Payroll Protection Program for Family Business

© 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

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

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

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!

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)

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

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

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

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

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

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)

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

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)

• 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)

• 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

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)

Loan Uses
• Loan MAY Be Used in Covered Period For:
– Payroll
– Group Health Care Benefits
– Salaries, commissions, comp
– Mortgage interest
– Rent
– Utilities
– Other interest

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

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

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

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

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

Forgiveness Limitation
• Capped at:
– Principal amount
– $100,000 per employee
– Non-Payroll Cost amount can’t exceed 25% of forgiveness amount

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

• 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

• 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

• 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

• Increased By: wages paid to tipped employees (if meet certain
Fair Labor Standards Act requirements to be tipped employee)

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

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.

Thank you.
Brent Nelson, Partner
brent.nelson@rimonlaw.com
(520) 979-3839
BIO LINK

Payroll Protection Program for Family Business

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