FAQs: Small Business Administration (SBA) Loans for Brokers

Updated on July 7, 2020

See Also: FAQ on Pandemic Unemployment Assistance (PUA)

The CARES Act was passed on March 27 to provide financial relief to small business owners, independent contractors and other unemployed Americans.  There remain many ambiguous provisions in the law that continue to be clarified by rule-making at the federal and state agencies. We will continue to update this FAQ as any rules or other guidance are provided. Please check this FAQ frequently for updates.

June 19 Update: New Step-by-Step Guide to PPP Loan Forgiveness for Borrowers With Employees and Step-by-Step Guide to PPP Loan Forgiveness for Borrowers Without Employees

July 2 Updates:

President Trump has signed a bill that extends the deadline to apply for a PPP loan. The deadline was formerly June 30, 2020; now, the deadline has been extended to August 8, 2020.

 

Additionally, the SBA has provided PPP application instructions for self-employed borrowers who were in operation on February 15, 2020 but not in operation between February 15, 2019, and June 30, 2019. In this case, your maximum PPP loan amount is equal to 2.5 times your average monthly payroll costs incurred in January and February 2020, plus the outstanding amount of any EIDL loan received between January 31, 2020, and April 3, 2020 that will be refinanced by the PPP loan.

TABLE OF CONTENTS

 

What assistance is available for brokers from the SBA?

The federal government, through the SBA, is providing significant relief for small businesses suffering from the impact of the COVID-19 pandemic. Most brokers are likely to be eligible for loans which are being made available through the SBA. The CARES Act makes the following options available to brokers:

 

  • Paycheck Protection Program loans

  • Economic Injury Disaster Loans

  • SBA Express Bridge Loans

SELECTING THE BEST LOAN

 
 
 
 

Which of the SBA loans should I apply for?

As described below, Paycheck Protection Program (PPP) loans are provided on very favorable terms, and they may be the best option for brokers if used to cover payroll and overhead costs. If you have additional expenses that will not be forgiven if spent with PPP loan proceeds, an Economic Injury Disaster Loan (EIDL) may be a good option. However, keep in mind that EIDLs (except for the emergency grant portion which does not need to be repaid) are conventional loans and not forgivable. If you need immediate financial relief, arranging an SBA Express Bridge Loan (EBL) (discussed below) with your lender is a good option. 

Can I apply for both a PPP loan and an EIDL loan?

Yes – but borrowers cannot take out an EIDL and a PPP loan for the same purposes. You could, if desired, get a PPP loan to cover “payroll costs” (defined below) and other costs that are forgivable under the PPP, and then get an EIDL loan to cover some of your other expenses. You should carefully review the options available to select the SBA loans that will be the best fit for your needs and circumstances.

 

If you have already applied for or received an EIDL loan related to COVID-19 before April 3, 2020 and used the loan proceeds to cover payroll costs, you will be able to refinance the EIDL into a PPP loan for purposes of loan forgiveness. Remaining portions of the EIDL, for purposes other than those laid out as eligible for loan forgiveness under the PPP, will remain a non-forgivable loan. Recipients of the EIDL emergency grant will have that amount subtracted from the amount forgiven under the PPP.

PAYCHECK PROTECTION PROGRAM (PPP) LOANS

Eligibility

 

What is a Paycheck Protection Program loan, and who qualifies?

The CARES Act has created the Paycheck Protection Program (PPP), an expansion of SBA’s 7(a) loan program for providing financial assistance to small businesses.

 

Businesses with fewer than 500 employees — including sole proprietors, independent contractors, and other self-employed individuals ­— all qualify for PPP loans. Most real estate brokers and real estate firms are therefore likely to qualify.

 

Borrowers are required to make a good faith certification that they have been affected by COVID-19 and will use funds to retain workers and maintain payroll and meet other debt obligations.

 

Am I eligible for a PPP loan if I structure my business as an S Corp?

Many brokers structure their businesses as S Corporations and pay themselves salaries from the corporation’s funds. Since the definition of “payroll costs” includes employee salaries, wages paid by an S Corporation will be considered payroll costs that can be covered by PPP loan proceeds.

