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Update: Interim Final Guidance for the Paycheck Protection Program

By Klatzkin Tax Team

April 6, 2020

This is an update to our previous post published on April 3, 2020, regarding the Paycheck Protection Program (PPP). Since then, the Small Business Administration has announced that the interest rate is set at 1%, and the calculation of average payroll costs is based on gross payroll without deductions for taxes. Changes are happening quickly, and we anticipate additional regulations will be released. Check back for further updates as we continue to monitor the situation.

The sudden and abrupt changes implemented to reduce the spread of the Coronavirus (COVID-19) has left many New Jersey businesses in difficult positions. When Governor Phil Murphy issued mandatory closure and a shelter-in-place mandate, in an instant, the business world changed. Rather than focusing on new sales or hiring, these businesses shifted into survival mode. To help alleviate issues, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which offers comprehensive relief, including tax and financing opportunities. One important change was the introduction of a new forgivable loan under the Payroll Protection Program (PPP). The PPP was designed to provide an immediate cash infusion to qualifying applicants to reduce layoffs and furloughs. Unfortunately, there has been confusion and questions about the specifics surrounding the PPP. In an attempt to resolve the situation, the Small Business Administration (SBA) recently released an interim final rule. To help clients, prospects, and others, Klatzkin has provided a summary of key points below.

Interim PPP Guidance Highlights

  • Loan Eligibility-There are specific circumstances under which an application is prohibited from applying for the loan. This includes businesses engaged in illegal activity, household employers, or when an owner, or any other business controlled by the owner, obtained a loan from a Federal agency that is currently delinquent or has defaulted within the last seven years.
  • Interest Rate–The guidance clarifies loans taken under the Program will be subject to 100 basis points or 1% interest.
  • Independent Contractors – The guidance clarifies that independent contractors cannot be counted as an employee for purposes of loan forgiveness. Since they are already able to apply for the PPP independently, they are excluded from being counted as employees.
  • Loan Deferment –The guidance also outlines that while the Act allows the SBA to defer payments for up to one year, it was determined that six months is an appropriate length of time given the low-interest rate. Remember, the deferment only pertains to the principal, and interest will continue to accrue.
  • Multiple Loan Applications– A question posed was whether an applicant could submit multiple loan applications. It was determined that no eligible borrower could receive more than one loan. It was noted the Act doesn’t make this prohibition. Still, the SBA decided to make the limitation because of the short application window (due date June 30, 2020) but also to allow as many as possible to apply.
  • Qualifying Expenses – Loan funds are to be used on qualifying payroll costs. According to the guidance, this includes employee compensation (U.S. residents only) including salary, wages, commission, or similar compensation such as cash tips, payment for vacation, group health care coverage, allowance for separation, and related state and local taxes. For independent contractors and sole proprietors, this includes wages, commission, income, or net earnings, from self-employment compensation.
  • Loan Forgiveness– One reason the PPP is so popular is because of the opportunity for partial or full loan forgiveness. The guidance provides clarification about forgiveness details. The amount of loan forgiveness can be up to the entire principal amount and interest. The business is not responsible for loan repayment if funds are used for qualifying purposes (outlined above). The actual amount will depend, in part, on the total payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight weeks following the date of the loan.
  • Expanded Loan Certifications – The initial certification requirements of loan need, usage, and business operation date, remain in effect. However, the guidance added additional requirements, including:
    • Payroll Documentation – The borrower will need to submit documentation that verifies the number of full-time equivalent (FTE) employees on the payroll, including payroll costs, mortgage interest payments, rent payments, and utilities for the eight-weeks following funding
    • Loan Exclusivity – For the period beginning on the date of application through December 31, 2020, the applicant must certify they have not or will not receive another PPP loan
    • Loan Forgiveness – The amount eligible for forgiveness will be determined by the sum of documented payroll costs, mortgage interest payments, rent payments, and covered utilities. The application must also acknowledge that not more than 25% of the forgiven amount can be attributed to non-payroll expenses
    • Validity Certification – The borrower is required to certify the information provided in documents and forms is true and accurate. Making any false statements to obtain a loan could result in significant fines.

It’s important to note the interim guidance temporarily supersedes any conflicting Loan Program Requirements.

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The PPP offers a substantial lifeline for businesses struggling to meet expenses during the COVID-19 emergency. Although there were issues on the first day of application acceptance, it’s a significant opportunity that should not be missed. If you have any questions about the information outlined above or need assistance with a tax analysis or other COVID issue, Klatzkin can help. For additional information, click here to contact us. 

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