SBA PPP Loan FAQs & Tips
1. If my PPP loan is eventually forgiven, can I deduct expenses on my tax return that I paid with my PPP loan? Currently, IRS published Notice 2020-32 that prohibits deducting expenses if paid with a forgiven PPP loan.
2. Does the CARES Act exclude from payroll costs employee compensation greater than $100k? Yes. However, the exclusion only applies to cash compensation and does not apply to all employee benefits such as contributions to a defined benefit retirement plan, group health care coverage, and payment of state/local taxes assessed on compensation.
3. Can a business include payments to an independent contractor or sole proprietor in the calculations of payroll costs? No. The independent contractor or sole proprietor is itself potentially eligible for a PPP loan if it satisfies the requirements.
4. What rules should I rely on to ensure my business complies with the PPP requirements? A borrower may rely on the laws, rules and guidance available when it submitted its application through the time its application was accepted.
5. Are there any restrictions on which employees are paid with SBA PPP loan funds? Yes, employees need to have their “principal place of residence” in the United States.
6. To determine borrower eligibility for the “500-employee threshold” per the CARES Act, should a borrower count all employees or only full-time equivalent employees? For purposes of loan eligibility, borrowers must calculate the total number of employees including part-time employees. For purposes of “loan forgiveness,” employers must use “full-time equivalent” employees to determine the extend the forgiveness amount will be reduced for workforce reductions.
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7. Will SBA review all loans to ensure loans were provided to eligible borrowers? Yes. SBA, in consulting with the Department of the Treasury, will review all loans greater than $2 million (as well as other loans) after a borrower submits a loan forgiveness application to ensure PPP loans were provided to eligible borrowers.
8. Will SBA review PPP loan of $2M or greater to ensure borrowers accurately and truthfully certified that “current economic uncertainty makes this loan request necessary to support the ongoing operations…”? Yes. However, a safe harbor provision applies to SBA’s review of PPP loans. Borrowers with an original principal amount less than $2M are deemed to have made the required certification regarding the necessity of the loan request in good faith. Borrowers with loans greater than $2M must be able to substantiate their certification in good-faith. If SBA determines a borrower lacked adequate basis for the required certification, SBA will seek repayment. SBA indicates it may not pursue administrative enforcement or referrals to other agencies (i.e. IRS) if the loan is repaid. However, there is no guidance at this time regarding the amount of time to repay the loan once SBA determines a borrower was not eligible for the loan.
9. Can an individual who is a partner in a partnership or member of an LLC file a separate application for an SBA PPP loan? No. The PPP loan must be filed by the partnership or LLC. Only individuals who are self-employed or sole proprietors who filed a Form 1040 Schedule C for 2019 are eligible to file a PPP loan application if they were in operation on February 15, 2020 and their principal place of residence was in the U.S.
10. What expenses can be paid with an SBA PPP loan? Owner compensation replacement (calculate based on 2019 net profit); employee payroll costs for employees whose principal place of residence is in the U.S.); mortgage interest payments (not mortgage repayments or principal payments) on any business loan on real or personal property (i.e. warehouse or vehicle used to conduct business); business rent payments; business utility payments. For these expenses to be “permissible,” you must be entitled to claim these expenses on your Form 1040 Schedule C. Additionally, interest payments on any other business debt incurred before February 15, 2020 can be paid with PPP loan funds but these amounts are not eligible for PPP loan forgiveness.
11. Is there a limitation on the “allowable” use of the SBA PPP loan funds? Yes, for self-employed individuals who file a form 1040 Schedule C, allowable uses for the funds are the type of expenses incurred and paid in 2019. The purpose for the PPP loan is to “maintain existing operations and payroll.” It is not for business expansion. Additionally, at least 75 percent of the PPP loan proceeds shall be used for payroll costs. Other restrictions and conditions may apply.
12. Is there a deadline to pay expenses with the PPP loan funds? Yes, you have 8 weeks to use the loan funds starting with the date of the first disbursement of the SBA PPP loan.
13. Can you apply for an SBA PPP loan if you received an SBA EIDL loan from January 31, 2020 through April 3, 2020? Yes, you can apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
14. What amounts paid with PPP loan funds are eligible for forgiveness? Payroll costs including salary/wages and tips up to $100k of annualized pay per employee (max $15,385 per individual for the 8 week period) including covered benefits for employees (not owners) and including health care expenses, retirement contributions, and state tax imposed on employee payroll paid by the employer (i.e. unemployment insurance premiums). Additionally, payments for owners compensation (calculated based on 2019 net profit, limited to 8 weeks worth (8/52) of 2019 net profit) excluding qualified sick leave equivalent amount where a credit is claimed under section 7002 of the Families First Coronavirus Response Act or qualified family leave equivalent amount where a credit is claimed under section 7004 of FFCRA. Lastly, the following payments are eligible for forgiveness to the extent they are deductible on Form 1040 Schedule C: i) interest on mortgage obligations on real or personal property (incurred before February 15, 2020); ii) rent business rent payments (leases in force before February 15, 2020); iii) and business utility payments (under service agreements before February 15, 2020).