June 4 Update: Senate Approved Paycheck Protection Program Flexibility Act of 2020; President Trump Expected to Sign.

As a follow-up to our March 31 post on the CARES Act Paycheck Protection Program, the SBA released yesterday an Interim Final Rule and an updated Paycheck-Protection-Program-Application-v3.

April 7 Update: Working together with Treasury, the SBA issued FAQs today providing clarification on a number of issues, including exceptions to the 500 employee rule, borrower and lender responsibilities, affiliation rules, the $100,000 salary limitation, and how federal taxes do not affect the calculation. These FAQs are being updated regularly by the SBA.

April 14 Update: The SBA today issued another Interim Final Rule, providing guidance for self-employed individuals. Click here for the Treasury Department’s page with additional details on the PPP and EIDL programs.

Below are some of the highlights from the guidance:

  • The step-by-step method to calculate the maximum loan amount is provided (p. 8), as well as examples for different scenarios. (p. 9-10)
  • Payments to independent contractors do not count as payroll costs in determining the maximum loan amount. (p. 11)
  • A borrower can only apply for 1 PPP loan. (p. 12)
  • Loans will be made on a first come, first served basis. (p. 13)
  • At least 75% of the loan amount must be used for payroll costs.  Knowingly using the funds for unauthorized purposes will subject the borrower to additional liability such as charges for fraud. (p. 16-17)
  • The interest rate on the loan is 1 percent. (p. 25)
  • The term of the loan is 2 years. (p. 25)
  • No collateral or personal guarantees are required. (p. 25)

Uncertainties that existed when we published this article on April 3 have been clarified with guidance issued on April 7 and April 14:

  • It appears that the maximum loan amount is based on payroll costs for the 12 months preceding the loan date. (p. 8)
    • Elsewhere in the guidance (p. 21), the lender is required to confirm calendar year 2019 payroll costs. The reason for this apparent conflict is unclear, but both the Act and the guidance indicate the loan should be based on the 12 months preceding the loan date.
      APRIL 7 UPDATE: This issue has been clarified. FAQ #14 states that you can use either the previous 12 months or calendar year 2019.
  • There is a confusing reference to payroll taxes withheld from employees (p. 11). We recommend following the step-by-step instructions on p. 8.
    APRIL 7 UPDATE: This issue has been clarified. FAQ #16 states that you should use gross wages with no subtractions or additions for the employee or employer’s share of FICA or income taxes withheld.
  • The Interim Final Rule issued on April 14 clarified how partnership income is treated for purposes of calculating the maximum loan amount. Partnerships can submit loan applications and include the self-employment income of partners as a payroll cost, up to $100,000 per “general active partner” on an annualized basis. Partners are not allowed to separately apply for a PPP loan based on their share of the partnership income.

Note that the loan amount is based on payroll costs in a 2.5-month (11-week) period (p. 8), but the forgiveness is based on payroll and other allowable costs in an 8-week period (p. 14). For businesses that are payroll intensive, it’s possible that not all of the loan will be forgiven. Only 25 percent of the loan forgiveness can be from allowable non-payroll costs.

Please contact an MCB Advisor if you need assistance in applying for a loan under this program.

We will continue to update you as we get more information on Coronavirus-related legislation and guidance that may impact you. Continue to check back here for the most up to date tax information and changes in response to Coronavirus. If you have more questions contact an MCB Advisor at 703-218-3600 or click here. 

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