 

How much money can I borrow with a PPP loan?

SBA will loan borrowers up to $10 million. The actual loan size borrowers receive will be determined by a formula based on average total monthly payroll costs over the prior year. For the formula to calculate your maximum PPP loan, please refer to the “Application Process” section below. For the formula to calculate the maximum amount of loan forgiveness you qualify for, see the “Loan Forgiveness Process” section below.

Loan Terms

 

What can I use the PPP loan proceeds for?

Once received, the loans may be used by brokers for payroll costs (including paid sick leave), employee salaries, rent expenses, mortgage expenses, utility expenses, insurance premiums and other debt obligations. This means that you can use the proceeds of the PPP loan to pay your employees, but not any of your agents who are independent contractors. If you operate as a sole proprietor, you can use the PPP loan proceeds as a substitute for the compensation you would normally receive from commissions. The SBA refers to this as “owner income replacement.” The borrower can spend the “owner income replacement” portion of the PPP loan on anything the borrower chooses. (Note: Sick leave tax credits under the Families First Coronavirus Response Act (FFCRA) are not included as “payroll costs” that can be paid with a PPP loan. C.A.R.’s Guidance for Employers regarding the COVID-19 situation provides more information on the FFRCA sick leave tax credits.)

 

What are the benefits of a PPP loan?

PPP loans are offered on highly favorable terms for borrowers: They are forgivable, they are guaranteed by the government, and payments are deferred. Additionally, no collateral is required to obtain a loan, and there is no personal guarantee requirement.

 

“Loan forgiveness” means that you are not required to repay your loan. More information about PPP loan forgiveness can be found in the ”Loan Forgiveness” section of the FAQ.

 

“Government guarantee” of a loan means that the government assumes the debt obligation for the loan if the borrower defaults. A government guarantees reduces the risk to the borrower. PPP loans are 100% guaranteed by the government through December 31, 2020. After that, PPP loans are 75% guaranteed for loans exceeding $150,000 and 85% guaranteed for loans equal to or less than $150,000. PPP loans will have a 1.00% fixed interest rate.

 

“Payment deferment” means that you are not required to immediately begin making payments to the lender. 

 

What are the PPP loan terms for any amounts that are not forgiven?

Any unforgiven amounts will be considered loans with the following terms:
 

  • A 1.00% interest rate

  • Payment deferment until: (a) whenever the amount of loan forgiveness is remitted to the lender; or (b) 10 months after the applicable forgiveness covered period if a borrower does not apply for forgiveness during that 10‑month period.

  •  A default loan term of 2 years for loans dispersed prior to the enactment of the PPP Flexibility Act, and 5 years for loans dispersed after the enactment of the PPP Flexibility Act.  However, lenders and borrowers can mutually agree to modify the maturity terms of a PPP loan.
     

Application Process

 

Where can I apply for a PPP loan?

The United States Small Business Administration (SBA) delegates the authority to make PPP loans to numerous lenders throughout the country. These lenders will be handling the PPP application process. Because PPP is an expansion of the already-existent 7(a) program, the financial institutions that offer 7(a) loans will be offering PPP loans as well. There are thousands of banks that already participate in the SBA’s lending programs, including numerous community banks. All of the largest banks (such as JPMorgan Chase and Bank of America) are offering PPP loans.

 

If you choose to apply for assistance, work with your lender to apply as soon as possible. The SBA has released a sample application form if you want to see the information that will be requested from you when you apply: https://home.treasury.gov/system/files/136/PPP-Borrower-Application-Form-Revised-June-12-2020.pdfHowever, please contact your lender to apply for a PPP loan and to obtain the real application form. You cannot apply for PPP loans on the SBA website.  The deadline to apply for a PPP loan is August 8, 2020.

How do real estate firms calculate their maximum PPP loan amount?

Formula for firms to determine eligible loan amount:

  • Step 1: Compute 2019 payroll by adding the following:

    • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c- column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; subtract any amounts paid to any individual employee in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States; and

    • 2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14), retirement contributions (Form 1040 Schedule C line 19), and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).

