Payroll Protection Program—What Strings Are Attached?

In the midst of the economic shutdown brought about by the pandemic of COVID-19, small businesses got some good news in the form of the Payroll Protection Program (PPP). According to U.S. Treasury, the PPP initially authorized “up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis.” And last month, Congress approved another $321B in funding as the initial amount quickly ran out. This much needed relief will go a long way in helping Americans keep their heads above water during this time of great uncertainty.

But before you start mentally spending your potential loan, there are some essential things you need to know.

HOW MUCH CAN BUSINESSES GET WITH THE PPP?

“Loans can be for up to 2.5x an employer’s average monthly payroll, with a limit of $10 million. The average monthly payroll amount is calculated as the monthly average for the previous year, (either up to the date the loan is made or, if employers choose, from January 2019 to December 2019), or of January and February 2020 for new businesses.” — paycor.com

WHAT CAN YOU USE A PPP LOAN FOR?

The loans can be used for payroll costs (including benefits), interest on mortgage obligations (incurred before February 15, 2020), Rent (under lease agreements in force before February 15, 2020), and Utilities (for which service began before February 15, 2020).Payroll costs can include:

  • Salary, wage, commission or similar up to $100,000
  • Cash tips or equivalent
  • Payment for vacation, parental, family, medical or sick leave
  • Dismissal or separation allowance
  • Group health care benefit payments (including insurance premiums)
  • Retirement benefits
  • State and local taxes (based on employee compensation)

But beware that PPP loans cannot be used for: 

  • Any salary in excess of $100,000
  • Income tax, payroll tax or railroad retirement tax
  • Compensation for employees not based in the U.S.
  • Sick leave or FMLA leave for which a credit is available under the FFRCA

STRINGS ARE ATTACHED TO LOAN FORGIVENESS

If you are a business owner thinking about applying for a Paycheck Protection Program loan or you have already applied, you should be aware that there are strings attached that may affect how you do business down the fiscal road.

PRIMARILY FOR PAYROLL

In its Fact Sheet, the U.S. Treasury estimates that if you want your loan to be forgiven, no more than 25% of the loan amount should be used for expenses not related to payroll (e.g. rent and utilities). A major goal of the PPP is to help U.S. workers to continue to put food on the table, so it makes sense that the forgiveness of the loans would be tied to the funds given being used to pay those workers.

POTENTIAL REDUCTIONS IN FORGIVABLE AMOUNTS 

Since the goal of the PPP is to give continuing income to American workers during this crisis, the terms of the loan state that loan forgiveness will be reduced if:

  1. You reduce the number of your full-time staff.
  2. You reduce salaries and wages by more than 25% per employee (if they made less than $100,000 in 2019).
  3. You do not restore by June 30, 2020, your full-time employee headcount and salary levels (for which you made changes between Feb 15 and Apr 25, 2020).

PAYROLL TAX DEFERRAL

The CARES Act “allows employers to defer the deposit and payment of the employer’s share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes.” —irs.gov

But, if you choose to enroll in the PPP and attain loan forgiveness, you will not be eligible for payroll tax deferral.

TAX IMPLICATIONS

Sec. 1106 of the Act provides that PPP loan forgiveness is excluded from the recipient’s gross income.  Word of caution, it is still not clear if the expenses paid with PPP proceeds will be tax deductible, although that appears to have been Congress’s intent.   We are still waiting for clarification from the IRS and the Department of Treasury to confirm.

WE CAN HELP ANSWER YOUR QUESTIONS

We understand that it is a very different world for business owners today than it was just a few months ago. We are here to help. We know the implications and ramifications of making financial choices for your business and can help you make the wisest decisions. If you want help, you can call us at (888) 272-7102 or send us a message.

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May 6, 2020
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