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Payroll Protection Program for Family Business

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Many family businesses could qualify for the Payroll Protection Program (PPP), which is a $349 billion program available until June 30, 2020. The PPP is a loan program, guaranteed by the Federal government, to help businesses effected by COVID-19. PPP loans can be forgiven, income tax free, up to 100% of the loan. Businesses need to act fast to utilize the program while it lasts.

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Payroll Protection Program for Family Business

  1. 1. © 2019 Rimon, P.C. All Rights Reserved Family Businesses Can Get Part of $349 Billion Federal Assistance By: Brent W. Nelson Rimon, P.C. One South Church, Ste. 120 Tucson, AZ 85701 brent.nelson@rimonlaw.com 520-979-3839
  2. 2. © 2019 Rimon, P.C. All Rights Reserved CARES Act Resources • CARES Act (the “Act”): https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf • Family First Coronavirus Response Act (“FFCRA”): https://www.congress.gov/116/bills/hr6201/BILLS-116hr6201enr.pdf • IRS Coronavirus Website: https://www.irs.gov/coronavirus • IRS FFCRA FAQs: https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required- paid-leave-provided-by-small-and-midsize-businesses-faqs#sick_leave • Treasury Press Releases: https://home.treasury.gov/news/press-releases • SBA Loan Resources: https://www.sba.gov/page/coronavirus-covid-19-small-business- guidance-loan-resources • Draft PPP Regs: https://home.treasury.gov/system/files/136/PPP--IFRN%20FINAL.pdf • Sample PPP Loan Application: https://www.sba.gov/document/sba-form--paycheck- protection-program-ppp-sample-application-form
  3. 3. © 2019 Rimon, P.C. All Rights Reserved CARES Act Major Provision for Family Business • On March 27, 2020, President Trust signed the CARES Act into Law (the “Act”) • The Act sets aside $349 Billion for loans and loan guarantees for small businesses • Called Paycheck Protection Program (PPP) Loans • Most Family Businesses would meet requirements to get PPP Loans
  4. 4. © 2019 Rimon, P.C. All Rights Reserved PPP Loan Benefits • Get immediate cash for payroll (and other expenses) • Low 1% interest rate • As much as 100% loan forgiveness within 8 weeks after the loan • The Loans are made on a First-Come, First-Served Basis!
  5. 5. © 2019 Rimon, P.C. All Rights Reserved General Overview • PPP Loans are set aside until 6/30/20 (unless the total fund is disbursed before then to: – Individuals (sole proprietor, independent contractor, self-employed), – Business concern, – Non-profit, – Veterans organization, – Tribal business, or – Small business concern (per 13 CFR 121.301)
  6. 6. © 2019 Rimon, P.C. All Rights Reserved General Overview (Continued) • AND: – Less than 500 employees, – Principal place of business in U.S., – Operating on 2/15/20 – Paid salaries and payroll tax or independent contractors • BUT NOT FOR ineligible businesses listed in SOP 50 10 5(B), Subpart B, Chapter 2 here: https://www.sba.gov/sites/default/files/files/serv_sops_50105 b_0_5.pdf
  7. 7. © 2019 Rimon, P.C. All Rights Reserved Business Concerns • A Business concern = – Organized for profit – Place of business in U.S. – Operates primarily within U.S. OR makes a significant contribution to U.S. economy through taxes or use of U.S. products, materials or labor – Not more than 49% foreign owned if joint venture 13 C.F.R. § 121.105
  8. 8. © 2019 Rimon, P.C. All Rights Reserved 500 Employees Calculation • Counting Employees: – Must aggregate employees of affiliated entities – BUT NOT IF: • Less than 500 employees and business and is in the hotel, RV park, food service industries (NAICS Code beginning in 72) (then look just at each location), • Any franchise assigned a franchise number by SBA, or • Received financial assistance from a Small Business Investment Company
