July 14th, 2020
The Payroll Protection Program (PPP) application deadline has been extended until August 8th. The five-week extension was passed by unanimously House and Senate, just a few hours before the PPP application window was scheduled to close.
The PPP was introduced within the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was signed into law on March 27, 2020. It was designed to provide small businesses with low-interest loans to keep employees in their jobs through the COVID-19 pandemic. PPP loans are eligible for forgiveness provided borrowers meet certain requirements.
Self-employed individuals with no employees, and therefore no actual payroll expenses, can qualify for PPP loan forgiveness by paying themselves an “owner compensation replacement” The amount that can be forgiven is based on 2019 net self-employment income and can be up to 100% of the loan amount. However, the maximum loan amount for a self-employed person with no employees is $20,833. This is derived by dividing their Schedule C, line 31 net profit amount, up to a $100,000 maximum, by 12, then multiplying by the PPP factor of 2.5. If the line 31 net profit amount is zero, the individual is ineligible for a loan. Proper documentation is important. There should be a separate business checking account to collect business income and disburse it a personal checking account rather than co-mingling with non-business activity.
The Internal Revenue Code Section 265 states that federal income tax deductions are not allowed for expenses relating to tax-exempt income. Because forgiveness of a PPP loan is a federal-income-tax-free event, the IRS has taken the position that Section 265 applies. It is possible subsequent legislation will re-visit this position.
The Paycheck Protection Program Flexibility Act of 2020 (PPPFA) was enacted on June 5th. It is designed to ease the forgiveness process and allow borrowers to take advantage of the CARES Act payroll tax deferral privilege, even if their loans are forgiven. Under original CARES Act rules, no PPP forgiveness was allowed unless the borrower spent at least 75% of loan proceeds on payroll expenses. The PPPFA lowers the threshold to 60%. The PPPFA also gives borrowers up to 24 weeks to use PPP loan proceeds for purposes that will result in loan forgiveness, rather eight weeks under the original CARES Act rules.
The SBA has recently released an updated loan forgiveness application form (SBA Form 3508) that reflects these PPPFA changes. Eligible borrowers can now use a simplified form to apply for loan forgiveness (SBA Form 3508EZ
Please contact us if you need assistance with the PPP process.
U.S. Department of the Treasury