Payroll Protection Program (PPP) for C Corporation and S Corporation

The number-one pressure on small-business owners right now is payroll. Whether you’re a sole proprietor one-person-show or a company with 500 employees, you’ve certainly felt the pressure. Maybe you’ve already stopped paying yourself, have laid off workers or cut hours. Well, you can thank your federal government for the best aid program recently offered for small business, the Paycheck Protection Program loan (aka Coronavirus Stimulus Loan, or PPP Loan).

The PPP Loan was signed into law on March 27, 2020. On March 31, the SBA issued its guidance and sample application for the loan to be used by banks. Here’s a summary of the details you need to know.

All PPP loan applicants are required to make a “necessity certification.”  In doing so, PPP loan applicants must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

After “Round 1” of PPP loan funding was exhausted in just 14 days, Congress approved “Round 2” on April 23rd, 2020.  Coinciding with this approval, the SBA and Treasury added FAQ 31 and FAQ 37 to its FAQ document.  The answers to these two questions purport to provide guidance, retroactively, on the “necessity certification.”  FAQ 31 and FAQ 37, in effect, modify the necessity certification by making additional factors part of that certification.  Thus, in making the necessity certification, borrowers must now take into account their “current business activity” and their ability to “access other sources of liquidity.” 

For a prospective borrower, this guidance creates significant uncertainty as to whether a borrower can make this certification when it may have access to other sources of liquidity (e.g., cash reserves, other investments or assets, access to undrawn lines of credit or other debt).  This guidance also presents questions about how a borrower having an owner or owners with significant capital should factor such facts into a borrower’s evaluation of other sources of liquidity, and therefore necessity for a PPP loan.

Many small businesses previously made this “necessity certification” when submitting their applications for PPP loans long before the SBA and Treasury made this recent “guidance” available.  Nevertheless, PPP loan applicants must take this guidance into account in deciding whether to: (1) accept PPP loan funds previously applied for, or (2) return PPP loan funds that they have already received following SBA approval of their initial application. 

Treasury Secretary Mnuchin has advised that borrowers receiving $2 million or more of PPP loan proceeds will be audited.  Mnuchin has also threatened to impose criminal and civil liability against PPP loan recipients for making a false certification as to “loan necessity” taking into account the above additional factors.  The FAQ guidance and an SBA rule released on April 24 offer a safe harbor for borrowers who repay their PPP loans by a recently extended deadline of May 14.  Borrowers who repay by this date will be deemed to have made the required certification in good faith, presumably avoiding any civil or criminal liability.  The SBA just recently announced that it intends to provide additional guidance prior to May 14th on how it will review the “necessity certification.”

Given these recent developments, any business that has received or is in the process of receiving a PPP loan should maintain complete and accurate documentation to support the “loan necessity” position required for a PPP loan.  Legacy Tax & Resolution Services continues to assist clients in accessing the benefits of PPP loans and in monitoring guidance for this program, which is still evolving.  We are helping clients contemporaneously document their need for PPP loans with a view towards defending their position on the “necessity certification” required.

Who Qualifies?

A small business with fewer than 500 employees that was in business on or before February 15, 2020. This can be an S Corp, C Corp, LLC, sole proprietorship or independent contractor. It also includes certain nonprofits, tribal groups and veteran groups. When obtaining the PPP loan, you need to certify that your business has been economically affected or that economic uncertainty make the loan necessary.

Related: New Stimulus Bill Unlocks IRA and 401(k) Dollars for Financially Affected

How Much Can I Get?

Up to $10 million dollars. But the amount each business gets is based on its payroll costs. The amount you qualify for is based on 2.5 times your average monthly payroll costs. Your monthly average payroll is calculated based on your prior 12 months of payroll costs. You take that average monthly payroll number and multiply it by 2.5. For example, if your monthly average payroll was $20,000, then you would qualify for a $50,000 PPP Loan.

What if I don’t use a payroll service?

If you own a business and do not give yourself a salary through a payroll service, you are likely still eligible for the Paycheck Protection Program—with one exception. Businesses that are structured as C Corporations or S corporations must use payroll to pay their owners, because the corporation is taxed separately from the individual. If you own a corporation and have not been paying yourself a salary through payroll, you will not have a salary covered through the PPP. This is because distributions or dividends from a corporation are not considered to be a salary or self-employment income.

What’s Included in Monthly Payroll Costs?

It includes salary, wages, commissions, payment of vacation, sick, parental/family/medical leave, payment of retirement contributions, group health coverage premiums and state and local taxes assessed on payroll. It doesn’t include federal payroll taxes though. It also doesn’t include payroll costs for those making more than $100,000. Their first $100,000 is considered, but anything in excess is not considered for determining average monthly payroll costs.

What Can I Use This Money For?

