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Many businesses have been reeling from the sudden and abrupt changes implemented during the COVID-19 emergency. The forced closure of non-essential businesses and stay-at-home orders have dealt a strong blow to business owners. In an attempt to help companies, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides comprehensive tax, financing, and other relief measures. A popular provision was the introduction of the Paycheck Protection Program, when combined with Economic Injury Disaster Loans (EIDL), offer a lifeline to businesses in need. On April 3, 2020, the Small Business Administration (SBA) issued interim guidance to make it easier for small businesses to apply with complete information about loan terms, conditions, and more. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key information below.
Essential PPP Guidance
- Loan Eligibility -There are specific circumstances under which a business is prohibited from applying for the loan. This includes businesses engaged in illegal activity, household employers, or when an owner, or any other business controlled by the owner, obtained a loan from a Federal agency that is currently delinquent or has defaulted within the last 7 years.
- Interest Rate – Initially, the SBA announced the loan rate under this program would be .5%. However, just prior to the application period, the Treasury made a different announcement asserting the loan rate would actually be 1%. The interim guidance clarifies loans taken under the program will be subject to 100 basis points or 1% interest.
- Independent Contractors – The guidance clarifies that independent contractors can not be counted as an employee for purposes of loan forgiveness. Since they are already able to apply for the PPP independently, they are excluded from being counted as such. This group can start submitting applications on April 10, 2020.
- Loan Deferment – There was confusion about whether a loan recipient would be permitted a deferment of principal payment for 6 months or a year. The guidance outlines that while the Act allows the SBA to defer payments for up to one year, it was determined that six months is an appropriate length of time given the low-interest rate. Remember, the deferment only pertains to the principal and that interest will continue to accrue during this time.
- Loan Maturity Date – The loan maturity date is 2 years. Although the Act allows the SBA to provide a window of up to ten years, it was decided to limit the timeframe to 2 years. This is because the disruption caused by COVID-19 is expected to abate and permit normal operations to resume shortly.
- Multiple Loan Applications – A question posed by many was whether they could submit multiple loan applications. It was determined that no eligible borrower can receive more than one loan. It was noted the Act doesn’t make this prohibition, but the SBA decided to make the limitation because of the short application window (due date June 30, 2020) but also to allow as many businesses as possible to apply.
- Excluded Payroll Expenses – There was confusion about qualifying payroll expenses, so the guidance provided specific examples of excluded expenses. This includes compensation of an employee who lives outside the U.S., employee compensation that exceeds $100,000 and qualified sick leave, and family wages for which a credit is allowed under the Families First Coronavirus Response Act.
- Loan Forgiveness – One reason the PPP is so popular is because of the opportunity for partial or full loan forgiveness. The guidance provides clarification about forgiveness details. The amount of loan forgiveness can be up to the full principal amount and interest. The business is not responsible for loan repayment if funds are used for forgivable purposes. The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan. It’s important to note that not more than 25 percent of the loan forgiveness amount may be attributable to nonpayroll costs.
While the first day of application submission was fraught with challenges, the opportunity provided by the PPP is a needed lifeline for many. If you have questions about the information outlined above or need assistance with a COVID-19 tax analysis or other issues, JLK Rosenberger can help. For additional information, call us at 818-334-8625, or click here to contact us.