    • Payroll costs do not include compensation to agents who are independent contractors. Agents may qualify for their own PPP loans.

    • Payroll costs also do not include: Compensation of an individual employee in excess of an annual salary of $100,000; employer-side payroll taxes, railroad retirement taxes, and income taxes; any compensation of an employee whose principal place of residence is outside of the US; and qualified sick or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

  • Step 2: Calculate the average monthly amount (divide the amount from Step 1 by 12).

  • Step 3: Multiply the average monthly amount from Step 2 by 2.5.

  • Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

 

How do I calculate my maximum PPP loan amount if I am a sole proprietor without employees?
 

Formula for sole proprietors without employees:

  • Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan.

  • Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12).

  • Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5. Thus, if your Schedule C net profit amount is $100,000 or greater, you qualify for the maximum loan available to a sole proprietor without employees, which is $20,833.33.  ($100,000 ÷ 12 * 2.5)

  • Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

 

How do I calculate my maximum PPP loan amount if I am a sole proprietor with employees?

Formula for sole proprietors with employees:
 

  • Step 1: Compute 2019 payroll by adding the following:

    • Your 2019 Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value), up to $100,000 annualized, if this amount is over $100,000, reduce it to $100,000, if this amount is less than zero, set this amount at zero;

    • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c- column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; subtract any amounts paid to any individual employee in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States; and

    • 2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14), retirement contributions (Form 1040 Schedule C line 19), and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).

    • Payroll costs do not include compensation to agents who are independent contractors. Agents may qualify for their own PPP loans.

    • Payroll costs also do not include: Compensation of an individual employee in excess of an annual salary of $100,000; employer-side payroll taxes, railroad retirement taxes, and income taxes; any compensation of an employee whose principal place of residence is outside of the US; and qualified sick or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

  • Step 2: Calculate the average monthly amount (divide the amount from Step 1 by 12).

  • Step 3: Multiply the average monthly amount from Step 2 by 2.5.

  • Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

 

Does the calculation of payroll costs include the amount of commission I pay agents and report on a 1099 form?

No, payroll costs do not include compensation to agents who are independent contractors. Agents may qualify for their own PPP loans.

 

I tried to apply for a PPP loan at my bank, but the bank refused to consider my application or rejected it. Do I have any other options?

Many major lenders are currently only assisting borrowers who already have a business checking account with them. If you only have a personal checking account, these lenders will still not accept your PPP application. However, there are some PPP lenders, such as community banks, that are willing to take new customers. If you need assistance finding a PPP lender, SBA has created a “Lender Match” tool that allows you to search for lenders based on your Zip Code: https://www.sba.gov/paycheckprotection/find.

 

Additionally, many financial technology (“FinTech”) companies have started processing PPP loan applications. Before you apply for a PPP loan, it is important to review the options with your CPA or financial advisor. If you are considering a FinTech lender, you will want to determine if the FinTech company is actually submitting applications to a bank or to the SBA, not just collecting your contact information for marketing purposes. Also, you will want to determine if the lender has a specific timeline indicated in its written materials that promises to provide a response when you submit an application request.

 

Below are some resources and links that you can use to find a PPP lender. Please be advised that you are not required to seek services from any of the companies suggested. These companies are not in any way reviewed, supported or endorsed by C.A.R.

 

FinTech Companies Providing PPP Loans**

 

$60 billion of PPP funding has been set aside for community banks, credit unions, and community development financial institutions. However, be aware that many of these lenders will only be accepting applications from customers that have a pre-existing relationship with the lender, and/or the lender will be prioritizing applications from those customers. If you are considering applying for a PPP loan with one of these smaller lenders, here are some resources to locate a lender in your area.

 

Community Banks, Credit Unions and Community Development Financial Institutions**
 

 

** C.A.R. is not making any representations or warranties regarding the quality of their services. C.A.R. has not paid and will not pay the companies any compensation whatsoever for the level of service they have committed to providing. The companies will not pay C.A.R. or its members any referral fee or any other thing of value for being on this list. C.A.R. disclaims any and all liability related to the services provided by the companies on this list. Please be advised the list below may be amended at any time without notice.

