It started with the Paycheck Protection Plan (PPP) Loan/Grant that was enacted into law on March 27, 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES).
The idea was to keep people employed and to do it by providing the funds for businesses to keep their people working. And the Act was supposed to concentrate on those who were the most vulnerable, small businesses.
And there was an added incentive. Whatever you spent in accordance with the CARES Act’s definition of qualified expenses in the first 8 weeks would be turned into a grant. You didn’t have to pay it back. And not only that, but it was tax free!
The first round of funding for the PPP Act went fast. In the weeks following, the announcement that the money was gone in a matter of just a few days it was discovered that over 245 publicly traded companies applied for PPP loans. They were able to apply fast due to on-staff accounting and some banks are accused of shuffling the applications to give them loans faster. That would make sense that the bank wants to keep their biggest clients happy.
But that wasn’t the intent of the loans. Treasury Secretary Steven Mnuchin gave a deadline for the publicly traded companies to give the money back. Just hours before the deadline, we knew that there actually had been 407 loans made to publicly traded companies and only 61 had returned the money.
Time will tell if the Treasury Dept actually does anything about this. Unfortunately, the large loans given to hundreds of companies that had other options took money out of the hands of small businesses. They had to wait for a second round of funding.
The scare tactics by the Treasury Dept and the confusion that followed made small businesses wary. Half of the available money is still available for PPP loans.
The next issue with the original plan occurred when the IRS and Treasury Secretary re-defined the PPP Grant and took away the tax-free definition. Remember Congress said it was tax-free. The IRS and Treasury took a strange position and in essence, made it taxable.
In The Case of the Disappearing Tax-Free Grant, the math of the IRS’s position is examined. It just doesn’t add up.
The grant is no longer tax-free. At least it’s not unless Congress gets involved again. Stay tuned for that.
And now we have another problem. This one is specifically targeting self-employed persons and employee/shareholders.
The PPP starts out as a loan, but you can turn it into a grant if you spend it in accordance with the rules.
In CoronaTax: Free Money! New Opportunities! we learn that:
The amount that can be forgiven is the sum of the following that were paid during the 8 weeks following the date of the loan. The items to be totaled are:
- Payroll costs (as previously defined),
- Mortgage interest,
- Rent, and
- Certain utility payments.
When you get the money, you have 8 weeks to spend it in accordance with their rules. Whatever you spent in that time period, in accordance with their rules, will be forgiven. And it will be tax-free. Or that’s what we were told originally.
We’ve already seen how that part (the tax-free part) is working out.
Hint: It’s not.
But is the loan still forgivable if you spend the money?
In a strange set of circumstances, the Treasury Dept has made it both easier and harder.
The initial rules from the CARES Act said that you must have at least as many FTE (full time equivalent employees) working during the 8 week period as you do pre-pandemic.
If you didn’t have the same number of employees, you wouldn’t get the full forgiveness.
With shelter in place warnings still up in many places and workers still receiving much more in unemployment benefits than they ever did working, it’s hard to find employees. If you can’t get your employees back to work, how can you pay the money? And remember you only have 8 weeks to spend it if you want the grant money you don’t have to pay back.
The SBA gave them a pass. If they can prove they tried to get an employee back, then they count the regular hours that employee worked as part of the FTE calculation. In other words, if it was a person who worked half time, then you have 0.50 additional FTE.
It seems that this is one of those changes that benefit larger employees. Certainly small, family run businesses won’t have this issue. Neither with solopreneurs. You HAVE to work if you want to keep your business.
So far, it seems like bigger businesses are winning with the PPP loan.
Last week, we got one more surprising ruling, this time from the Treasury Dept. The instructions that were released this past week along with the new PPP Grant Forgiveness Form. had a few changes, again impacting small business owners and solopreneurs.
These are:
- S Corporation employee/workers salary is limited to 2019 levels,
- Self-employed owners limited to 2019 levels, and
- Retirement benefits & health ins for owner/employees and families are not allowed.
Independent contractors, owner-employees, self-employed individuals and partners are all limited to 2019 income amounts. If you draw a salary as an S Corporation employee of your own company, your salary can only be 8/52 of your 2019 salary. The 8/52 is used because it is 8 weeks divided by 52 weeks (in a year). That means you can’t pay yourself more in form of overtime, bonus or salary increase in 2020, at least for purposes of the PPP forgiveness amount.
Additionally, you can’t take any credit for retirement plan amounts paid for you, as owner, and your family members. And you can’t get any credit for health insurance premiums paid for you and your family members.
If you have a large payroll, the amount paid for you and your family become less significant. But if you have a small business, this could make a big difference in how much you’re able to deduct.
Again, it seems that the SBA, the IRS and Treasury Dept are putting rules in place to make it easier for bigger companies and, at the same time, hamstringing small businesses.
And it remains to see if the Treasury Dept will really enforce the blatant disregard for the purpose and guidelines of the PPP loan made by banks who gave preference to publicly traded companies who had other resources available.
Meanwhile, small businesses wait for funds and try to stay in compliance with the rapidly changing rules.
