Paycheck Protection Program (PPP)

Update 6/16/2020:

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Update (5.8.2020) Last week, the IRS provided additional guidance dealing with the taxation of Paycheck Protection Program (PPP) loan forgiveness.  The CARES Act explicitly states that loan forgiveness would be non-taxable.  Therefore, the expenses that normally would be deductible that are forgiven by a PPP loan, are not a deductible expense. As it currently stands, your taxable income will be increased by the amount of these expenses. Finally, the income associated with the forgiveness is excluded from gross income.

The IRS Code disallows any otherwise allowable deduction for the amount of any payment of an eligible PPP expense to the extent of the resulting covered loan forgiveness, preventing a double-tax benefit.  Many commentators assume that the intent of Congress was that this deductibility would be an additional benefit to the borrowers.  Unfortunately, Congress did not include any language in the CARES Act stating that expenses, would in fact, be deductible.

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Update (5.6.2020) All PPP loan applicants are required to make a “necessity certification.”  In doing so, PPP loan applicants must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

Treasury Secretary Mnuchin has advised that borrowers receiving $2 million or more of PPP loan proceeds will be subject to mandatory audit. For making a false certification as to “loan necessity”, PPP Loan Recipients may be at risk of criminal and civil liability. If you have questions about your business’ application, contact our experts today.

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The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $349 billion to help small businesses keep workers employed amid the pandemic and economic downturn. Those funds dried up within a very short period of time. A few weeks later (on April 24th, 2020) another $310 billion was allocated for a second round application window which opened on April 27th, 2020. Known as the Paycheck Protection Program (PPP), the initiative provides 100% federally guaranteed loans to small businesses.

Importantly, a portion of these loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward. You can read our PPP Guide here:

SBA Paycheck Protection Program (PPP)

Sole Proprietors and Independent Contractors – PPP Eligibility

You qualify for the PPP:

• If you were in operation on February 15, 2020;
• If you had self-employment income;
• If your principal place of residence is in the US; and
• If you filed or will file a Form 1040, Schedule C.

*It should be noted that Partners in partnerships cannot apply for PPP loans separate from the partnership. The partnership applies and includes the partners. This includes self-employment income (SEI) of general active partners up to $100K annualized.

Loan Application

Documentation for Loan Application

In addition to the borrower certification required by Section 1106(e)(3) of the Act, to substantiate your request for loan forgiveness, if you do not have employees, you should submit:

• 2019 Form 1040 Schedule C with your PPP loan application to substantiate the applied-for PPP loan amount
• 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7)
• invoice, bank statement, or book of record that establishes you are self-employed. You must provide a 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020.

In addition to the borrower certification required by Section 1106(e)(3) of the Act, to substantiate your request for loan forgiveness, if you have employees, you should submit:

• 2019 Form 1040 Schedule C
• Form 941 (or other tax forms or equivalent payroll processor records containing similar information)
• state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records
• Evidence of any retirement and health insurance contributions, if applicable.
• A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish you were in operation on February 15, 2020.

Loan Forgiveness

How much of my PPP loan will be forgiven?

According to the US Department of the Treasury Fact Sheet, you will owe money when your loan is due if you use the loan amount for expenses other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.

You will also owe money if you do not maintain your staff and payroll.

• Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time
  employee headcount.
• Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and
  wages by more than 25% for any employee that made less than $100,000 annualized in
  2019.
• Re-Hiring: You have until June 30, 2020 to restore your full-time employment and
  salary levels for any changes made between February 15, 2020 and April 26, 2020.

Documentation for Loan Forgiveness

In addition to the borrower certification required by Section 1106(e)(3) of the Act, to substantiate your request for loan forgiveness, if you have employees, you should submit:

• Form 941
• 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. The Administrator, in consultation with the Secretary, determined that for purposes of loan forgiveness it is appropriate to require self-employed individuals to rely on the 2019 Form 1040 Schedule C to determine the amount of net profit allocated to the owner during the covered period.

How can I Request Loan Forgiveness?

You can submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.

When do I need to start paying interest on my loan?

All payments are deferred for 6 months; however, interest will continue to accrue over this period.

What do I need to certify?

As part of your application, you need to certify in good faith that:

• Current economic uncertainty makes the loan necessary to support your ongoing
  operations.
• The funds will be used to retain workers and maintain payroll or to make mortgage,
  lease, and utility payments.
• You have not and will not receive another loan under this program.
• You will provide to the lender documentation that verifies the number of full-time
  equivalent employees on payroll and the dollar amounts of payroll costs, covered
  mortgage interest payments, covered rent payments, and covered utilities for the eight
  weeks after getting this loan.
• All the information you provided in your application and in all supporting documents
  and forms is true and accurate. Knowingly making a false statement to get a loan under
  this program is punishable by law.
• You acknowledge that the lender will calculate the eligible loan amount using the tax
  documents you submitted. You affirm that the tax documents are identical to those you
  submitted to the IRS. And you also understand, acknowledge, and agree that the lender
  can share the tax information with the SBA’s authorized representatives, including
  authorized representatives of the SBA Office of Inspector General, for the purpose of
  compliance with SBA Loan Program Requirements and all SBA reviews.

If you have questions as it relates to the CARES Act, you can visit our COVID-19 Updates page, our Resources page, or you can contact our experts today. We’re here to help.