More Guidance From IRS On PPP Loans: Lenders Should Not File Form 1099-C for Forgiven PPP loans
On March 27, 2020 President Trump signed the $2 trillion Stimulus Bill formally known as the Coronavirus Aid, Relief and Economic Security [CARES] Act (the “CARES Act”) to provide assistance to workplaces and employees. The CARES Act provides many benefits intended to deliver cash into the hands of individuals and businesses, as well as many other tax provisions. One of the most publicized provisions is the access of funds through banks to qualifying businesses and self-employed taxpayers to pay for payroll, insurance premiums and mortgage, rent and utility payments. This is known as the Paycheck Protection Program (“PPP”).
Under this program administered by the U.S. Treasury and the U.S. Small Business Administration (SBA), small businesses with 500 or fewer employees including not-for-profits, veterans’ organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors are eligible for loans to pay up to eight weeks of payroll costs including benefits as well as other costs.
Eligible loan recipients are eligible for forgiveness of indebtedness for all or a portion of the stated principal amount of a covered PPP loan if certain conditions are satisfied, and the forgiven amount is excluded from the borrower’s gross income.
How To Report Forgiven PPP Loans?
IRC §6050P generally requires a lender that discharges at least $600 of a borrower’s indebtedness to file a Form 1099-C, Cancellation of Debt, with the IRS and to furnish a payee statement to the borrower. Concerned that the filing of such information returns could result in the issuance of under-reporter notices (IRS Letter CP2000) to eligible recipients, on September 22, 2020, the IRS announced that lenders in the PPP should not file cancellation-of-debt information returns or furnish payee statements under IRC §6050P to report the amount of qualifying forgiveness with respect to covered loans made under PPP.
Recent Guidance Issued By The U.S. Treasury
On April 6, 2020, the U.S. Treasury and the SBA released FAQs on the PPP. The FAQs clarify certain aspects of the program which hopefully will expediate the process of the PPP funds being released to businesses. The FAQs cover:
- Using the gross payroll approach for both loan application and forgiveness and that the employer’s share of Federal Insurance Contributions Act taxesshould not be included.
- The $100,000 salarylimitation does not include health care, retirement benefits, and state and local taxes.
- Applicants that use Professional Employer Organizations (PEOs) can provide payroll reports since they cannot produce individual entity payroll tax documents.
- The time period for calculating payroll costs for the maximum loan amount.
What can PPP funds be used to pay?
PPP funds can be used to pay payroll costs including benefits (with salaries being under $100,000 per employee), interest on mortgages, rent payments, and utility bills; however, no more than 40% of the funds can be used for non-payroll costs.
What counts as payroll costs?
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basisfor each employee);
- Employeebenefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
- State and local taxesassessed on compensation; and
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basisfor each employee.
What counts as non-payroll costs?
- Intereston mortgage obligations, incurred before February 15, 2020;
- Rent, under lease agreements in force before February 15, 2020; and
- Utilities, for which service began before February 15, 2020.
Under what circumstances do I have to repay these PPP funds received?
The loan of the PPP funds will be forgiven if you maintain your pre-existing employees at their pre-existing salary levels. Also, that you do not pay out more than 40% of the PPP funds for non-payroll costs specifically limited to: interest on mortgages, rent, and utilities.
How large can my loan be?
Loans can be for up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount. That amount is subject to a $10 million cap. If you are a seasonal or new business, you will use different applicable time periods for your calculation. Payroll costs will be capped at $100,000 annualized for each employee.
How many loans can I take out under PPP?
Are there any charges or requirements for collateral or personal guarantees?
No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.
What if I do not spend all the funds or make non-qualifying expenditures?
The amount of loan forgiveness will be reduced including if full-time headcount declines or if salaries and wages decrease. Also, if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 24 weeks after getting the loan.
How can I request loan forgiveness?
You can submit a request to the lender that is servicing the loan by completing the SBA application. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.
What is my interest rate?
1% fixed rate.
When do I need to start paying interest on my loan?
All payments are deferred for 6 months; however, interest will continue to accrue over this period.
When is my loan due?
Loans issued prior to June 5, 2020 have a maturity of 2 years. Loans issued after June 5, 2020 have a maturity of 5 years.
Can I pay my loan earlier?
Yes. There are no prepayment penalties or fees.
What Should You Do?
Now with the 24-week certification period expiring on many PPP Loans, let the attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles (including Long Beach and Ontario) and elsewhere in California assist you achieve full PPP loan forgiveness. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.