Author Archives: Christina Strasser

Christina Strasser

About Christina Strasser

Christy is a corporate and tax attorney with Williams Parker. She can be reached at cstrasser@williamsparker.com.

Simpler Forgiveness Application for Small PPP Loans

Last Thursday, October 8, the Small Business Administration (“SBA”) released a simplified application form (Form 3508S) and instructions for Paycheck Protection Program (“PPP”) loans of $50,000 or less.  Any qualifying PPP borrower that uses the new two-page application is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in full-time equivalent employees or reductions in employee salary or wages that would otherwise apply.  Accordingly, the new Form 3508S application “does not require borrowers to show the calculations” supporting the requested loan forgiveness amount, though the SBA reserves the right to request information to review the borrower’s calculations.

Borrowers using the Form 3508S application must still submit documentation to verify employee cash compensation and non-cash benefit payments and nonpayroll expenses. The instructions include examples of appropriate documentation. Borrowers must also retain all documents supporting their PPP loan application, their forgiveness application, and their compliance with PPP requirements for six years after the date their loan is forgiven or repaid in full.

A borrower with affiliates (defined by the SBA here) may not use Form 3508S if the borrower, together with its affiliates, received PPP loans totaling $2 million or more.

Treasury Releases Guidance Implementing Executive Action on Employment Tax Deferral

On Friday, August 28, the Treasury Department (“Treasury”) released guidance implementing President Trump’s executive directive to defer the employee portion of social security tax.  As part of the continued response to the COVID-19 pandemic, Notice 2020-65 allows employers to make this deferral during the period of September 1, 2020 through December 31, 2020 for employees earning below a threshold amount of $4,000 during a bi-weekly pay period. This threshold is to be determined on a per-pay period basis rather than as an annualized amount. While not clearly stated in the Notice, both Treasury and the Internal Revenue Service (“IRS”) have framed the deferral as optional for employers.

For those employers who do choose to defer the employee share of social security tax, these amounts will be postponed until the period beginning on January 1, 2021 and ending on April 30, 2021. This could mean that absent further legislation affording permanent forgiveness of these amounts, employees would be obligated to make increased payroll payments for that four-month period. If employers fail to withhold and deposit any deferred amounts by May 1, 2021, the Notice states that they will be on the hook for penalties and interest—again, assuming Congress fails to enact legislation that says otherwise.    

What remains unclear is whether employees may choose to opt out of an employer’s choice to defer and how employers should treat the deferred taxes of employees who are terminated before these amounts are fully repaid in 2021. The Notice does, however, state that “[i]f necessary, the [employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee,” suggesting that an employer could, for example, deduct any deferred tax owing from an employee’s final paycheck to the extent permitted by the Fair Labor Standards Act.  

The IRS has released a draft update of Form 941, Employer’s Quarterly Federal Tax Return, on which employers may take into account employee social security withholding that is deferred. The key change appears to be on page 3, line 24, which asks for the “Deferred amount of the employee share of social security tax included in line 13b.”

We hope to see more concrete guidance from Treasury in the coming weeks.

For the Self-Employed the CARES Act Could Provide Too Much Liquidity: Simultaneous PPP and Unemployment Payments

Self-employed individuals may find themselves in a difficult situation because they have simultaneously received Paycheck Protection Program (“PPP”) loan and Unemployment benefits under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act was enacted this past March with a primary goal of combating COVID-19-related shutdowns and layoffs. It made state unemployment insurance (plus an additional $600 per week through July 31, 2020) (“Unemployment”) available to self-employed individuals, among others, and offers that same group a forgivable PPP loan for their suffering businesses. Faced with the menu of liquidity and uncertainty within the CARES Act, many self-employed individuals immediately applied for both Unemployment and a PPP loan. The question they now face is whether receiving both benefits at the same time is permissible.

The Tension Between The PPP and Unemployment Benefits

While there is no explicit authority in the CARES Act prohibiting the simultaneous receipt of both PPP loan and Unemployment monies, keeping both is risky at best and could potentially be viewed as fraudulent at worst. This is because the receipt of one goes against the purpose and spirit of the other. Looking first at the PPP, its very goal is to allow businesses to keep their employee or employees on the payroll. In other words, the applicant needs the money to keep its business going and pay salaries and wages. It logically follows that a self-employed individual who receives a PPP loan is therefore considered fully employed, at least until the funds run dry.

