PPP Loan Waiver: Some Answers, Many Questions | Jackson Lewis PC
Much has happened in the three-plus weeks since the Coronavirus Aid, Relief, and Economic Securities (CARES) law was enacted on March 27, 2020. The $ 349 billion earmarked for the new paycheck protection program (PPP) have been exhausted. The Small Business Administration (SBA), the federal agency administering the PPP, reports that it has made more than 1.6 million loans through nearly five thousand lenders with “net approved dollars” (net of fees paid to original lenders) of $ 342.3 billion. As of this writing, the Senate has approved a law providing an additional $ 320 billion for the PPP and the House is expected to approve it. The President indicated his support for the additional funding.
Many of these lenders have now disbursed funds to borrowers, triggering the eight week deadline “Period coveredFor loan forgiveness purposes. The cornerstone of the PPP, the PPP loan forgiveness provisions provide that amounts spent on salary costs, rent, mortgage interest and utilities (“Eligible expenses“) during this Covered Period are potentially forgiven. Unfortunately, many questions remain unanswered at a time when employers must make important decisions regarding their workforce and the use of P3 funds to secure forgiveness.
The CARES Act mandates the SBA to issue guidance on the cancellation provisions of PPP loans within thirty days of enactment, which is April 26, 2020. Hopefully these guidelines will answer some or all of the following questions that perplex employers and their advisers:
- What are the “costs incurred and payments made” during the period covered?
Article 1106 of the CARES Act provides that a borrower is entitled to debt relief on a PPP loan in an amount equal to the sum of the “costs incurred and payments made” authorized during the period covered. The term “costs incurred and payments made” is open to at least two plausible interpretations: (a) that a cost must be both incurred and incurred during the period covered to be eligible for a discount; or (b) that a cost must be incurred or incurred during the period covered to be eligible for the rebate. Employers need clarity on this basic provision.
- What does “full-time equivalent employee” mean?
The pardon provisions are not absolute; even after deciphering which “costs incurred and payments made” are eligible for the rebate, the sum of eligible expenses incurred and incurred during the period covered (the “Basic amount of forgiveness) ”May be reduced or eliminated depending on the employer’s workforce during the period covered compared to one of the two preceding periods. Specifically:
the Basic amount of loan forgiveness is reduced by multiplying it by the following fraction:
- the numerator whose average number of full-time equivalent employees per month employed by the borrower during the period covered (neither the CARES law nor any subsequent directive to date defines “full-time equivalent employees”)
- whose denominator is, at the choice of the eligible beneficiary, Is–
- the average number of full-time equivalent employees per month employed by the borrower during the period from February 15, 2019 to June 30, 2019, or
- the average number of full-time equivalent employees per month employed by the borrower in January and February 2020.
For example, if an employer had 50 full-time equivalent employees during the period covered and employed 100 employees during the period between January 1, 2020 and February 29, 2020, and during the period beginning February 15, 2019 and ending June 30, 2019, the base amount of the loan forgiveness would be multiplied by 50/100 or half and therefore reduced by 50%.
Unfortunately, there is no definition of full-time equivalent employees in law or in other directives published to date. While the typical full-time equivalent (FTE) calculation is an employee’s scheduled paid hours divided by the employer’s hours for a full-time work week, Small Business Administration rules generally address all employees (full-time, part-time, temporary or employed on any other basis) on an equal basis. And guidance is needed regarding the treatment of the following employees in this fraction:
- employees on leave
- employees on work-sharing programs
- reduced hours employees
- former compensated employees
- employees who have voluntarily terminated
- employees who have been terminated for just cause
- employees on paid leave
Apparently, to the extent that employees or former employees receive amounts that are considered salary costs, these employees should be counted in the numerator of the reduction fraction; however, in the absence of affirmative guidelines, we cannot say for sure.
In addition, the provisions allowing an employer to “remedy” any reduction in the basic loan forgiveness amount for reductions in employees or wages between February 15, 2020 and April 26, 2020 (meaning that the entire of the basic loan forgiveness amount is remitted) by restoring endowment levels to previous levels no later than June 30, 2020, are also linked to full-time equivalent employees. As employers face these decisions now, quick and clear direction is needed.
- How do employers persuade unemployed employees who earn more money to go back to “work” and earn less money?
As we can see from the previous question, employers need to bring staff up to previous levels to get maximum loan forgiveness. However, many employers laid off or laid off employees at the start of the COVID-19 pandemic. When they receive the proceeds from the PPP loan and the covered period begins, however, many businesses remain closed. These employers will therefore have to pay their employees so that they do not work. Due to the strengthened unemployment provisions in the CARES Act, many of these employees are currently making more money for not working than they did before the pandemic. Many employers find it difficult to convince these employees to give up their lucrative unemployment benefits and are looking for ways to get them to do so.
- Do bonuses or pay increases count as salary costs?
The amount of a PPP loan and the loan cancellation arrangements are largely based on the employer’s “labor costs”. As defined in the CARES Act, labor costs include “the sum of payments of any compensation relating to employees which is salary, wages, commission or similar compensation”.
Many employers are considering paying employees on leave a bonus or increasing wage levels to induce them to forgo their lucrative unemployment benefits and return to work during the period between the start of the period covered and the time where the employer’s business becomes operational again. However, it is not clear whether these payments will be considered salary costs eligible for the remission. Although bonus payments are arguably “similar compensation”, different interpretations are equally plausible, as the absence of the term “bonus” in the definition of labor costs appears to be an intentional omission (Section 4116 of the Act CARES specifically refers to bonuses). We also note that the employee retention tax credit provisions in the CARES Act (which provide an employment tax credit for qualified wages paid to employees) limit wages for credit purposes to the amount that such an employee would have received an equivalent amount of time for having worked. within the immediately preceding 30 days. The SBA could take a similar approach and limit wage costs to the average wages paid to the employee during a past measurement period.
- What about partnerships and LLCs?
The availability of PPP loans to partnerships and LLCs and the application of loan cancellation provisions to these entities created confusion from the start. Many believed that partners and members of an LLC could take out loans as freelancers. Subsequent guidelines issued by the SBA confirm that partner loans are not allowed, and that a partnership and its partners (and an LLC filing taxes as a partnership) are limited to a single PPP loan.
Many questions remain, however. For example, the SBA guidelines state that “the self-employment income of general active partners may be reported as salary costs, up to $ 100,000 annualized, on a PPP loan application filed by or on behalf of partnership ”. Does this mean that a partnership with multiple active general partners, each of whom has more than $ 100,000 in self-employment income, is limited to $ 100,000 in total? Similar questions remain regarding loan cancellation.
- Can an employer deduct payments eligible for a rebate?
When the CARES Act was enacted, PPP loans seemed too good to be true. The P3 provides for loan forgiveness to the extent of qualifying expenses and provides that forgiveness amounts are not taxable to the borrower for federal income tax purposes (but not necessarily for income tax purposes. state and local income). The law is unclear as to whether the borrower can also deduct these payments for federal income tax purposes. Typically, Section 265 of the Internal Revenue Code would prevent a deduction of expenses due to the tax-exempt nature of the income, but clarity in future directions would be welcome.
The response to PPP has been extremely popular; the initial credit was exhausted quickly and future credits are also expected to be disbursed promptly. These loans offer a lifeline to many employers. To achieve this goal, however, employers need definitive guidelines on the issues discussed above, among others. Hopefully the expected SBA guidance will provide much needed clarity.