 

What forms do sole proprietors need to provide to the lender to apply for a PPP loan?

Regardless of whether you have filed a 2019 tax return with the IRS, sole proprietors must provide the 2019 Form 1040 Schedule C with your PPP loan application to substantiate the applied-for PPP loan amount. You must also provide a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), or an invoice, bank statement, or book of record that establishes you are self-employed. Finally, you must also provide a 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020.

 

Can I apply for a PPP loan if I am a new broker that did not have any income during 2019?

The SBA has provided PPP application instructions for self-employed borrowers who were in operation on February 15, 2020 but not in operation between February 15, 2019, and June 30, 2019. In this case, your maximum PPP loan amount is equal to 2.5 times your average monthly payroll costs incurred in January and February 2020, plus the outstanding amount of any EIDL loan received between January 31, 2020, and April 3, 2020 that will be refinanced by the PPP loan.

 

The following methodology should be used to calculate the maximum amount that you can borrow:
 

  • Step 1: Fill out an IRS Form 1040 Schedule C for January and February 2020. The entries on the schedule must reflect all business income and expenses from those two months, with the exception that on Schedule C line 13 you must include only 1/6 of the amount of any annual depreciation and section 179 expense deduction attributable to investment made in those months, and you must include 1/6 of the amount of the 2020 depreciation deduction attributable to investment made in prior years.

  • Step 2: Take the net profit amount for January and February on Schedule C line 31. If this amount is more than $16,667 for the two months combined, set it to $16,667.

  • Step 3: If you have employees, add your employee payroll costs for January and February 2020 to the result in Step 2. Only include payroll costs for those employees whose principal place of residence is in the United States and up to $16,667 of cash compensation per employee.

  • Step 4: Divide the total by 2, and then multiply it by 2.5.

  • Step 5: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).
     

Your IRS Form 1040 Schedule C as completed must be provided to your lender when you apply for a PPP loan. This information should be consistent with what you will submit to the IRS and must be true and accurate in all material respects. You must also supply bank statements from your business account(s) for the months of January and February 2020 to substantiate your net profit amount from Schedule C. If you have employees, you also must provide payroll records from those two months and your IRS Form 941 for the first quarter of 2020.

I need help completing my PPP application. What should I do?
 

If you need assistance completing the PPP application, C.A.R. recommends seeking a CPA to provide that assistance. Pursuant to guidance from the Department of the Treasury, CPAs are not supposed to charge fees for assistance in preparation of a PPP loan application. However, keep in mind that CPAs are allowed to charge fees for advisory services, such as helping you decide which COVID-19 relief program is the best fit for your needs and circumstances.

 

How long will it take for me to get a PPP loan after I apply?
 

According to the Wall Street Journal, it usually takes SBA around one month to process a 7(a) loan. However, government officials have stated that the PPP process will be significantly expedited. According to the Department of the Treasury, the lender must make the first disbursement of a PPP loan no later than ten calendar days from the date of loan approval.

Loan Forgiveness Process

 

Updated on June 19: Step-by-Step Guide to PPP Loan Forgiveness for Borrowers With Employees and Step-by-Step Guide to PPP Loan Forgiveness for Borrowers Without Employees

How will I be able to obtain forgiveness for my PPP loan?

On June 17, the SBA posted a revised, borrower-friendly Paycheck Protection Program (PPP) loan forgiveness application implementing the PPP Flexibility Act.  In addition to revising the full forgiveness application, SBA also published a new “EZ” version of the forgiveness application. All independent contractors and sole proprietors without employees will be able to use the “EZ” version of the forgiveness application. REALTORS® operating through a corporation or an LLC with no employees (or for which they are the sole employee) will also be able to use the “EZ” form.

Most borrowers with employees will also be able to use the “EZ” version of the forgiveness application, as long as they did not reduce salaries or hourly wages by more than 25 percent for any individual employee during the Covered Period or Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020; AND as long as one of the following is true: (a) They did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period; OR (b) They were unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 related to COVID-19.