On the other hand, an individual is only eligible for Unemployment benefits with respect to the CARES Act, where they become totally or partially unemployed (or furloughed) due to COVID-related reasons. These monies serve only as a bridge across gaps in employment. A recipient is therefore very arguably ineligible for Unemployment benefits where compensated work is made possible by PPP funds. This is to be distinguished from a situation where a self-employed individual received necessary Unemployment while waiting for PPP loan approval and disbursement or following the depletion of the PPP loan if it came first.  

Potential Consequences

Continuing to take Unemployment while benefiting from a PPP loan could potentially be, or appear to be, a fraudulent situation. The Department of Labor (“DOL”) has made clear that all states, including Florida, are to exercise due diligence to detect fraud and assess the accuracy of payments to eligible claimants. The Small Business Administration (“SBA”) is also prosecuting PPP loan fraud under federal civil and criminal statutes and has been vocal about the consequences of failing to return unnecessary PPP funds. Most individuals who have simultaneously received or are currently receiving monies from both programs are well-intentioned and unknowing recipients, but this may not save them from an accusation of wrongdoing and/or having to go through state or federal administrative proceedings.

Finally, even assuming one could carefully segregate their PPP funds for their business from their Unemployment, using only the Unemployment monies to pay themselves a salary and the PPP to pay all other eligible business expenses, the risk of losing eligibility for full or substantial loan forgiveness remains. At least 60 percent (previously 75 percent) of the PPP loan must be spent on payroll expenses (i.e., wages) to qualify for full loan forgiveness. When comparing the size of most PPP loans to Unemployment payment amounts, the importance of avoiding this risk becomes obvious. It also remains unclear whether such segregation of simultaneous benefits is possible.

Based on the foregoing, self-employed individuals who have received both PPP and Unemployment benefits to review their payouts for any overlap of funds and check with their legal/financial advisors on the best course of action in the event of any overlap.

Amounts Paid to Employees for Sick and Family Leave Wages Are to be Reported on W-2s

Yesterday, July 8, 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-54, which provides guidance to employers on reporting qualified sick and family leave wages paid to employees under the Families First Coronavirus Response Act (FFCRA). Enacted this past March 2020, the FFCRA generally requires employers with fewer than 500 employees to provide paid leave due to certain circumstances related to COVID-19.  Notice 2020-54 directs employers to “separately state” each of the paid sick and family leave wage amounts either in Box 14 of Form W-2 or in a statement that accompanies the Form W-2.

The guidance provides employers with adaptable model language for use in the Form W-2 instructions for employees. An excerpt of that language is as follows:

“Included in Box 14, if applicable, are amounts paid to you as qualified sick leave wages or qualified family leave wages under the Families First Coronavirus Response Act. Specifically, up to three types of paid qualified sick leave wages or qualified family leave wages are reported in Box 14:

  • Sick leave wages subject to the $511 per day limit because of care you required;
  • Sick leave wages subject to the $200 per day limit because of care you provided to another; and
  • Emergency family leave wages.”

The Notice goes on to state that the wage amount required to be reported by employers on Form W-2 will provide self-employed individuals who are also employees with the information necessary to determine the amount of any sick and family leave equivalent credits they may claim in their self-employed capacities. We recommend that employers review the Notice’s model language for their Form W-2 instructions.

With $130 Billion Left, PPP Application Deadline Extended

On July 1, 2020, the House waived through Senate-passed legislation (S. 4116) that extends the deadline to apply for a loan under the Paycheck Protection Program (PPP), the centerpiece of relief under the CARES Act. The PPP provides forgivable loans to certain small businesses to cover payroll and other permissible expenses.

The original deadline to apply for PPP loans was last Tuesday, June 30, 2020. With the President’s signature over the weekend on July 4, 2020, the deadline for businesses to take advantage of the nearly $130 billion in remaining PPP funds is now August 8, 2020. Business owners interested in applying for a PPP loan should contact their local lender about the program. We are happy to discuss the PPP and other available economic relief for your business.

