The Paycheck Protection Program

By Kenneth H. Bridges, CPA, PFS June 2020

In mid-March, as efforts began to “flatten the curve” of the spread of COVID-19, businesses began to furlough employees by the millions, and the fear was that many small businesses would not survive. In an effort to preserve jobs and businesses, Congress included in the CARES Act the “Paycheck Protection Program” (PPP). From a very high level, the PPP provides forgivable loans of up to $10,000,000 to virtually all businesses with 500 employees or less (and in some industries more), and certain nonprofits and tribal concerns. The loan amount is basically 2 ½ months of 2019 payroll costs, and it will be forgiven so long as used during the 8-week period following its receipt (or up to 24 weeks if elected) for qualifying costs (basically payroll, rent, utilities and mortgage interest, with some limitations). 

The stampede – Congress initially appropriated $349 billion for the PPP.  It was widely believed that this would not be a sufficient amount to satisfy the need, and, other than a “Sense of the Senate” as to what types of businesses should receive priority (which the SBA appears to have ignored), the legislation provided no guidance as to how the funds would be allocated if oversubscribed.  The SBA announced that the limited funds would be allocated on a first-come-first-served basis, which caused a mad dash to apply as soon as the application process opened. It was as if President Trump had announced he was flying over the country in Air Force One dropping hundred-dollar bills. When the $349B was gone, and it was learned that publicly-traded companies and other high-profile organizations had received millions in funding while many “Main Street” businesses got left out, the widely-held perception was that the banks (through which the application process was run) had favored their best customers over the small businesses that most needed the funding. Basically, if you were a large customer of a small bank you got funded, whereas if you were a small customer of a large bank you probably did not.

The “necessity of the loan” requirement – One of the requirements for receiving a PPP loan is that the applicant “make a good faith certification that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient”. This is perhaps the most vague and subjective standard ever included in legislation, and initially the consensus seemed to be that Congress basically intended to fund 2 ½ months of payroll for all small companies and qualifying nonprofits. However, after it became known that publicly-traded companies like Ruth’s Chris Steakhouse and Shake Shack had gotten PPP money, members of Congress and the Administration began to publicly question whether some companies which had applied met the “necessity of the loan” requirement.  Treasury Secretary Steven Mnuchin went on CNBC and suggested possible criminal charges for those who had applied and shouldn’t have, and the SBA issued FAQ 31 suggesting that some borrowers should return their PPP funds and providing an amnesty date (originally May 7; later extended to May 14) by which they could return the money and avoid the risk of criminal charges. Many companies immediately returned their PPP funds. However, when it became clear that many of the businesses intended to benefit from the program were fearful of utilizing the money because of the risk of criminal prosecution under a totally subjective standard, the SBA walked back the tough talk and issued FAQ 46 which says that any applicant which received a PPP loan of less than $2,000,000 is deemed to have met the necessity of the loan requirement, and if a recipient of PPP loan in excess of $2M is found not to meet the requirement then they simply have to repay it.

Will your name be disclosed if you accept PPP money? – The SBA has bounced back and forth on this one.  The latest (June 19) is that SBA will disclose the company names, addresses, demographic data and other information for those businesses which received $150,000 or more.

Qualification for the PPP The PPP is available to most businesses with fewer than 500 employees (as tested on an affiliation basis), restaurant businesses with fewer than 500 employees at any one location, businesses with more than 500 employees where the company is considered small by its industry standards, and 501(c)(3) organizations, 501(c)(19) veterans’ organizations, and tribal concerns with fewer than 500 employees.

Maximum amount of PPP loan – $10,000,000; which, mathematically, would be about the most a business with fewer than 500 employees could qualify for anyway, based on 2.5 months of payroll limited to $20,833 for any one employee.

Computation of eligible amountBasically, you take your 2019 W-2 wages paid, back out amounts paid to any one individual(s) in excess of $100,000, add in health insurance premiums and retirement plan contributions paid by the employer, divide by 12, and multiply by 2.5 (i.e. roughly 2 ½ months of payroll).  This is an oversimplification of the process, and there are exceptions for seasonal employers and start-ups, but, for most companies, this will get you pretty close to the eligible amount.

Independent contractors – Based on the language in the statute, it was originally thought that companies might be able to include in the computation of eligible amount the amounts they paid to 1099-MISC contractors.  However, subsequent guidance from the SBA provided that you cannot count amounts paid on 1099-MISC.  The independent contractor can instead apply for their own PPP, based on their “income replacement amount” (which is basically 20.83% of their 2019 Schedule C profit, not to exceed $20,833).

