for a 7(a), 504, or microloan?
In general, businesses must meet size standards, be based in the U.S., be able to repay, and have a sound business purpose. To check whether your business is considered small, you will need your business’s six-digit NAICS code and three-year average annual revenue. Each program has different requirements, see here for more details.
DR-4: What is a 7(a) loan, and how do I apply?
7(a) loans are an affordable loan product of up to $5 million for borrowers who lack credit elsewhere and need access to versatile financing. The program provided short-term or long-term working capital and to purchase an existing business, refinance current business debt, or purchase furniture, fixtures and supplies. In the program, banks share a portion of the risk of the loan with SBA. There are many different types of 7(a) loans; you can visit this site to find the one that is best for you. You apply for a 7(a) loan with a bank or a mission-based lender.
DR-5: What is a 504 loan, and how do I apply?
The 504 Loan Program provides loans of up to $5.5 million to approved small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization. It is a good option if you need to purchase real estate, buildings and machinery. You apply through a Certified Development Company.
DR-6: What is a microloan, and how do I apply?
The Microloan Program provides loans up to $50,000 to help small businesses and certain not-for-profit child care centers to start up and expand. These loans are delivered through mission-based lenders.
DR-7: I am unfamiliar with SBA loans, can anyone help me apply?
Yes, SBA resource partners are available to help guide you through the loan application process. You can also contact your nearest Small Business Development Center (SBDC) or Women’s Business Center.
These grants provide an emergency advance of up to $10,000 to small businesses and private not-for-profits harmed by COVID-19 within three days of applying for an SBA Economic Injury Disaster Loan (EIDL). To access the advance, you must first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance and may be used to keep employees on the payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments.
E-1: Are businesses and private not-for-profits in my state eligible for an EIDL related to COVID-19?
Yes, those suffering substantial economic injury in all 50 states, D.C. and the territories may apply for an EIDL. (Note: The not-for-profits included under an EIDL are more comprehensive then under a PPP.)
E-2: What is an EIDL, and what is it used for?
EIDLs are lower interest loans of up to $2 million, with the principal and interest deferment available for up to four years, that is available to pay for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses.
E-3: Who is eligible for an EIDL?
Those eligible are the following with 500 or fewer employees:
Small business concerns and small agricultural cooperatives that meet the applicable size standard for SBA are also eligible, as well as most private not-for-profits of any size. See below for more info on size standards.
E-5: How do I apply for an economic injury disaster loan?
To apply for an EIDL online, please visit the SBA Disaster Loan Program page. Your SBA District Office is a valuable resource when applying for SBA assistance.
E-6: I am unfamiliar with the EIDL process. Can anyone help me apply?
Yes, SBA resource partners are available to help guide you through the EIDL application process. You can find the nearest Small Business Development Center (SBDC), Women’s Business Center or SCORE mentorship chapter here.
E-7: Who is eligible for an Emergency Economic Injury Grant?
Those eligible for an EIDL and who have been in operation since Jan. 31, 2020, when the public health crisis was announced.
E-8: How long are Emergency Economic Injury Grants available?
Jan. 31, 2020 – Dec. 31, 2020. The grants are backdated to Jan. 31, 2020, to allow those who have already applied for EIDLs to be eligible also to receive a grant.
E-9: If I get an EIDL and/or an Emergency Economic Injury Grant, can I get a PPP loan?
Whether you’ve already received an EIDL unrelated to COVID-19 or you receive a COVID-19-related EIDL and/or Emergency Grant between Jan. 31, 2020, and June 30, 2020, you may also apply for a PPP loan. If you ultimately receive a PPP loan or refinance an EIDL into a PPP loan, any advance amount received under the Emergency Economic Injury Grant Program would be subtracted from the amount forgiven in the PPP. However, you cannot use your EIDL for the same purpose as your PPP loan. For example, if you use your EIDL to cover payroll for certain workers in April, you cannot use PPP for payroll for those same workers in April, although you could use it for payroll in March or for different workers in April.
E-10: How do I know if my business is “small”?
Please visit SBA’s size standards tool to find out if your business meets SBA’s small business size standards. You will need the six-digit NAICS for your business and your business’ three-year average annual revenue.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.