 

The real estate industry was adversely affected by statewide and local orders that were put in place in response to the COVID-19 pandemic. Thus, most real estate industry borrowers should be able to truthfully certify that they were unable to operate “at the same level of business activity” during the Covered Period as they were able to prior to February 15, 2020. This means real estate industry PPP loan borrowers should be able to qualify for the “EZ” Version of the loan forgiveness application if they didn’t reduce employee salaries by more than 25% during the Covered Period or Alternative Payroll Covered Period. If you qualify, filling out the “EZ” version of the loan forgiveness application is the preferred option because it is shorter and less complicated than the full application.

To apply for forgiveness of your PPP loan, you must complete the application and submit it to your lender. Check with your lender to determine if you will be required to submit a paper version of the application or if the lender will be offering an electronic application. Your lender may have additional instructions for submitting the PPP loan forgiveness Application or may require you to submit additional documentation.

 

When do I have to begin and end using PPP loan proceeds to qualify for forgiveness?

 

A borrower is eligible for loan forgiveness for amounts the borrower spends during a 24-week period (the “Covered Period”) which begins on the date the lender makes the first disbursement of the PPP loan to the borrower. For borrowers with employees, there is an “Alternative Payroll Covered Period” that you can use instead for payroll costs. The Alternative Payroll Covered Period is the 24-week  period beginning on the first day of the first pay period following the PPP loan disbursement date. Neither the “Covered Period” nor the “Alternative Payroll Covered Period” can extend beyond December 31, 2020.

You will choose the length of the Covered Period and Alternative Payroll Covered Period for your loan when you fill out the PPP loan forgiveness application. You do not need to take any action related to this decision prior to filling out the loan forgiveness application.

 

(NOTE: For loans disbursed prior to June 5, borrowers can also elect for a Covered Period and/or Alternative Covered Period that is 8 weeks long instead of 24 weeks long. The main reason to elect for an 8-week period is if the borrower is a business with employees that has quickly spent all PPP loan proceeds and wants to obtain loan forgiveness as soon as possible. Otherwise, most borrowers with employees and all borrowers without employees should elect for a 24-week Covered Period and/or Alternative Covered Period.)

When can I submit my loan forgiveness application?

A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan, including before the end of the Covered Period, if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.

 

If the borrower applies for forgiveness before the end of the Covered Period and has reduced any employee’s salaries or wages in excess of 25%, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period. This means that a borrower that chooses to file before the end of the Covered Period cannot contact the lender at a later date to mitigate any salary reductions after the loan forgiveness application has been filed.

What expenses can I spend the PPP loan proceeds on if I want the loan to be forgiven?

At least 60% percent of the PPP loan must be spent on “payroll costs” in order for the loan to be fully forgiven. For borrowers with employees, payroll costs include cash compensation paid to employees, employer contributions to employee health insurance, employer contributions to employee retirement plans, and amounts paid by the borrower for employer state and local taxes assessed on employee compensation.

The SBA is stating that PPP loan forgiveness for “payroll costs” for sole proprietors without employees is limited to “owner income replacement,” i.e., a proportionate share of the borrower’s 2019 net profit, as reflected in the individual’s 2019 Form 1040 Schedule C. The SBA has clarified that, pursuant to the PPP Flexibility Act, sole proprietors can now attribute up to 2.5 times their 2019 IRS Form 1040 Schedule C average monthly net profit as “owner income replacement.” Since this amount is equivalent to the maximum PPP loan size for borrowers without employees, these borrowers will now be able to classify 100% of their PPP loan proceeds as forgivable “payroll costs.” This means sole proprietors without employees will all be able to get their PPP loans fully forgiven simply by filling out and submitting the "EZ" PPP loan forgiveness application to their lender.

 “Owner Income Replacement” is capped at 2.5 months’ worth or $20,833 per individual, whichever is less, for a 24-week Covered Period. For C-corporation owner-employees, owner income replacement is capped at 2.5 times their average monthly 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf. However, for S-corporation owner-employees, owner income replacement is capped at 2.5 times their average monthly employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf can’t be separately added because those are already included in cash compensation.

(Note: The cap is based on 8 weeks’ worth or $15,385, whichever is less, for an 8-week Covered Period.)

