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FAQ

Paycheck Protection Program

Experts from Practical Law and Checkpoint address the common questions we’re hearing as small businesses and their advisors navigate the new Paycheck Protection Program.

  • Your bank must make the first disbursement of the loan no later than ten calendar days from the date of loan approval. (Source: Small Business Administration's Frequently Asked Questions dated as of June 25, 2020, Footnote 5).

  • Sole proprietors with no employees should use line 31 of Schedule C to Form 1040 for the 2019 tax year; the amount included in the PPP application is capped at $100,000. Regardless of whether you have filed a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C with your PPP loan application. You must also provide a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record establishing you were self-employed in 2019 and a 2020 invoice, bank statement, or book of record establishing you were in operation on February 15, 2020. (Source: Interim Final Rule on Additional Eligibility Criteria and Requirements for Certain Pledges of Loans, effective April 20, 2020; Paycheck Protection Program, How to Calculate Maximum Loan Amounts, April 24, 2020).

  • The Paycheck Protection Flexibility Act extended the term of PPP loans that receive an SBA loan number on or after June 5, 2020 to five years. If a PPP loan received an SBA loan number before June 5, 2020, the loan has a two-year maturity, unless the borrower and lender mutually agree to extend the term of the loan to five years. (Sources: Paycheck Protection Flexibility Act, June 5, 2020; Small Business Administration's Frequently Asked Questions dated as of June 25, 2020, Question 49).

  •  Borrowers are not obligated under PPP to request loan forgiveness. (Source: Treasury Information Sheet for Borrowers, March 31, 2020).

  • On June 5, 2020, President Trump signed the Paycheck Protection Flexibility Act, which extended the loan forgiveness calculation period from eight weeks to the earlier of (i) 24 weeks and (ii) December 31, 2020. However, a business can still choose the eight-week period if it received the loan before June 5. (Source: Paycheck Protection Flexibility Act, June 5, 2020.)

  • The loan forgiveness calculation period begins on the date your bank makes the first disbursement of the PPP loan to your business but if you have a bi-weekly (or more frequent) payroll cycle, you may choose to have the period start on the first day of the first payroll period after the loan disbursement date. (Source: Interim Final Rule on Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements - Loan Forgiveness, effective May 28, 2020.)

  • Although the business used less than 60% of the total loan proceeds for payroll costs, partial loan forgiveness is available. Based on current interpretations of the loan forgiveness program, the estimated loan forgiveness amount would be$85,000, not zero, calculated as follows. Because $15,000 was used for non-eligible costs, the potential loan forgiveness amount would be capped at $85,000. The $55,000 used for payroll costs is 64.7% of $85,000. Therefore, since more than 60% of the forgivable amount of the PPP loan was used for payroll, the estimated loan forgiveness amount would be $85,000. The SBA and the Treasury Department are expected to issue more guidance on calculating PPP loan forgiveness in the coming months. In the interim, be aware that banks and other lenders may interpret the forgiveness provisions differently. (Source: Paycheck Protection Flexibility Act, June 5, 2020; Interim Final Rule on Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to First Interim Final Rule, June 11, 2020.)

  • No. If you offer to rehire an employee, the employee is generally excluded from the loan forgiveness reduction calculation if they reject the offer. This exclusion is also available if the business previously reduced an employee's hours and the employee rejects an offer to restore that employee’s hours at the same salary or wages. To qualify for this exception, your small business must have made a good faith, written offer to rehire the employee, for the same salary or wages and same number of hours, that the employees rejects. Your small business must also document the employee’s rejection of the offer and inform the applicable state unemployment office of the employee's rejection of the offer within 30 days of rejection. There are also exceptions to loan forgiveness reductions if, for example, your business can document an inability to (i) replace departing employees with similarly qualified employees or (ii) return to the same level of business activity it had on February 15, 2020, due to compliance with federal COVID-19 health and safety guidelines. (Sources: Interim Final Rule on Business Loan Program Temporary Changes effective May 28, 2020; Paycheck Protection Flexibility Act, June 5, 2020.)

  • No. In general, loan proceeds are not considered taxable income to the borrower. 

  • Ordinarily, forgiveness or cancellation of a loan can result in federal taxable income for the borrower, unless one of several exceptions applies. The CARES Act creates a new exception for PPP loans. After applying the other available exclusions, a business can exclude any remaining amount of PPP forgiveness from their federal gross income. Note that the CARES Act applies only to federal income taxes. While many states will mirror the federal rule, PPP loan forgiveness may be subject to income tax in some states. (IRS Notice 2020-32)

  •  No, to the extent the loan is forgiven. According to IRS guidance released on April 30, 2020, expenses paid with PPP loan proceeds are not deductible if payment of the expense results in forgiveness of any portion of the loan. There has been pushback on this interpretation from the AICPA and some lawmakers. (IRS Notice 2020-32)

  • Payments of interest, principal, and fees on PPP loans are deferred until the amount approved for forgiveness is remitted to your lender. Payment deferral ends 10 months after the end of the covered loan period if your business has not applied for forgiveness by that date. For example, if a business received a PPP loan disbursed on June 25, 2020, the 24-week covered period would end on December 10, 2020. If the business does not submit a loan forgiveness application to its lender by October 10, 2021, it must begin making payments on or after October 10, 2021. (Source: Paycheck Protection Flexibility Act, June 5, 2020; Interim Final Rule on Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to First Interim Final Rule, June 11, 2020.)

  • Interest continues to accrue during the loan deferment period. If some or all of the loan is forgiven, interest stops accruing on that portion of the loan and any interest that has accrued on the forgiven portion is also forgiven. Interest will continue to apply to any portion of the loan that is not forgiven. Interest paid (or accrued, depending on your business’ accounting method) on a PPP loan is generally deductible for federal income tax purposes, but other limitations may apply depending on the specific facts and circumstances of your business. (Interim Final Rule on Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to First Interim Final Rule, June 11, 2020)

  • If your business receives a PPP loan, it can impact eligibility for other relief. For example, a business that receives a PPP loan is not eligible for the Employee Retention Credit, even if the business does not request forgiveness and ultimately repays the loan. (An exception applies to businesses that repaid their loans by May 18, 2020.) If your business is planning to claim new credits for COVID-19 paid sick or family leave, be aware that you cannot claim these credits for wages paid using PPP funds. The CARES Act also allows employers to defer deposits and payments of the 6.2% employer share of social security tax for 1-2 years. Under the PPP Flexibility Act, a business is still eligible for this payroll tax deferral even after it is granted PPP loan forgiveness.

Last Updated: 7/7/2020

Additional resources

This page was created by Thomson Reuters legal and tax experts to assist your small business. For further in-depth coverage, access free COVID materials via the following Thomson Reuters platforms.

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