Partner compensation – Under tax rules, partners receive neither W-2 nor 1099-MISC.  Instead, their compensation for services rendered is reported on their Schedule K-1.  The PPP legislation was silent with respect to partner compensation. Initially, the SBA appeared unsure how to handle, but eventually came out with guidance permitting 20.83% of partner self-employment income (not to exceed $20,833) to count, and permitting partnerships which had applied prior to the guidance (and excluded partner compensation) to apply for an additional PPP amount which included partner compensation.

The application process – To apply for a PPP forgivable loan, you submit a Form 2483 to your bank along with supporting documentation.  Once the bank has approved, it submits to SBA for approval, and after the SBA approves, the bank provides the loan.

Forgiveness – What makes the PPP attractive is that the loan will be forgiven, so long as you spend the proceeds on qualifying costs within the “covered period”.  Qualifying costs are payroll (which includes health insurance and retirement plan contributions), rent, utilities and mortgage interest. Qualifying salary cannot exceed the equivalent of $100,000 annually for any one individual, as prorated over the covered period (i.e. $15,385 per person under the original 8-week period, or $46,154 per person if electing the 24-week period).  For owner-employees, the amount cannot exceed the annualized equivalent received in 2019. Under initial SBA guidance, at least 75% of the PPP had to be spent on payroll costs.  However, subsequent legislation reduced this to 60%.  There were concerns (based on the language of the statute), that the 60% was a cliff (i.e. no forgiveness if you spent less than 60% of PPP amount on payroll), but SBA has now said you will receive forgiveness, but with the amount of such limited to the payroll costs divided by 60%.  To apply for forgiveness, once you have gotten through the 8-week covered period (or longer period if elected), you submit a Form 3508 to the bank which made the loan.

Is it taxable? – Under general principles of tax law, if you take out a loan, use the proceeds to pay business expenses, and then later have the loan forgiven, the expenses are still tax deductible, but you have taxable income for the cancellation of indebtedness (COD income).  In the PPP legislation, Congress specifically provided that the PPP forgiveness would be considered COD income, but that such income would be excluded from taxable income.  Accordingly, Congress made clear its intent that the PPP amount would be nontaxable.  The above notwithstanding, the IRS issued a notice (2020-32) that it intends to disallow the deduction of the expenses paid with PPP funds. Members of Congress on both sides of the aisle, in both the House and the Senate, have indicated this is contrary to Congressional intent, and so it appears that Congress may override the IRS on this.  Otherwise, a court challenge would appear likely.

The PPP Increase Act – As noted previously, the initial $349B appropriated for the PPP was insufficient to satisfy demand.  Accordingly, Congress subsequently appropriated an additional $310B, bringing the total to $659B.  This increase, combined with amounts returned by some companies, appears sufficient to have covered all who have applied.

The PPP Flexibility Act – The initial legislation provided that the “covered period,” during which you could utilize amounts and have such count in the forgiveness computation, was the 8-weeks following approval for the PPP.  Many businesses (and especially those that were subject to government-ordered closures) found that 8 weeks was not a sufficient time period to expend the funds on qualifying costs.  Further, some businesses could not meet the requirement that 75% be spent on payroll. Recognizing these challenges, Congress passed legislation permitting the “covered period” to extend up to 24 weeks and requiring that only 60% of the forgivable amount be spent on payroll-related costs.

Where are we today?  – After a wild roller-coaster ride over the past 3 months, with Congress making several substantial changes to the initial legislation and the SBA and IRS issuing frequent, and at times inconsistent, guidance, we still have many unanswered questions.  PPP funds remain available (until June 30) for any eligible business or self-employed person who has not yet applied.  Those who applied and received a loan of less than $2M appear to be in a position to be comfortable that they will not be challenged as to whether the loan was necessary.  Those who received a loan in excess of $2M appear to now be freed from the risk of criminal prosecution if SBA determines they did not really need the loan.  Those businesses which were struggling to effectively utilize the PPP proceeds on qualifying costs within an 8-week period have additional time to do so. Overall, while the PPP got off to a rocky start and has been a roller-coaster ride, it appears that most eligible companies have received funding and are benefitting substantially from it.

Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP, an Atlanta-based CPA firm.

This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice.  The article provides only a very general summary of complex rules.  For advice on how these rules may apply to your specific situation, contact a professional tax advisor.