The SBA has issued additional guidance on its loan programs related to the coronavirus pandemic. This newsletter updates the information contained in our previous newsletters.
Disaster Relief Loans
- The SBA is limiting the advances under the disaster relief loans to $1,000 per employee up to $10,000.
- There are reports that the SBA is capping the total they will loan to one business to $15,000 because of the large gap between requests for funding versus the congressional funding of the program.
- The CARES Act directed the SBA to have a 3-day turnaround time for issuing advances on these loans. The SBA has been much slower in funding the advances.
Payroll Protection Program (PPP) Loans
There are indications that the SBA is close to the lending limit that Congress included in the CARES Act. Although we expect Congress to eventually extend the lending limit, there are no guarantees. It is important to obtain your PPP loan before the SBA stops the application process. We believe that if you do not apply for your loan by April 16, 2020, your loan will not be approved in time
Calculation of Loan Amounts
The PPP loans are for 2.5 months of average payroll costs. The base time period for calculating the average payroll costs is:
- 2019 calendar year for most businesses
- Seasonal employers can elect to use either
- 12-week period beginning February 15, 2019, or
- March 1, 2019 through June 30, 2019
- If a business was not in business from February 15, 2019 through June 30, 2019, then the base period is January 1, 2020 through February 29, 2020
The average monthly payroll costs are calculated by totaling the following items and dividing by 12 if using calendar 2019 as the base. If using an alternate base period, the calculation should be adjusted accordingly.
- Wages (use the total Medicare wages and tips from box 5 of W-2) limited to $100,000
- Tips (included in the wage number if box 5 of W-2 is used)
- Employer payments for health care coverage (not limited to $100,000)
- Employer contributions to retirement plans (not limited to $100,000)
- Payment of state and local employer taxes based on compensation (not limited to $100,000)
- State unemployment taxes
- Local employer occupational privilege taxes
- If the applicant is a partnership, the income of the partners (limited to $100,000 for each partner). The income for each partner from their 2019 K-1 is
- Line 1 ordinary business income (loss)
- Plus Line 2 Net rental real estate income (loss)
- Plus Line 3 Other net rental income (loss)
- Plus Line 4 Guaranteed payments for services
- Plus Line 11 Other income (loss)
- Less Line 12 Section 179 deduction
- Less Line 13 Other deductions
- The total must be limited to $100,000
- If the business is reported on an individual’s tax return on Schedule C, take the net income for the business on line 31 of Schedule C, limit it to $100,000, and divide by 12.
Calculation of Loan Forgiveness
Some or all the PPP loans are forgiven based on the business spending in the eight weeks following the origination of the loan. If the business has reduced its workforce measured by full time equivalent employees (FTEs) or reduced the pay of employees, the amount of loan forgiveness is reduced. The loan forgiveness on these loans is excluded from income for tax purposes.
Forgiveness Before Reductions
The amount of forgiveness before reductions is the amounts spent on the following items during the 8-week period following the loan origination date:
- Payroll costs which must be at least 75% of the total forgiveness. These costs include the following:
- Gross wages paid to employees limited to $15,384 (eight weeks pay at an annualized $100,000 rate)
- For self-employed individuals 8/52 of 2019 Schedule C net income with the product limited to $15,384. Note that the SBA adjusted the period for measuring the income to 2019.
- For partnerships 8/52 of 2019 income allocated to the partner as described above but limited to $15,384. Note that the SBA adjusted the period for measuring the income to 2019.
- Tips received by employees. It is unclear whether the tips count toward the $15,384 limit. Hopefully the SBA will issue more guidance.
- Employer payments for health care coverage (not limited to $15,384)
- Employer contributions to retirement plans (not limited to $15,384)
- Payment of state and local taxes on the employer based on compensation (not limited to $15,384)
- State unemployment taxes
- Local employer occupational privilege taxes
- Other allowable costs limited to 25% of loan forgiveness
- Rent on leases in place before February 15, 2020
- Interest on loans in place by February 15, 2020
- Utilities including the following items if service began before February 15, 2020
- Internet access
Reductions of Loan Forgiveness
The total amount of loan forgiveness is reduced if the employer has reduced their FTEs or reduced the wages of certain employees. These reductions in loan forgiveness do not apply if the employer has restored the FTEs and wages by June 30, 2020. Note that there is some uncertainty as to whether the reductions are completely ignored or only ignored until April 26, 2020. The language of the CARES Act is unclear on this point and the SBA has not issued guidance.
Reduction in Forgiveness for Reduction in Number of Employees
If the employer has reduced the number of FTEs from the base period, the loan forgiveness is reduced proportionally by the percentage of the reduction. The employer has two options for what base period to use: February 15, 2019 through June 30, 2019, or January 1, 2020 through February 29, 2020.
The SBA has not issued guidance for how they will calculate FTEs for this purpose. Most commentators expect them to use the same 30-hour week that they use for calculations for Obamacare purposes. Under these rules, a worker is considered one full FTE if they are paid for a minimum of 30 hours. Employees who work fewer than 30 hours would count as a fractional employee. Thus, if an employer will have a reduction in total work hours they require, they would be better reducing hours for positions from 40 hours to 30 hours rather than having fewer workers. If employers have employee turnover, they should consider hiring replacements at 30-hour weeks rather than 40. However, you must also consider that this affects the employee count for other purposes such as the requirement to provide health insurance to employees.
Reduction in Forgiveness for Reduction in Salary and Wages
If the employer reduces the wages of any employees by at least 25% from the total salaries or wages during the most recent full quarter (generally the first quarter of 2020) the loan forgiveness is reduced by the amount of that reduction. This reduction does not apply to any employee who was paid at an annualized pay rate over $100,000 for any pay period in 2019. If an employer included bonuses or other increases in wages for a specific 2019 pay period, they should pay close attention to whether those extra wages increase employees over a $100,000 annualized rate for that specific pay period.
These reductions only apply if an employee is paid during the eight-week measurement period and during the prior quarter. If employees leave or join the employer after that prior quarter but before the eight-week measurement period, they are not included in the reduction. If an employee leaves employment during the eight-week measurement period, it is unclear whether the lost wages are part of the reduction.
Although tips are included in the calculation of the amount of loan and the amount of loan forgiveness, they appear to be excluded from the calculation of wages for this reduction.
Remember that any reductions of less than 25% do not count against the debt forgiveness.
If you have any questions about these updates, reach out to us at 303-989-7600.