Do you remember playing the telephone game in elementary school? I’ll spare you the rules. But, in the end, the game exposes the way information mutates after numerous people filter it. As information about the Small Business Association’s Paycheck Protection Program rolled out, it quickly started to feel like a large game of telephone with misinformation floating around rampantly. Small businesses are extremely vulnerable during these times and cashflow is top of mind for every CPA and their client. Nobody can afford to live with confusion around a program promising direct relief. Let’s address a few pieces of PPP information — or misinformation. See if you can guess if the following are MYTHS or FACTS:
- You can only receive one SBA loan at a time, so PPP applicants must rescind other SBA loan applications.
MYTH — Borrowers may apply for the PPP and other SBA financial assistance, including disaster loans and Section 7(a) loans. However, you cannot use PPP proceeds for the same purpose as your other SBA loan(s). Loan proceeds need to cover payroll for a different period or other qualifying costs. This includes the up to $10,000 grant available with Section 7(b)(2) loans — Economic Injury Disaster Loans (EIDL).
- The employers’ share of payroll taxes increases payroll costs.
MYTH — The employer's share of payroll taxes don’t increase payroll costs and taxes imposed on an employee don’t reduce them. Payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld, including FICA and Medicare.
- $10 million is the maximum amount that can be borrowed.
FACT — Businesses can borrow the lesser of $10 million or 2.5 times the amount of their average monthly payroll costs. If there is an outstanding amount of an Economic Injury Disaster Loan (EIDL) made between Jan. 31, 2020, and April 3, 2020, that can be refinanced into the the PPP loan at the borrower’s discretion. If the borrower chooses to refinance and received an emergency grant of up to $10,000; the grant portion must be excluded from the refinance as repayment of this amount is not required. The interest rate will be 1%. The maturity of the loan is two years. Payments are deferred for six months following the disbursement of the loan. Interest will accrue on the loan beginning with disbursement.
- You can use the PPP loan for rent payments for self-employed individuals.
FACT — Yes, it’s acceptable to use funds for self-employed individuals for business rent payments. Other acceptable uses include:
- Business utility payments
- Owner compensation replacement (calculated based on 8/52 of 2019 net profit from Form 1040 Schedule C)
- Employee payroll costs (as defined by the interim rule)
- Business mortgage interest payments on real/personal property
- Interest payments on debt obligations incurred before Feb. 15, 2020
- Refinancing an SBA EIDL loan made between Jan. 31, 2020, and April 3, 2020
Note that the individual must have claimed or be entitled to claim a deduction for the included expenses on 2019 Form 1040 Schedule C.
Businesses other than self-employed individuals can cover payroll costs, health care benefits, mortgage interest payments, rent, utility, interest payments on debt incurred before Feb. 15, 2020, and/or refinancing an SBA EIDL loan made between Jan. 31, 2020, and April 3, 2020. Check out these FAQs on payroll costs and other PPP topics.
- The eight-week period that determines the amount of forgiveness for the PPP loan begins on the loan approval date.
MYTH — The lender must make the first disbursement of the loan no later than 10 days from the loan approval date, but those eight weeks begin on the day the lender makes the first disbursement.
The amount of loan forgiveness depends on the amount spent during those eight weeks on:
- Payroll costs as defined by the interim rule (does not include benefits for owners)
- Owner compensation replacement (limited to 8/52 of 2019 net profit and excluding any qualified sick or family leave equivalent amount for which an FFCRA credit was claimed)
- Interest payments on mortgage obligations for real/personal property incurred before Feb. 15, 2020
- Rent payments on lease agreements in force before Feb. 15, 2020
- Utility payments under service agreements dated before Feb. 15, 2020
*Note that for interest, rent and utility payments, the amounts must be deductible on Form 1040 Schedule C for those applying as a self-employed individual.
There you have it. Remember that facts around PPP and other programs springing from COVID-19 are always developing, so it’s important to be alert to news and changes. Being informed is one of the best ways to serve your clients. Another? Sharing information and resources. For more information about the PPP and other COVID-19 resources for small businesses and individuals, check out CPApowered.org.