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Update to Small Business Administration (SBA) COVID-19 Related Loans

The information in this publication is provided only for educational purposes and to inform the reader of relevant topics. This is not to be perceived or utilized as formal tax or legal advice. It is up to the reader to seek the necessary and appropriate tax and legal professionals that specialize in these areas for specific guidance.

Small Business Administration Loan Programs Have Received Additional Appropriations

Congress has passed, and the President signed on April 24, 2020, the Paycheck Protection and Health Care Enhancement Act. The law added $310 billion to the Paycheck Protection Program (PPP) and $10 billion to the Emergency Injury Disaster Loan (EIDL) program. The Small Business Administration (SBA) opened processing for these programs on Monday, April 27, 2020.1

Second Round of Payroll Protection Program (PPP) Loans

The SBA is now accepting a second round of applications under the Payroll Protection Program (PPP). As of Monday, April 27, 2020, the government has authorized an additional $310 billion in funding, with $30 billion of the $310 billion being specifically appropriated to smaller financial institutions that have consolidated assets of less than $10 billion. The remaining $280 billion will be used for all institutions processing PPP applications. The funding that has been allocated for PPP is expected to run out quickly.1

A farm is eligible under the PPP if:

  • the farm has 500 or fewer employees; or
  • the farm fits within the revenue-based sized standard, and has an average annual receipt of $1 million or less (there are exceptions to this rule); or
  • the maximum net worth of the farm is not more than $15 million and the average net income after federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of application is not more than $5 million.

Economic Injury Disaster Advance Loan (EIDL) Program

The Paycheck Protection and Health Care Enhancement Act added $10 billion to the EIDL program. The law has also opened eligibility for the program to farms.1

You cannot use EIDL for the same purposes as PPP. If you receive an EIDL advance, which does not have to be paid back, and you receive a loan from PPP, the potential forgiveness of the PPP will be reduced by the value of the EIDL Advance that had been received. If the EIDL loan was received prior to receiving any funding through PPP and was used to cover payroll, the PPP will be used to restructure the EIDL so that the PPP funds are used to cover payroll.

New Rules for Seasonal Employers

The Department of Treasury recently added a new code of federal regulations (CFR), 13 CFR Part 120 Small Business Administration Business Loan Program Temporary Changes, Paycheck Protection Program – Additional Criterion for Seasonal Employers. This CFR specifically addresses the following for seasonal employers: Section 1102 of the Act permits seasonal employers to calculate their maximum loan amount by using their average monthly payments for payroll during “the 12-week period beginning February 15, 2019, or at the election of the eligible [borrower], March 1, 2019, and ending June 30, 2019.” Some seasonal employers, however, have seasons that occur later in the year. Without the ability to use an alternative base period, many summer seasonal businesses would be unable to obtain funding on terms commensurate with those available to winter and spring seasonal businesses. This interim final rule addresses that disparity and ensures consistency in program administration by providing a seasonal employer the option of using any consecutive 12-week period between May 1, 2019 and September 15, 2019 for determining its maximum loan amount.2

The borrower is now able to use any of the following methods to determine the maximum potential loan value they are eligible for:

  1. Monthly average payments for payroll for a 12-week period
    1. beginning on February 15, 2019, or
    2. beginning on March 1, 2019, or
    3. any consecutive 12-week period between May 1, 2019 and September 15, 2019.
  2. An employer can still use the entire 12-months of 2019 to determine their average monthly payroll as well.

The CFR explicitly states that there are no other changes other than the new alternative 12-week base period that can be used. This means is that once the borrower receives the PPP funds, the 8-week coverage period begins. The borrower must use the PPP loan for the approved purposes within that 8-week coverage period. If a borrower hopes to receive forgiveness of the PPP loan, 75% of the loan must have been used for payroll and/or self-employed compensation. So, although a farm may receive a higher loan value based on the alternative base period used to determine the maximum loan value using the higher worker numbers from later in the year, the 8-week coverage period will still begin this spring once the borrow received the PPP loan. Because of this, the borrower may not be able to meet the 75% rule for loan forgiveness purposes as their employees may not be on the farm yet.2

General Farm Information

The Department of Treasury has also put out a series of additional FAQs, rules/guidance on April 24, 20203, and again on April 28, 2020.4 In an earlier set of FAQs that were put out by the Department of Treasury, there was some confusion created as to whether or not farms were still eligible for the PPP. The earlier FAQs referenced how to determine the loan value and the maximum self-employed compensation that could be paid through the use of Line 31 of a self-employed individual’s Schedule C of the 1040. Because of this, some lenders stopped accepting applications from farms since most farms will file an IRS 1040F. In the April 24, 2020 dated document, “Paycheck Protection Program How To Calculate Maximum Loan Amounts – By Business Type,” question 3 specifically states that farms, in fact, continue to be eligible and that Line 34, net profit of the 1040F, should be used in place of Line 31 of the IRS Schedule C.3

It is important to note two things which were the case even prior to this for self-employed individuals and most importantly for farmers: 1) if Line 34 is “0” you will not be eligible for PPP unless you have employees that you are also adding into the equation, and 2) this number does not count any 4797 income that may have come from such things as raised cull cows or breeding livestock.

The April 24, 2020 release also specifically answers a question regarding partnerships. It reinforces that partners cannot apply for a PPP individually for income of a partnership and that a partner’s self-employment income needs to be on the partnership’s PPP loan applications.3

One last note of importance as farms have struggled with trying to determine whether or not some of the labor on the payroll could be counted in the determination of maximum PPP loan value. The April 28, 2020 document Department of Treasury Paycheck Protection Program Loans Frequently Asked Questions (FAQs) specifically referenced code 26 CFR § 1.121-1(b)(2).5 The CFR discusses looking at where the taxpayer’s family resides, where they work, attend religious services, where bills are sent to, where the taxpayer works, etc. This can be very confusing, and as many aspects of regulations and code, it will come down to “facts and circumstances.” Facts and circumstances refers to looking at the larger picture of the situation. It is important that before making a decision that you work with your lender, labor attorney, and tax professional.4

For further information and details about the Paycheck Protection Program (PPP) and the Emergency Injury Disaster Loan (EIDL), Clemson University and Michigan State University both provide information on their websites.

References Cited

  1. Paycheck protection and health care enhancement act, H.R. 266, 116th Cong. (2020). https://www.congress.gov/116/bills/hr266/BILLS-116hr266enr.pdf.
  2. Small business administration business loan program temporary changes; paycheck protection program – additional criterion for seasonal employers, 13 CFR Part 120 RIN 1505-AC67 (2020). https://home.treasury.gov/system/files/136/Interim-Final-Rule-Additional-Criterion-for-Seasonal-Employers.pdf.
  3. U.S. Department of the Treasury. Paycheck protection program: how to calculate maximum loan amounts – by business type. 2020 Apr. https://home.treasury.gov/system/files/136/How-to-Calculate-Loan-Amounts.pdf.
  4. U.S. Department of the Treasury. Paycheck protection program loans frequently asked questions (FAQs). 2020 Apr. https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf
  5. 26 CFR § 1.121- 1(b)(2). https://www.law.cornell.edu/cfr/text/26/1.121-1.
  6. CBO Estimate for H.R. 266 the Paycheck Protection Program and Health Care Enhancement Act as Passed by the Senate on April 21, 2020. https://www.cbo.gov/system/files/2020-04/hr266.pdf.

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