PPP Flexibility Act Expected to Be Signed into Law

On Wednesday, June 3, 2020, the U.S. Senate passed the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010), which was approved by the House late last week. President Trump is expected to sign the Act into law. As a part of the larger Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the Paycheck Protection Program (“PPP”) provides loans to small-to-mid-sized businesses suffering from the COVID-19 pandemic. As enacted, the PPP loans are to be forgivable when used for specific business and payroll expenses during a specified timeframe. Any forgiven loan amounts are excluded from businesses’ taxable income. However, due to insufficient funding and lengthier pandemic-related shutdowns, the PPP relief became inaccessible for many businesses.

The changes made to the PPP by the new legislation include:

  • Allowing businesses 24 weeks (or until December 31, 2020, if it comes first) post-loan origination to use loan money that will qualify for forgiveness. This applies to both new and existing loans.
  • Reducing the amount of loan money required to be spent on payroll expenses from 75 percent to 60 percent, allowing more funds to be spent on rent, utility payments, and mortgage interest.
  • Extending the time period for the rehiring exception to forgiveness reduction from June 30, 2020 to December 31, 2020 and adding new exceptions for employers who could not find qualified employees or were unable to restore business operations to February 15, 2020 levels due to COVID-19-related operating restrictions.
  • Extending the loan terms from two to five years, unless otherwise modified by lenders and borrowers.
  • Permitting payroll tax deferment for businesses that receive PPP loans regardless of loan forgiveness. Under the CARES Act and subsequent interpretive guidance, payroll tax deferral could only be utilized up until a business received notification of loan forgiveness.
  • Replacing the six-month deferral of PPP payments due with deferral until the date on which the amount of loan forgiveness is provided to the lender.

The legislation does not clarify the parameters of the required PPP certification that “[c]urrent economic uncertainty makes [a] loan request necessary to support the ongoing operations of the Applicant.” It also does not address the deductibility of expenses paid for by PPP loan funds, as previously discussed in a prior post. Further PPP corrections and guidance are expected.

PPP Bonuses, Hazard Pay Count Towards Forgivable Payroll Costs, and Other New Guidance

On May 22, 2020, a week after issuing the application form for the CARES Act’s Paycheck Protection Program (“PPP”) loan forgiveness, the Small Business Administration (“SBA”) released the twenty-six-page interim final rules that provide formal guidance to accompany the application package.

Most of the interim final rules reiterate the substance of the PPP loan forgiveness application, but they also include new pieces of significant guidance such as the inclusion of employee bonuses and hazard pay as forgivable payroll costs when paid to employees earning less than $100,000 a year. Such payments are eligible for forgiveness because, as a supplement to salary or wages, they are considered compensation.

Some of the other significant new guidance includes:

  • a further cap on the forgivable payroll expenses of owner-employees, as not to be confused with self-employed individuals, in an amount that is the lesser of 8/52 of 2019 compensation or $15,385 per employee;
  • application of the above cap across all business, suggesting that someone with an ownership interest in multiple business will be subject to the overall limitation; and
  • safe harbors to protect borrowers from a reduction in full-time employees due to the employees’ actions.

Unsurprisingly, questions remain following the release of the rules, such as the definition of an “owner-employee.” No additional IRS frequently asked questions  have been released to supplement the interim final rules.

IRS Issues Expanded FAQ Guidance on Employee Retention Credit

The Internal Revenue Service (“IRS”) has expanded its FAQ guidance on the Employee Retention Credit (“ERC”), which has been discussed in greater detail in a prior post. Enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the ERC provides a refundable tax credit to eligible employers for certain employment taxes equal to 50 percent of up to $10,000 in qualified wages paid per employee, effective March 12, 2020 through December 31, 2020. However, employers that received loans under the Paycheck Protection Program (“PPP”) are not eligible for the ERC.

