Paycheck Protection Program & Advance Payment of Employer Credit

Key Updates on Paycheck Protection Program

One of the most impactful programs Congress implemented to combat the effects of COVID-19 on businesses is undoubtedly the Paycheck Protection Program (PPP). The program authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. Applications for small businesses and sole proprietors can be submitted to participating banks starting today, April 3, 2020. Applications for independent contractors and self-employed individuals can be submitted beginning on April 10, 2020.

What is most newsworthy is that the SBA released this guidance late last night, which included a myriad of clarifications and surprising twists. We have detailed these below.

Loan Terms

• The original text of the CARES Act stated the PPP loans would have 10-year terms at a 4% interest rate.
• A version of the borrower application form released earlier this week showed a term of 2 years at 0.5%.
• The new guidance shows the terms are 2 years at 1%.
• No payments are due for six months following the date of disbursement of the loan.  However, interest will continue to accrue during this six-month deferment.

Payroll Costs

• The maximum PPP loan is the lesser of $10 million or a business’s average monthly payroll costs multiplied by 2.5. Contrary to what some believed, the new guidance made it clear that payments to independent contractors cannot be included in the calculation of a business’s average monthly payroll costs. Likewise, when calculating the forgiveness amount, payments to independent contractors cannot be included.
• In calculating the average monthly payroll costs, the new guidance and the text of the bill both state that an employee’s salary must be capped at $100,000. It is not clear in the Act whether “salary” includes health insurance premiums, retirement contributions, and payment of state and local taxes or if those payments may be layered on top of the limited $100,000 salary cap per employee. Unfortunately, this new guidance does not provide clarification. The new guidance defines payroll costs as including those benefits and taxes, but it still refers to the cap as $100,000 of “salary.” The borrower application form, however, indicates the cap applies to all payroll costs, not just an employee’s base salary. As you can see, there is still ambiguity.
• It should be noted that both the new guidance and the borrower application form state the average monthly payroll costs are generally for the preceding calendar year (2019), but the Act explicitly states payroll costs should be for the “1-year period before the date on which the loan is made.” We recommend asking the bank for their preference when submitting your application. 
• At this point, there is not sufficient guidance for independent contractors to calculate their average payroll costs for their PPP applications.

Uses of Loan Proceeds and Forgiveness

• One of the best features of the Paycheck Protection Program is that part, if not all, of a loan can be forgiven.  A business could apply for loan forgiveness equal to eight weeks of the following expenses: payroll costs, mortgage interest payments, rent, and utilities. Later guidance revealed that, in order to be forgiven, the forgiveness amount must be comprised of at least 75% payroll costs. Only 25% of the loan forgiveness amount can be non-payroll expenditures.
• The new guidance explains that the loan proceeds themselves must be spent in the same 75-25 ratio. In other words, at least 75% of the loan proceeds must be spent on payroll costs, and the remainder can be spent on mortgage interest payments, rent, and utilities. 
• If PPP loan proceeds are used in an unauthorized manner, the SBA will direct a business to repay those amounts. Intentional misuse will be subject to additional charges.
• The guidance has made it quite clear that the PPP is designed to keep individuals employed. Treasury is not as concerned with the other expenses small businesses are facing at the moment, despite how significant those costs can be.
• Keep in mind that forgiveness will be limited if a business reduces the number of employees over a specified time period or reduces certain employee salaries.
• Note: Businesses that take advantage of the employee retention credit or payroll tax deferral are ineligible for PPP loan forgiveness.

The guidance indicates the PPP loans will be issued on a first come, first serve basis so you need to send your application to your banker as soon as possible. ATKG can assist you with your application and gathering the data needed to complete it. In addition, we understand this program does not work for every business, especially those who have already let employees go. Please contact us for other options that may be available to you. The specifications of the Paycheck Protection Program seem to be changing by the hour, and ATKG is committed to keeping its clients informed.

IRS Issues Form for Advance Payment of Employer Credits

The IRS has just issued Form 7200, Advance Payment of Employer Credits, along with instructions on the form’s usage. Form 7200 allows businesses to receive an advance of the tax credits for qualified sick and family leave wages and the employee retention credit.

Sick Leave and Family Leave Credit

• Employers with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the Families First Coronavirus Response Act (FFCRA) are eligible for a 100% credit on the emergency leave wages.  

Employee Retention Credit

• The CARES Act provides a refundable payroll tax credit for 50% of wages paid to certain employees during the COVID-19 crisis. The credit is available to employers whose operations have been fully or partially suspended as a result of a government order.
• The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.

Taking the Credits

• Employers eligible for the credits may take them against the employment taxes due on their quarterly payroll reports.  Any excess of the credit over the employment taxes due is refundable.
• Form 7200 will enable businesses to estimate the amount of the credits for which they may be eligible and receive a refund of the credits earlier than if they wait until their payroll tax returns are filed. 

Who Benefits Most?

Employers with sizable payrolls who have a lot of employees out on paid leave are in the best position to take advantage of completing Form 7200.

For a copy of Form 7200 and Instructions, visit the IRS webpage About Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Our Commitment to You

ATKG is committed to keeping you up to date with the latest changes during these challenging times. Though overwhelming, these changes pave the way for opportunistic tax planning. Please contact your ATKG advisor with any questions or concerns.

ATKG Coronavirus Newsroom

Visit the ATKG Coronavirus newsroom for a complete listing of articles released by ATKG addressing the fast paced changes occurring in the US as a result of the COVID-19 pandemic. 

Allison Miller is a Senior Manager for ATKG. She holds both a bachelor and master degree in accounting from Texas A&M University, having graduated Summa Cum Laude. Arriving at ATKG in August 2017, she comes to us with 10 years of public accounting experience from the Big Four and a great background in retail, non-profit, and wealth management.  For further information on this topic or other tax questions please contact Allison  Miller or a member of our Tax practice at 210.733.6611 or amiller@atkgcpa.com.