Brown Brothers Harriman (BBH) continues to monitor changes to legislation and program rules as they are released. This article is intended to serve as a guide and is accurate as of April 6, 2020. This material does not constitute tax or legal advice and is not intended to replace the advice of the client’s qualified tax advisor, attorney and accountant.
We recently provided an overview of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the $2 trillion government relief package for business owners that have been dealing with near-term liquidity challenges. Many BBH clients have asked about the $349 billion set aside for the Paycheck Protection Program (PPP), which is specifically designed to incentivize business owners to keep employees on payroll by offering forgivable loans to pay wages and other fixed expenses. BBH believes that businesses should assess their eligibility for this generous program as soon as possible. This article addresses the most common questions that we have received. Please reach out to your BBH relationship team for further information or assistance in taking advantage of these opportunities.
On the Small Business Administration (SBA) website, I see information about disaster relief loans and Economic Injury Disaster Loans. Are these the forgivable loans under the CARES Act?
No, disaster relief loans, including Economic Injury Disaster Loans (EIDLs), are distinct from forgivable PPP loans under the CARES Act.1 Businesses seeking a disaster loan will apply directly on the SBA’s website, while businesses applying for a PPP loan must apply through an SBA-approved lender as described below. Of note, borrowers who have received an EIDL are able to refinance the loan when applying for a PPP loan.
Is my business eligible for the Paycheck Protection Program?
Small businesses, 501(c)(3) nonprofit organizations, 501(c)(19) veteran organizations and tribal businesses that have fewer than 500 employees or the applicable employee-based or revenue-based size standard provided by the SBA in number of employees (based on the NAICS classification system), which may be up to 1,500 employees in certain industries, are eligible to apply.2 A business can also qualify if it met both tests in SBA’s “alternative size standard” as of March 27, 2020 (maximum tangible net worth of no more than $15 million and average net income after federal income taxes for the two full fiscal years prior to loan application not more than $5 million). Sole proprietorships and 1099 independent contractors also qualify for PPP loans. Applicants must have been in operation on February 15, 2020, to be considered for a PPP loan.
Do these loans restrict my decision-making as an owner?
There has been significant media attention paid to CARES Act loans that restrict borrowers from paying dividends, limit executive compensation, impact collective bargaining dynamics, prohibit offshoring jobs and restrict share buybacks. These conditions do not apply to loans under the PPP. However, borrowers through the program are not eligible to take advantage of employee retention credits or payroll tax deferrals. While the company is responsible to pay the extent of the loan that is not forgiven, PPP loans do not require collateral or a personal guarantee and are nonrecourse against any individual owner.
What information do I need to apply for PPP?
The application requires the legal and trade names of your business, primary business address and contact information, business TIN (EIN or SSN), average monthly payroll in the year prior to February 15, 2020, and employee number. You will also need to provide a list of owners with greater than 20% ownership stakes, their respective percentage of ownership, title, TIN (EIN or SSN) and home address. The applicant must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation, such as payroll processor records, payroll tax filings or Form 1099-MISC, or income and expenses from a sole proprietorship. If you do not have access to the documentation listed, you may provide other supporting documentation, such as bank records or other records that demonstrate qualifying payroll amount.
How can I apply?
Businesses can apply through existing SBA 7(a) lenders as well as through any federally insured depository institution, federally insured credit union or Farm Credit System institution that is participating in the program. Please visit https://www.sba.gov/paycheckprotection/find to find a nearby eligible lender.
What happens if the Treasury publishes new guidance after my application is filed or approved?
Businesses whose applications have been filed or approved prior to new guidance being released are not required to take action based on newly posted guidance. However, businesses whose loan applications have not yet been processed may revise their applications based on clarifications reflected in new guidance.
When can I apply?
Beginning on April 3, 2020, small businesses and sole proprietorships can apply. Starting on April 10, 2020, independent contractors as well as self-employed individuals can apply.
How is the amount of the loan determined?