  9. 9. © 2019 Rimon, P.C. All Rights Reserved Affiliation Rules • Affiliated Entities = – One business controls or has power to control another – Third party controls or has power to control two businesses • Control = ownership, management, or other relationships (i.e. economically dependent by contract) • Totality of circumstances considered 13 C.F.R. § 121.103
  10. 10. © 2019 Rimon, P.C. All Rights Reserved Affiliation Rules (Continued) • Example: Husband and wife own several LLCs that hold rental real property (residential and commercial) – All LLCs are affiliates (because common control) – All employees of all LLCs count – Affiliation rules might prevent each LLC from applying for separate PPP loans…but, currently not clear
  11. 11. © 2019 Rimon, P.C. All Rights Reserved Loan Amount The Lesser of: (1) Average monthly payroll cost in 12 months before loan X 2.5 + Outstanding amount on EIDL loan made between 1/31/2020 and date of PPP loan available to refinance to PPP loan Or (2) If not in business between 2/15/2019 and 6/30/2019: then Average payroll costs from 1/1/2020 and 2/29/2020 X 2.5 + Outstanding amount on EIDL loan made between 1/31/2020 and date of PPP loan available to refinance to PPP loan Or: $10,000,000 Minus: amount of EIDL advance received (discussed below)
  12. 12. © 2019 Rimon, P.C. All Rights Reserved Payroll Costs Sum of all payment of any compensation to employees: AND Sum of payments of compensation of a sole proprietor that is: Salary, wage, commission, or similar comp (Union expenses?) Wage, commission, income, net earning from SE, or similar comp Cash tips or equivalents Vacation, parental, family, medical, or sick leave (but not FFCRA extended leave) Retirement benefits State and local taxes on employee comp
  13. 13. © 2019 Rimon, P.C. All Rights Reserved Payroll Costs (Continued) • Payroll Costs are shown by: – Payroll Processor Records – Payroll Tax Filings – Form 1099-MISC – Income and Expenses (sole proprietorships) – Other supporting documents (if none of above)
  14. 14. © 2019 Rimon, P.C. All Rights Reserved Payroll Costs (Continued) • Payroll Costs Are ≠ • Salary to individual employee or comp to IC > $100,000, prorated in Covered Period • Social security, rail road retirement, and income tax withholdings • Comp for non-US resident employee • FFCRA leave wages • Payments to independent contractor (per draft PPP regulations, though not in Act)
  15. 15. © 2019 Rimon, P.C. All Rights Reserved Payroll Costs (Continued) • Payroll Costs? – S corporation salaries: yes – Guaranteed Payments: Unclear • Payroll Costs or sole proprietor and IC include wage, commission or self- employment income. Is a partner going to apply for their own PPP Loan? • Partners cannot be employees for tax purposes. See Treas. Reg. § 1.707-1(c) – Self-employment income of Sole Proprietor: yes
  16. 16. © 2019 Rimon, P.C. All Rights Reserved Loan Amount Example • If payroll costs for prior 12 months was $100,000 and employer has no EIDL loan to refinance: – Average monthly payroll = $8,333 – 2.5 x $8,333 = $20,833 (PPP loan amount)
  17. 17. © 2019 Rimon, P.C. All Rights Reserved Loan Uses • Loan MAY Be Used in Covered Period For: – Payroll – Group Health Care Benefits – Salaries, commissions, comp – Mortgage interest – Rent – Utilities – Other interest
  18. 18. © 2019 Rimon, P.C. All Rights Reserved Borrower Must Certify • Loan needed due to current economic conditions • Funds will be used to retain workers and maintain payroll OR make mortgage, lease, or utility payments • Doesn’t have duplicative application for SBA loan pending • Hasn’t received SBA loan for same purpose between 2/15/2020 and 12/31/2020
  19. 19. © 2019 Rimon, P.C. All Rights Reserved Terms of Loan • Treasury and SBA Announced that PPP loans will be: – 2 Year term – 1.0% interest – There are no prepayment penalties • PPP LOANS ARE ISSUED ON A FIRST-COME, FIRST-SERVED— ONE LOAN PER BORROWER BASIS
