BHBM Tax Law Alert | Guidance for Forgivable Loans
Thank you for subscribing to our firm’s Tax Law Alert. If you have any questions pertaining to this information, please contact our tax law group.
FEDERAL TAX LAW UPDATE
U.S. DEPARTMENT OF TREASURY PROVIDES GUIDANCE FOR FORGIVABLE LOANS
On March 31, 2020, the U.S. Department of Treasury provided additional guidance (the “Guidance”) regarding the Paycheck Protection Program 7(a) loans (the “PPP Loans”). The Guidance provides an overview of the Paycheck Protection Program (the “Program”) and clarifies the application process for businesses applying for PPP Loans, as follows:
Timing of Applications
The Guidance provides that even though the Program is open until June 30, 2020, businesses are encouraged to apply as quickly as possible due to the Program’s overall funding cap ($349 billion) and the need for lenders to process the applications.
Please find PPP Loan application here.
The Guidance clarifies that compensation of employees making over $100,000 per year can be included in the calculation of payroll costs, but is capped at $100,000 on an annualized basis for each employee.
Please find BHBM Tax Alert addressing the calculation of payroll costs and other provisions of the Program here.
- All businesses – including nonprofits, veterans’ organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors with 500 or fewer employees can apply.
- Businesses in certain industries can have more than 500 employees if they meet applicable U.S. Small Business Administration (“SBA”) employee-based size standards for those industries.
Please find applicable SBA employee-based size standards here.
Affiliation Waiver Rules
- For purposes of the Program, the SBA’s affiliation standards are waived for small businesses (1) with a NAICS code beginning with 72 (i.e. businesses in the hotel and food services industries); or (2) that are franchises in the SBA’s Franchise Directory; or (3) that receive financial assistance from small business investment companies licensed by the SBA.
Please find a list of businesses with NAICS Codes beginning with 72 here.
Please find a list of businesses that are franchises in the SBA’s Franchise Directory here.
- Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans through existing SBA lenders.
- Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans through existing SBA lenders.
- Businesses can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating in the Program.
- Please note that additional regulated lenders will be available to make PPP Loans as soon as they are approved and enrolled in the Program.
Please find a list of existing SBA lenders here.
- Borrowers will need to complete the Program loan application and submit the application with the required documentation to an approved lender that is available to process the application by June 30, 2020.
- Borrowers will additionally need to provide the lender with payroll documentation.
Forgiveness Request Procedure
- Borrowers may submit a forgiveness request to the lender that is servicing the PPP Loan.
- The request must include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations.
- Borrowers must certify that the documents are true and that they used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments.
- The lender will be required to make a decision with respect to the forgiveness within 60 days.
Terms of PPP Loans
- Interest – 0.50% fixed interest rate
- Deferral – All payments are deferred for 6 months; however, interest will continue to accrue over this period
- Maturity – 2 years
- Prepayment – No prepayment penalties or fees
- Required Collateral – No collateral is required for PPP Loans
- Personal Guarantee – No personal guarantee is required for PPP Loans
Please note that the Guidance provides that if the PPP Loans proceeds are used by borrowers for fraudulent purposes, the U.S. government will pursue criminal charges.
Terms for PPP Loan Proceeds Not Forgiven
- Any PPP Loan proceeds not forgiven will be carried forward as a continuing loan with maximum terms of ten (10) years, at a maximum interest rate of four percent (4%).
As part of the PPP Loan application, borrowers will need to certify in good faith that:
- Current economic uncertainty makes the PPP Loan necessary to support ongoing operations;
- The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments;
- They have not and will not receive another loan under Program;
- They will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan;
- Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities;
- All the information provided in the application and in all supporting documents and forms is true and accurate; and
- The Guidance clarifies that knowingly making a false statement to get a loan under the Program is punishable by law.
- Borrowers will acknowledge that the lender will calculate the eligible loan amount using the tax documents submitted. Borrowers must affirm that the tax documents are identical to those submitted to the IRS. Borrowers will acknowledge, and agree that the lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.
Please note that the Guidance provides that due to likely high subscription, it is anticipated that not more than twenty five percent (25%) of the forgiven amount may be for non-payroll costs.
Required Signatories for Application
- Sole Proprietorships – the sole proprietor;
- Partnerships – all general partners, and all limited partners owning twenty percent (20%) or more of the equity of the firm;
- Corporations – all owners of twenty percent (20%) or more of the corporation;
- Limited Liability Companies – all members owning twenty percent (20%) or more of the company; and
- Any Trustor (if the applicant is owned by a trust).
To view all of our COVID-19 related Tax Law Alerts, click here.
If you would like to receive BHBM Email Tax Alerts to stay informed on the latest changes in tax law, subscribe here.