 

For the loan to be fully forgivable, any PPP loan proceeds that are not spent on payroll costs must be spent on certain non-payroll costs: namely, mortgage interest payments, rent, and utilities. Borrowers with employees may have costs that fall into this category. However, keep in mind that pursuant to the PPP Flexibility Act, all loan proceeds for borrowers without employees can now be attributed as “owner income replacement,” and there is no need for these borrowers to attribute any of the loan proceeds to the non-payroll costs category.

 

The following non-payroll costs are forgivable:

  • Eligible mortgage interest costs include payments for any indebtedness or debt instrument incurred in the ordinary course of business that is a liability of the borrower, is a mortgage on real or personal property, and was incurred before February 15, 2020 (but not any prepayment or payment of principal).

  • Eligible rent costs include payments for rent obligations on real or personal property under a leasing agreement in force before February 15, 2020.

  • Eligible utility costs include payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
     

Additionally, per the SBA’s Interim Final Rule, sole proprietors must have claimed or been able to claim these expenses as deductible on their 2019 IRS Form 1040 Schedule C in order for them to be forgivable when paid with PPP loan proceeds.

Can a sole proprietor include a prorated portion of their home mortgage interest payments, home rent payments, and/or home utility bills as eligible non-payroll expenses if they have a home office and deduct these expenses on their IRS Form 1040 Schedule C?
 

At this point, the answer is unclear. Current SBA regulations do not explain whether home office expenses are eligible for forgiveness, and third-party commentators disagree. For now, C.A.R. recommends checking with your lender to see if the lender is willing to provide loan forgiveness in this circumstance. C.A.R. will update these FAQs if SBA provides more guidance on this issue.

 

Will my PPP loan forgiveness be reduced if I lay off employees or reduce their salaries?
 

Yes, in some cases. The PPP Loan Forgiveness Application incorporates several formulas to reduce a borrower’s loan forgiveness if the borrower laid off employees after receiving the PPP loan and/or if the borrower reduced employee salaries by more than 25% after receiving the PPP loan.

Borrowers have until December 31, 2020 to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. Nevertheless, there are ways for borrowers to achieve full PPP loan forgiveness even if they do not fully restore their workforce. Borrowers can exclude from loan forgiveness calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. If a borrower is going to claim on the forgiveness application that they tried to rehire an employee but the offer was rejected by the employee, the borrower is required to inform the applicable state unemployment insurance office of the employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer.

 

Additionally, borrowers can obtain full loan forgiveness if they were unable to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to COVID-19 related operating restrictions, as long as they do not reduce salaries or hourly wages by more than 25 percent for any employee during the Covered Period or Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020. Please refer to the updated PPP Loan Forgiveness Application Step-by-Step Guide for more information.

Do I need to submit any additional supporting documentation with my loan forgiveness application?
 

Yes. To verify payroll costs, you must submit the following documents along with your PPP Loan Forgiveness Application:
 

  • Bank account statements or third-party payroll service provider reports documenting the amount of Cash Compensation paid to employees.

  • Tax forms (or equivalent third-party payroll service provider reports for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period. This can include payroll tax filing reported (or that will be reported) to the IRS (typically, Form 941); and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported (or that will be reported) to the relevant state.

  • Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that you included in the loan forgiveness amount.

 

To verify full-time equivalent employees, you must submit payroll tax filing reported (or that will be reported) to the IRS (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported (or that will be reported) to the relevant state.

 

To verify non-payroll costs, you must submit:
 

  • For mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the covered period. Alternatively, you can submit lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.

  • For rent or lease payments: Copy of current lease agreement and receipts of cancelled checks verifying eligible payments from the Covered Period. Alternatively, you can submit lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.

  • For utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks or account statements verifying those eligible payments.

 

How will PPP loan forgiveness for “owner replacement income” work if I am a sole proprietor?