  20. 20. © 2019 Rimon, P.C. All Rights Reserved Loan Refinance and Collection • PPP loans can be used to refinance existing SBA loans • PPP loans are non-recourse to the business owners (sole proprietors?) if used for proper purposes
  21. 21. © 2019 Rimon, P.C. All Rights Reserved Loan Deferral • If, borrower was in business on 2/15/2020 and has approved or pending application for PPP loan • Then, lender must defer payment for 6 months
  22. 22. © 2019 Rimon, P.C. All Rights Reserved PPP Loan Forgiveness (Act Sec. 1106) General Overview • PPP Loan forgiven, if borrower, for 8 weeks after PPP loan made (the “Covered Period”), used the loan for: Payroll Costs Mortgage interest (on pre 2/15/2020 mortgage) Rent (lease started pre 2/15/2020) Utilities (services began pre 2/15/2020) AND: Maintained Employee and compensation levels
  23. 23. © 2019 Rimon, P.C. All Rights Reserved PPP Loan Forgiveness (Act Sec. 1106) Forgiveness Limitation • Capped at: – Principal amount – $100,000 per employee – Non-Payroll Cost amount can’t exceed 25% of forgiveness amount
  24. 24. © 2019 Rimon, P.C. All Rights Reserved PPP Loan Forgiveness (Act Sec. 1106) Forgiveness Limitation (Continued) • Reduced by: forgiveness amount x this faction • Seasonal employer must use (1) • Averaging done by counting employees per pay period • Independent Contractors ≠ Employees (1) Average # full-time employees per month during Covered Period Or (2) Average # full-time employees per month during Covered Period Average # full-time employees per month from 2/15/19 to 6/30/19 Average # full-time employees per month from 1/1/20 to 2/29/20
  25. 25. © 2019 Rimon, P.C. All Rights Reserved PPP Loan Forgiveness (Act Sec. 1106) Forgiveness Limitation (Continued) • Reduced FURTHER by: – reduction in salaries and wages of employees who weren’t paid > $100,000, if also – Reduction of total salary and wages during Covered Period was over 25% of most recent full quarter of employee’s employment before Covered Period
  26. 26. © 2019 Rimon, P.C. All Rights Reserved PPP Loan Forgiveness (Act Sec. 1106) Forgiveness Limitation (Continued) • Re-Hire Exception to Reductions: if between 2/15/20 and April 26, 2020 (April 27?) – There is a reduction in full time employees and by 6/30/20 the employer eliminates the reduction, OR – There is a reduction in 1 or more employee’s salaries or wages and by 6/30/20 the employer eliminates the reduction
  27. 27. © 2019 Rimon, P.C. All Rights Reserved PPP Loan Forgiveness (Act Sec. 1106) Forgiveness Limitation (Continued) • Re-Hire Example: Employer has 30 employees whom employer can’t afford until PPP loan comes in: – Furlough employees so they can claim unemployment – Apply for PPP loan – Apply for EIDL and request immediate $10,000 grant – If PPP loan comes back before 6/30/20, hire employees back (or replace employees) to avoid forgiveness limitation on PPP loan
  28. 28. © 2019 Rimon, P.C. All Rights Reserved PPP Loan Forgiveness (Act Sec. 1106) Forgiveness Limitation (Continued) • Increased By: wages paid to tipped employees (if meet certain Fair Labor Standards Act requirements to be tipped employee)
  29. 29. © 2019 Rimon, P.C. All Rights Reserved PPP Loan Forgiveness (Act Sec. 1106) Other Things • Good news, the forgiveness of PPP loan is not taxable discharge of indebtedness income • Loan forgiveness is requested from the bank (lender) who verifies the information to calculate amount. No other guidance at this point
  30. 30. © 2019 Rimon, P.C. All Rights Reserved DISCLAIMER These materials are not legal advice and should not be taken as such. They do not create an attorney-client relationship. Each user of these materials should do their own research, or seek the advice of their own competent advisors, with respect to the user’s specific facts and circumstances. The materials are for general information purposes only and are not exhausted of any topic present.
  31. 31. © 2019 Rimon, P.C. All Rights Reserved Thank you. Brent Nelson, Partner brent.nelson@rimonlaw.com (520) 979-3839 BIO LINK

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