The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Does the exclusion apply to all employee benefits of monetary value?
No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:
- Employer contributions to defined-benefit or defined-contribution retirement plans;
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
- Payment of state and local taxes assessed on compensation of employees.
Will companies have to pay federal tax on any loan forgiveness?
The CARES Act provides that recipients of PPP loans are eligible for forgiveness to the extent loan funds are used for certain payroll-related costs (“Covered Expenses”). Under Section 1106(i) of the CARES Act, any amounts forgiven are excluded from gross income. The amount of loan forgiveness may be reduced if a recipient does not meet such conditions as maintaining its full-time employees or the salaries of such employees.
While the CARES Act expressly states forgiven amounts are excluded from gross income, it does not address the interplay between Section 1106(i) of the CARES Act and sections of the Internal Revenue Code (the “Code”) relating to the tax consequences of loan forgiveness. In an effort to provide some clarity, the IRS has now issued guidance outlining the effect of loan forgiveness on the deductibility of Covered Expenses.
Note that any impact on states taxes appears to be an open question in some states.
I filed or approved a loan application based on the version of the PPP Interim Final Rule published on April 2, 2020. Do I need to take any action based on the updated guidance in these FAQ’s (Note: The FAQ’s in question are linked below)?
No. Borrowers and lenders may rely on the laws, rules and guidance available at the time of the relevant application. However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on the clarifications reflected in the updated FAQ’s.
How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
When submitting a PPP application, all borrowers must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form.
If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
Will companies be able to include mortgage interest and rent payments on both real and personal property in their forgiveness application?
What time period should borrowers use to determine their number of employees and payroll costs to calculate their maximum loan amounts?
In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. 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.
Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months).
Should payments that an eligible borrower made to an independent contractor or sole proprietor be included in calculations of the eligible borrower’s payroll costs?
No. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs. However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements.
How does The CARES Act as passed differ from the Interim Final Rule released by the SBA? Will there be a reconciliation between the two?
In a recent report, the Inspector General found that the SBA’s Interim Final Rule mostly aligned with the The CARES Act as passed, but that there were discrepancies, mostly in the form of the Interim Final Rule not addressing issues (i.e. Prioritizing Underserved And Rural Markets, Loan Proceeds Eligible For Forgiveness, Guidance On Loan Deferments, and the Registration of Loans). The Inspector General recommended that future guidance from the SBA and Treasury address these gaps in guidance.
To determine borrower eligibility under the 500-employee or other applicable threshold established by the CARES Act, must a borrower count all employees or only full-time equivalent employees?
For purposes of loan eligibility, the CARES Act defines the term employee to include “individuals employed on a full-time, part-time, or other basis.” A borrower must therefore calculate the total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold. For example, if a borrower has 200 full-time employees and 50 part-time employees each working 10 hours per week, the borrower has a total of 250 employees.
By contrast, for purposes of loan forgiveness, the CARES Act uses the standard of “full- time equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions.
What if an eligible borrower contracts with a third-party payer such as a payroll provider or a Professional Employer Organization (PEO) to process payroll and report payroll taxes?
SBA recognizes that eligible borrowers that use PEOs or similar payroll providers are required under some state registration laws to report wage and other data on the Employer Identification Number (EIN) of the PEO or other payroll provider. In these cases, payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation. Relevant information from a Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s or other payroll provider’s Form 941, Employer’s Quarterly Federal Tax Return, should be used if it is available; otherwise, the eligible borrower should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes. In addition, employees of the eligible borrower will not be considered employees of the eligible borrower’s payroll provider or PEO.