The 2019 IRS Form 1040 Schedule C that was provided by a sole proprietor at the time of the PPP loan application must be used to determine the amount of net profit allocated to the borrower for the Covered Period. Since the form is already provided by the borrower at the time the PPP application is submitted, no additional documentation will need to be submitted by the borrower to obtain  forgiveness for the portion of the loan used as the borrower’s income replacement. For sole proprietors without employees, “owner income replacement” can now encompass the entire principal of the loan, so no additional supporting documentation will need to be submitted to obtain forgiveness. The “owner income replacement” portion of the PPP loan can be spent by the borrower on anything, at any time. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, since such expenses may be paid out of their net self-employment income. Additionally, there is no requirement that a borrower must pay themselves in equal weekly installments to obtain loan forgiveness. There is nothing preventing a borrower from spending all PPP loan proceeds immediately upon receipt.

Will I need to pay income tax on the PPP loan proceeds if I use the proceeds for income replacement? Will employees need to pay taxes on the proceeds that they receive?
 

Any forgiven loan amounts under the SBA 7(a) PPP program will not count as income for the borrower for tax purposes.

 

Employees will likely need to pay income tax on the loan proceeds they receive, although the IRS has not yet issued any formal guidance on this. C.A.R. will provide updates when we receive more information.

 

Are expenses paid with forgiven PPP loan proceeds deductible from my 2020 federal income taxes?

In a notice published Thursday, April 30, the IRS announced that expenses paid with PPP loan proceeds that are forgiven cannot be deducted from the business’ 2020 federal income tax statement.

If my PPP loan is forgiven, will I still be required to pay interest?

If the full principal of the PPP loan is forgiven, the borrower is not responsible for the interest accrued.

I think my lender allowed my loan amount to be too high.  How will this affect forgiveness?

 

If your loan was too high (for example, if you received more than $20,833 despite not having any employees), then it might not be possible to obtain full forgiveness. The best option is to contact the lender to arrange returning any portion of the loan in excess of what can be forgiven.

 

I’m a sole proprietor without employees but indicated on my PPP application that I have 1 employee (myself). Will this affect my loan forgiveness?

As long as you did not receive a larger PPP loan than you are eligible for, this should not have any impact on loan forgiveness.

 

When will I know if my PPP loan is forgiven?

Lenders are required to issue decisions on borrowers' forgiveness applications to the SBA within 60 days after receiving them. A borrower may request that the SBA review the lender’s decision regarding forgiveness of the loan in the event that the lender determines that the borrower is not eligible for forgiveness. If the lender determines that the borrower is entitled to forgiveness of some or all of the loan amount, the lender must request payment from SBA at the time the lender issues its decision. SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to SBA. If SBA determines in the course of its review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, the loan will not be eligible for loan forgiveness. The lender is responsible for notifying the borrower of the forgiveness amount after the SBA makes its decision.

What happens if any portion of my PPP loan is not forgiven?

The remainder of the loan that is not forgiven (if any) will operate according to the loan terms described in the “Loan Terms” section above.

ECONOMIC INJURY DISASTER LOANS (EIDL)

 

Eligibility

 

What is an Economic Injury Disaster Loan, and who qualifies?

Economic Injury Disaster Loans (EIDLs) are targeted, low-interest loans to small businesses that have been severely impacted by the coronavirus. They are currently available to small businesses with fewer than 500 employees, including sole proprietors, independent contractors and other self-employed individuals. Most brokers will qualify for EIDLs.

 

Businesses that have experienced “substantial economic injury” are eligible for an EIDL. “Substantial economic injury” means the business is unable to meet its obligations and pay its ordinary and necessary operating expenses.

 

How much money can I receive from an EIDL emergency grant?

The CARES Act establishes an emergency grant to allow an eligible applicant who has applied for an EIDL to request an advance on that loan of no more than $10,000. SBA has started informing applicants that the amount of an EIDL emergency grant will be determined by the number of the applicant’s pre-disaster (i.e., as of January 31, 2020) employees. The EIDL emergency grant will be calculated as follows: $1,000 per employee up to a maximum of $10,000. This means independent contractors and sole proprietors without employees will only be eligible to receive an EIDL emergency grant of $1,000. An applicant would not be required to repay the advance payment, even if subsequently denied an EIDL loan. According to the CARES Act, SBA is supposed to distribute the emergency grant within three days of its receipt of the application. In practice, it is currently taking many weeks for the SBA to begin reviewing an EIDL application due to the massive number of submissions. Based on C.A.R.’s current information, applicants should not expect to receive an emergency grant within 3 days of sending in the application.