First and foremost, payroll for you and your employees, but you can also use the money for rent, mortgage obligations, utilities and other debt obligations you may have.

What Is the Interest Rate?

Half a percent. that’s right. It’s nearly an interest-free loan. The bill allowed for a maximum rate of 4 percent, but the guidance issued by the U.S. Treasury is stating that the maximum rate would be 0.5 percent. Your government is stepping up as they’re backstopping these loans for the banks. Now, this rate could certainly change, but under the law it cannot exceed 4 percent.

When Do I Have to Pay It Back?

The loan term specified by the treasury guidance is two years. Loan payments are deferred for the first six months. There is no pre-payment penalty though, so you can repay or have the loan forgiven earlier.

Do I Have to Put Up Collateral or Sign a Personal Guarantee?

Nope. I told you this was a good deal, right?

How Do I Get This Loan Forgiven?

This is the critical question. The loan forgiveness provision is the best part. You are eligible for loan forgiveness for the amounts you spend over the next eight weeks after receiving the loan on certain qualifying expenses. The qualifying expenses of the business over the eight-week period includes payroll costs, rent, interest on mortgage debt and utilities.

If the number of full-time employees is reduced over this time period or if your payroll costs are reduced 25 percent or more, then the amount of the loan eligible for forgiveness will be reduced.

The bank who granted the loan is who will determine the loan forgiveness amount based on the criteria above. The business will request forgiveness of the loan with evidence to the bank, and the bank will have 60 days to approve or deny the forgiveness.

Will the Business Get Forgiveness of Debt Income Via a 1099-C?

Now, this is a question only your tax lawyer or account would ask. In other words, will I have to pay taxes on the amount of debt forgiven on the loan? Nope. The new law specifically stated that forgiven PPP Loans will not be considered forgiveness of debt income.

Do I Still Qualify If I Already Have an SBA Loan?

You can have more than one SBA loan. You just can’t exceed the total SBA loan maximums when all loans are combined.

What About the SBA Economic Injury Disaster Loans (EIDL)?

This is another good loan option. It is up to two million dollars and is the loan typically used for natural disasters that has been approved for businesses effected by the coronavirus pandemic. If you have a low payroll or need funds in excess of the amounts you qualify for under PPP, consider the EIDL loans, as they have low rates, longer repayment terms and can be used for more purposes than the PPP loans. However, they do not offer any form of loan forgiveness. But they do include a quick $10,000 grant to effected businesses that does no need to be repaid.

So, let’s run a quick scenario on the facts above for a PPP Loan. Let’s say your total “payroll costs” over the prior 12-month period is $240,000. As a result, your monthly average payroll is $20,000. We then multiply $20,000 by 2.5 and get the maximum loan amount of $50,000.

Let’s further assume that over the eight-week period after you receive the loan that you use $40,000 for payroll costs, $9,000 for rent and $4,000 on utilities. You would then have totally qualifying expenses for forgiveness of $53,000. Since you have qualifying expenses in excess of the loan amount, you would be eligible for forgiveness of the entire loan. Not bad, huh? Not bad at all. Finally, we have a stimulus bill that small businesses can be excited about.

So, What Should You Do Now?

It is important that you apply early on. There are 30 million small businesses in the U.S. and $350 billion allocated to the program. We expect funds may run out before everyone can receive a loan. I’d suggest only applying to FDIC-insured bank for PPP loans. Many non-banks are taking applications, but in almost all cases they are simply trying to broker this information to banks in return for a fee.”

What I’d suggest is that you gather your payroll records for the prior 12 months, check the sample loan app linked above and be ready to be amongst the first in line to get a PPP Loan. And by getting in line, we presume this will be with an application completed online, as most banks have limited in-branch capability right now. I’d recommend working with your current business bankers, if you have one, as they will have your business bank accounts and an established relationship. I have already seen notices from banks with increased questions and demand on these loans saying they are only working with existing customers first. If you don’t have a good business-banking relationship, consider small community banks who tend to specialize in SBA loans and are more eager to get local businesses as customers. Open a business checking and savings account there to show them you want to be a customer for the long haul. And finally, consider banks who are SBA Preferred Lending Partners, as they’ll be familiar with navigating the new SBA rules. Not all banks provide or have SBA loan expertise and the ones who do can usually move faster.

Many business owners have learned the hard lessons of carrying too much debt. However, this isn’t just any debt. This is debt eligible for forgiveness by the government. It’s debt that will keep your employees on payroll, and it’s an effort by our federal government to ensure that small businesses and their employees can survive the coronavirus financially. So, step up and take advantage of this program while it’s there. We don’t know how long the coronavirus will impact our economy, small business and entrepreneurship, but what we can do is work hard, work smart and take advantage of programs like this that can give us all a better chance at bouncing back and staying open for business.

To get started with the Application Click Below

Paycheck Protection Application