The loan amount equals 2.5x a company’s average monthly payroll costs for the one year prior to the loan or from calendar year 2019, plus any debt incurred as a result of COVID-19 under the SBA disaster relief program that you chose to refinance. Payroll costs consist of compensation to employees whose principal place of residence is the United States only. The loan amount has a maximum of $10 million. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019, to June 30, 2019, may use the average monthly payroll costs for the period January 1, 2020, through February 29, 2020.
- Monthly payroll costs include: (1) salary, wages, commissions or tips (capped at $100,000 on an annualized basis for each employee)3 ; (2) employee benefits, including costs for vacation, parental, family, medical or sick leave, allowance for separation or dismissal, repayments required for the provisions of group healthcare benefits, including insurance premiums, and payment of any retirement benefit; and (3) state and local taxes assessed on compensation. (Note that amounts paid to an independent contractor or sole proprietor should be excluded from monthly payroll costs calculation.)
- Monthly payroll costs for a sole proprietors and independent contractors include wages, commissions, income or net earnings from self-employment (capped at $100,000 on an annualized basis).
What is the interest rate and maturity on a PPP loan?
The interest rate will be 1.0%, and the maturity is two years.
Is the PPP first-come, first-served?
How is the forgivable amount determined?
Loan forgiveness is equal to the sum of eligible payroll costs, payment of interest on any mortgage obligation (not including any prepayment or payment of principal on mortgage), payment on any rent obligation and any covered utility payment incurred during the covered eight-week period. Covered utilities include gas, electricity, telephone, transportation and internet service. Mortgages, rent and utility contracts all must have been in place before February 15, 2020.
The loan forgiveness amount will be reduced if a borrower decreases its full-time employee headcount compared with the prior year period and/or decreases salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019. Borrowers will have until June 30, 2020, to rehire any full-time employees released between February 15, 2020, and April 26, 2020, and/or restore salary levels reduced between February 15, 2020, and April 26, 2020.
What if I have already laid off or furloughed employees since February 15?
Borrowers will not be penalized for the termination of an employee made between February 15, 2020, and April 26, 2020, so long as the employee is rehired by June 30, 2020.
How do I get forgiveness on my loan?
Companies must submit a request to the lender that is servicing the loan. The loan forgiveness application must include (1) documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and state income, payroll and unemployment insurance filings; (2) documentation verifying payments on covered mortgage obligations, lease obligations and utilities; and (3) certification from a representative of your business or organization that is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used in accordance with the program’s guidelines for use.
Can I really use the PPP calculation based on employee salaries to pay other expenses such as rent and utilities?
While 75% of the forgiven amount must have been used for payroll, borrowers may also use loan funds for payments of interest on mortgage obligations (excluding principal payments or any prepayments), rent and utilities (electricity, gas, water, transportation, telephone and internet). Eligible expenses must be governed by agreements in place prior to February 15, 2020.
What are the tax implications of taking on a loan?
The forgiven amount of the PPP loan will not constitute cancellation of indebtedness income for federal tax purposes. Furthermore, a firm that receives a PPP loan is ineligible for the CARES Act’s employee retention payroll tax credit and/or the act’s delay of payment of employer payroll taxes program.
When do I have to start making payments?
Borrowers may defer loan payments (including principal and interest) for six months; however, interest will accrue during this period.
Is there any loan program or relief for companies with over 500 employees?
While the focus on the CARES Act has been on the relief provided to small businesses, Title IV of the act appropriates funds for mid-sized and large businesses as well. The act directs the Secretary of the Treasury to use up to $454 billion for a program providing financing to banks and other lenders that provide loans to businesses, nonprofits and state and local government, including specific direction to the Secretary of the Treasury to implement a program or facility for “mid-sized” businesses with between 500 and 10,000 employees. An “eligible business” under Title IV of the act broadly includes any “United States business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under this act.” The goal of this provision is to unlock between $2 trillion and $4 trillion in private lending. Details of this program are still being finalized, and we will provide further information as details are provided. As reported in our recent article, “What Business Owners Need to Know About the Coronavirus Aid, Relief, and Economic Security Act,” the tax relief provisions are applicable to companies of all sizes.