 

How much money can I receive for the full EIDL loan?

The full amount of the loan can be up to $150,000, with interest rates of 3.75% for for-profit businesses. You cannot request the specific amount of the loan - instead, the SBA determines how much you can borrow using a formula intended to approximate six months of your operating expenses.

Keep in mind that although the emergency grant does not need to be repaid, the remainder of the EIDL loan is not forgivable. Repayment plans are available — up to 30 years — as determined on a case-by-case basis.

 

Loan Terms

 

What can I use the EIDL funds for?

When applying for an EIDL loan, the applicant must certify that the emergency grant funds will be used to provide paid sick leave to employees unable to work due to the direct effect of the COVID–19 pandemic, maintain payroll to retain employees during business disruptions or substantial slowdowns, meet increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains, make rent or mortgage payments, and repay obligations that cannot be met due to revenue losses. The full EIDL loan proceeds may be used for working capital purposes, including payments of fixed debts, payroll, and accounts payable. They may not be used to refinance long term debt.

 

Are EIDL emergency grants taxable?

Until the IRS provides guidance on this question, the answer is unclear.

 

Application Process

 

See our step-by-step guide on applying for an EIDL

Where can I apply for an EIDL, and what information do I need?

A streamlined online application for EIDL loans has been made available by SBA at the following link: https://covid19relief.sba.gov/

 

You will need to provide the following information as part of the application process:

  • General information about the business, including EIN (or SSN for a sole proprietorship)

  • Gross revenues for the 12 months prior to the date of the disaster (which SBA designates as Jan. 31, 2020)

  • Cost of goods sold for the 12 months prior to the date of the disaster

  • Personal and contact information for business owners

  • Information about where to send funds (bank name, account number, and routing number)

 

How long will it take for me to get an EIDL after I apply?
 

According to the New York Times, it typically takes one to two weeks for the SBA to make a decision on an application, and up to a week after that for the full loan check to be disbursed. Because of the current application backlog, application approvals are likely to be significantly delayed.

 

Where can I find more information about EIDLs?

The SBA has an online guide, which is available here:

https://www.sba.gov/funding-programs/disaster-assistance

 

 

EXPRESS BRIDGE LOANS (EBL)

What is an SBA Express Bridge Loan, and who qualifies?

The Express Bridge Loan (EBL) program authorizes SBA express lenders to provide expedited guaranteed bridge loan financing on an emergency basis for disaster-related purposes to small businesses (including sole proprietors, independent contractors and other self-employed individuals) while those small businesses apply for and await long-term financing. Effective March 25, 2020, SBA expanded the program to apply nationwide. Independent contractors who have been adversely impacted by the COVID-19 emergency are eligible. The contractor must have been engaging in business when the declared disaster commenced and must meet all other 7(a) loan eligibility requirements.

 

SBA express lenders are only allowed to make EBL loans to eligible borrowers with which the lender had an existing banking relationship on or before the date of the applicable disaster. Check with your bank to determine if it is currently offering EBLs and to see if you qualify. Applying for an EBL will be done through your lender.

 

How much money can I borrow with an EBL, and what are the terms of the loan?

You can borrow up to $25,000, which can be used for “disaster-related purposes” to support the survival and/or reopening of your business. The maximum EBL loan term is 7 years. The lender may require the EBL borrower to pay the loan, in part or in full, if the borrower is approved for long-term disaster financing (such as an EIDL) that allows loan proceeds to be used for EBL loan reimbursement.

 

How long will it take for me to get an EBL after I apply?

Because an EBL loan is a bridge loan, first disbursement of the EBL loan must occur within 45 days of the lender’s receipt of an SBA loan number. If the first disbursement is not made within 90 days from receipt of an SBA loan number, the EBL loan will be canceled.

 

Where can I find more information about EBLs?

SBA’s EBL program guide is available here:

https://www.sba.gov/document/support--express-bridge-loan-pilot-program-guide

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