Across the United States, small business owners have been impacted by the wave of business closures and stay-at-home orders resulting from the COVID-19 pandemic. In some cases, flattening the curve has caused a flattening of revenue for small businesses. As a response to these struggles, the largest financial support package in U.S. history, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was passed. The CARES Act contains multiple financing and tax options for small business owners.
One of those options is the Paycheck Protection Program (“PPP”). The PPP is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. Small businesses with less than 500 employees who have been affected by the COVID-19 pandemic are eligible to apply. Loan proceeds may be used for a variety of costs including payroll, group healthcare benefits, employee salaries, interest on mortgage obligations, rent, utilities, or interest on debt obligations incurred before February 15, 2020. The maximum loan amount is the lesser of $10 million or two-and-a-half times the employer’s average monthly payroll costs, whichever number is lower. The SBA forgives PPP loans based on the employer maintaining or quickly rehiring employees and maintaining salary levels. The SBA guidance on the PPP suggests that due to likely high subscriptions, at least 75% of the forgiven amount must have been used for payroll. Forgiveness is reduced if full-time headcounts decline or if salaries and wages decrease. These loans are backed by an SBA guarantee and do not require a personal guarantee or collateral by the borrower.
It is important for small business owners to note that these loans are issued on a first come, first served basis and the SBA advises eligible borrowers to apply as soon as possible. Eligible businesses can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, or Farm Credit System institution that is participating. No eligible borrower may receive more than one PPP loan, so the SBA advises business owners to consider applying for the maximum amount. The application is available at: https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf
Small business owners should also note that independent contractors do not count as employees for the purposes of PPP loan calculations because they are eligible to apply for a PPP loan on their own. Specifically, an individual who operates under a sole proprietorship or as an independent contractor or eligible self-employed individual, who was in operation on February 15, 2020 is eligible to apply. Applicable payroll costs for independent contractors or sole proprietors include wages, commissions, income, or net earnings from self-employment, or similar compensation.
The CARES Act provides that the amount of the PPP loan that is forgiven is not subject to a tax. This results in a loan that is treated like a grant for tax purposes. However, borrowers should take notice of how the receipt of a PPP loan impacts other tax benefits created by the CARES Act.
First, the CARES Act provides eligible employers with access to a potential credit against their employment taxes through the Employee Retention Credit. This is generally available to employers carrying on a business during 2020 whose operations were either fully or partially suspended due to an order from a governmental authority limiting commerce, travel, or group meetings due to COVID-19 or who experienced a drop of one-half or more in their gross receipts compared to the same quarter in the previous year. Borrowers of a PPP loan are not eligible to receive this credit.
Second, the CARES Act postpones the due date for depositing the employer portion of certain payroll taxes through the Payroll Tax Deferral. Employers and self-employed individuals may defer payment of the employer portion of their Social Security taxes on wages paid between March 27, 2020 and December 31, 2020. The employer is required to pay the deferred employment tax over the following two years: ½ is delayed until December 31, 2021 and ½ is delayed until December 31, 2022. Like with the employee retention credit, the payroll tax deferral is not available to a recipient of a PPP loan.
Further guidance is expected from the SBA on the PPP loan exclusions and tax benefits. More information is available for small businesses at: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp
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