Answers to FAQ on PPP loans (now that there is new financing for loans)
The Paycheck Protection Program (PPP), which was created by the Coronavirus, Aid, Relief and Economic Security Act (CARES), depleted its initial funding of around $ 349 billion just days after the program launch on April 3. week, Congress approved an additional $ 310 billion for PPP loans.
The new financing means that many small business owners will have a second chance to secure a P3 loan that could help them keep their businesses afloat. Businesses will again be able to apply for PPP loans from April 27.
Uncertainty and confusion has surrounded the PPP since its inception, especially regarding eligibility, salary costs and debt cancellation. Hopefully the answers below to common question about PPP loans will help small business owners who are looking for financial support at this time. The country needs our small businesses to bounce back as quickly as possible, and P3 loans are a big part of the plan to get there.
Eligibility based on business size
Question: Do small businesses need to have 500 or fewer employees to be eligible for PPP loans?
Reply: No. The Small Business Administration (SBA) says businesses may be eligible for PPP loans even if they have more than 500 employees. For example, a business with more than 500 employees may be eligible if it meets the employee-based or income-based SBA. size standard corresponding to its primary industry.
A business is also eligible for a PPP Small Business Loan if it meets both criteria of the SBA’s “Alternative Size Standard” as of March 27, 2020:
- The maximum tangible net worth of the company does not exceed $ 15 million; and
- The average net income after federal income taxes (excluding any loss carried forward) of the business for the two full years preceding the date of the claim does not exceed $ 5 million.
Annual compensation greater than $ 100,000
Question: The CARES Act excludes annual employee compensation greater than $ 100,000 from the definition of salary costs. Does this exclusion apply to all employee benefits of monetary value?
Reply: No. The exclusion of annual compensation greater than $ 100,000 only applies to cash compensation, and not to non-monetary benefits, such as employer contributions to pension plans.
Question: Do PPP Loans Cover Paid Sick Leave?
Reply: Yes. PPP loans cover salary costs, including the costs of employee vacation, parental, family, medical and sick leave. But sick leave and family leave wages are excluded for which credit is allowed under certain sections of the Families First Coronavirus Response Act.
Labor cost exclusions
Question: Is there anything that is expressly excluded from the definition of labor costs?
Reply: The CARES law excludes:
- Compensation for an employee whose primary place of residence is outside the United States;
- Compensation of an individual employee exceeding $ 100,000 for the year; and
- Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020.
Payments to independent contractors or sole proprietors
Question: Should payments that an eligible borrower has made to an independent contractor or sole proprietor be included in the borrower’s salary cost calculations?
Reply: No. Amounts paid to an independent contractor or sole proprietor should be excluded. However, an independent contractor or sole proprietor is eligible for a PPP loan if they meet the applicable requirements.
Start of 24 week period
Question: The amount of a canceled PPP loan depends on the borrower’s salary costs over a 24-week period. When does this 24 week period begin?
Reply: The 24 week period begins on the date the lender makes the first disbursement of the PPP loan.
Please note that borrowers who got their loans before June 5, 2020 have the option of using an eight week period, which was the original spending period under the CARES Act, instead of the new 24 week period. .
Tax deductions for expenses
Question: Can a business claim a tax deduction for expenses that result in the cancellation of a PPP loan?
Reply: No. A tax deduction is generally available for all ordinary and necessary expenses paid or incurred during the year in carrying on a trade or business. Labor costs related to the business, mortgage interest, rent and utilities are therefore normally deductible. However, no deduction is allowed for any expense that is otherwise exempt from tax. This avoids double tax relief.
The loan proceeds correctly used (in accordance with the rules of the CARES Act) for payroll, mortgage interest, rent and utilities do not have to be repaid. In addition, the income associated with the cancellation of the PPP loan is exempt from tax under the CARES Act. Therefore, to avoid duplicate tax breaks, expenses that result in a PPP loan forgiveness are not deductible.
Question: Are businesses owned by large corporations with sufficient sources of liquidity to support the day-to-day operations of the business eligible for a PPP loan?
Reply: Probably not. Borrowers should certify in good faith that their PPP loan application is necessary to support their ongoing operations, taking into account their current business activity and ability to tap other sources of finance. According to the SBA, “it is unlikely that a state-owned enterprise with substantial market value and access to capital markets can make the required certification in good faith.”
Question: Is a seasonal business that had not fully ramped up as of February 15, 2020 still eligible for a PPP loan?
Reply: Yes. The SBA says that by assessing a borrower’s eligibility, a lender can determine whether a seasonal business was in operation on February 15, 2020 or for an eight-week period between February 15, 2019 and June 30, 2019.