PPP Loan Forgiveness Guidance from the SBA as of April 15, 2020

sbaIf you were or are fortunate to get a PPP Loan, then there is a loan forgiveness that can be applied to the full amount of the loan and any accrued interest. The amount of loan forgiveness will depend on the total amount of payroll costs, payment of interest on mortgage interest (business) obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements on leases dated before February 20, 2020. However, not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.

Independent Contractors do not count as employees for the purpose of PPP loan forgiveness.

During the 8 weeks (56 days) after the date of funding of the PPP Loan, the PPP Loan is to be used for payroll costs (wages, commissions, bonuses, group health, medical and family leave, state & local payroll taxes, and employer retirement contributions), rent payments, utility payments and interest on mortgage payments and interest payments on any other debt obligations incurred before February 15, 2020. But remember that 75% of the loan forgiveness amount must be for Payroll Costs.

Proceeds from any advance up to $10,000 on the EIDL Loan will be deducted from the loan forgiveness amount on the PPP Loan.

It is presumed that the documentation for the loan forgiveness will be your payroll registers, lease agreements, health insurance invoices, retirement contributions, bank statements, and copies of checks/bank documents showing the payments. Additional guidance from the SBA is expected.

The CARE Act specifically says that the forgiveness amount of the PPP loan is not taxable. However, the IRS stated on April 30, 2020 that it believes the expenses that result in forgiveness of PPP loan are not tax deductible (the agency cited Section 256 of the tax code, which states that deductions can’t be taken if they are tied to a certain class of tax-exempt income). This essentially makes the loan forgiveness amount taxable. We will monitor to see if this gets changed.

CARES Act – Paycheck Protection Loan Program

The CARCost Seg2ES Act that has been passed by the Senate contains a Paycheck Protection Loan Program through the SBA.  The program offers a maximum loan of the lessor of your monthly average Payroll Costs over the twelve months prior to the loan multiplied by 2.5 or $10,000,000.  Basically, the maximum loan under this program is 2 1/2 months of your total Payroll Costs not to exceed $10,000,000.  They defined Payroll Costs to include salary, wages, commissions, vacation pay, leave pay, severance, health care benefits (including health insurance premiums), retirement benefits, and state & local payroll taxes.

The loan would carry a maximum interest rate of 4% with a maximum term of 10 years.  There is a payment deferral of both principal and interest for at least 6 months, but not to exceed 1 year.  There is no prepayment penalty, the loan is non-recourse with no personal guarantee required, and no collateral needed.

It also appears that the loan fees would be covered and reimbursed by the SBA.  The loan proceeds are meant to be used for payroll costs, healthcare, rent, and utilities to keep the business operating and it’s employees employed.