The ERC FAQ was originally posted in late March, and the IRS has since continued to update it. The FAQ now has nearly 100 questions posed and answered on major-issue areas such as:

A more recent update relates to the eligibility of an employer who repays its PPP loan in accordance with the Small Business Administration (“SBA”) requirement that a business recertify in good-faith that the PPP loan was “necessary to support ongoing business operations” (previously discussed here, here, and here). Released May 8, 2020, the IRS FAQ 79 states that an employer that applied for the PPP loan, received payment, and “repays the loan by May 14, 2020 . . . will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit.” Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer.

The original deadline for PPP loan repayment was May 7, 2020, but was extended to May 14, 2020 with FAQ 43 of the SBA’s PPP FAQs. The SBA then further extended the repayment deadline to Monday, May 18, 2020 in SBA FAQ 47, following its release of guidance which relieved borrowers with loans of less than $2 million from the “necessity” recertification. While the IRS ERC FAQ has not been updated to reflect the new May 18 deadline, we can only assume that those employers who do make repayment by this time would qualify for the ERC all the same. We note, however, that implicit in IRS FAQ 79 is that employers who do not voluntarily make timely repayment may not claim the ERC. In other words, any employer who is ultimately forced by the SBA to repay the loan would not be allowed to take the ERC.

While the PPP loan was at the top of most employers’ COVID-relief wish lists, and for obvious reasons, the ERC may be the next best option for those who erred on the side of repayment. We are happy to answer any questions employers that opted for repayment may have.

PPP Loans Less Than $2 Million Deemed Certified in Good Faith; Larger Loans Get Penalty Relief But Remain In Cloud of Repayment Uncertainty

On Wednesday, May 13, 2020, just a day before the deadline to recertify or repay Paycheck Protection Program (“PPP”) loans (previously discussed here), the Small Business Association (“SBA”) made good on its promise to provide further guidance as to what circumstances necessitate repayment with its release of FAQ 46. The new FAQ asks the following question:

“How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

The first part of the SBA’s answer reveals a safe harbor for borrowers of PPP loans with an original principal amount of less than $2 million. Borrowers who received loans below this threshold will be deemed to have certified in good faith that the loan was necessary, because they “are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.” The SBA also admitted that it has bigger fish to fry, as removing these borrowers from the PPP loan pool will allow it to “conserve its finite audit resources and focus its reviews on larger loans.”

As for the $2 million-and-above borrowers, the FAQ goes on to say that they may still have an adequate basis for making the required good-faith certification depending on their circumstances. If, however, the SBA determines by its review that a borrower lacked an adequate basis for its PPP loan, the SBA will seek repayment of such loan and notify the lender that the borrower is ineligible for loan forgiveness. Further, the SBA will not take administrative enforcement action to collect repayment or make referrals to other agencies if the borrower voluntarily repays the loan after receiving notification from the SBA. The SBA did not offer a specific timeframe within which repayment would prevent administrative enforcement.

Borrowers who did receive loans of $2 million or more should consider setting aside enough funds to make a repayment should the SBA require it, though one wonders whether the SBA could use retention of such reserves as a basis to question the necessity—and hence the qualification—of the loan. That seems like an unfair catch-22, motivating “larger” small businesses to stop paying employees after the PPP measuring period ends. We hope the SBA will provide more clarification to help these businesses avoid that dilemma and to encourage businesses to continue deploying funds to keep their workforces in place after the PPP measurement period ends.

The SBA also released FAQ 47 later in the day on May 13, which automatically extends the repayment date to Monday, May 18, 2020. The stated reason for this extension is “to give borrowers an opportunity to review and consider FAQ 46.” The practical significance of FAQ 47 as it relates to the necessary-ness certification is unclear, given the penalty relief provided by FAQ 46.

PPP Repayment Deadline Extended But Confusion Remains

On May 5, 2020, the Small Business Administration (“SBA”) in consultation with the Department of Treasury (“Treasury”) announced in a new online FAQ that it is giving extra time for companies to repay loans they applied for and received in good faith under the initial guidance provided by the SBA to the Paycheck Protection Program (“PPP”). Originally set for May 7, 2020, the deadline to repay the loan without incurring penalties is now extended to May 14, 2020. The SBA also stated that it plans to issue “additional guidance on how it will review certification prior to May 14, 2020.” Continue reading