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The Thomas Howell Ferguson Blog

Q&A on the CARES Act and Paycheck Protection Program (PPP)

In partnership with the Greater Tallahassee Chamber of Commerce, THF CPAs, Canita Gunter Peterson and Andrea Medley, held a webinar to discuss relevant issues pertaining to the CARES Act and Paycheck Protection Program (PPP) and provided a Q&A session.  You can watch the video above or read the transcription below.


In late March, the CARES Act, which has over 800 pages, was enacted into law. While it may seem daunting, we have broken it up into what we believe will be the most relevant points to you as a business owner and answer many of the questions that we have been receiving as a firm.

What is the Paycheck Protection Program (PPP)

The PPP loan program was designed to provide a direct incentive for businesses to keep their workers on the payroll.  If you continue to keep your employees on the payroll, and meet other criteria, then the loan may be forgiven.

Who Can Apply for the Paycheck Protection Program (PPP)?

  • For-profit businesses that have 500 or fewer employees and were in operation on February 15th, 2020.
  • Tax exempt not-for-profit organizations that are organized as a 501(c)3.
  • Individuals that operate as a sole proprietorship.
  • Individuals that operate as an independent contractor.

Once you determine if you are eligible for the Paycheck Protection Program (PPP), how do you determine how much you can borrow?

To determine this, you will need to look at your average payroll cost during the 2019 calendar year.  You will then take that number and multiply it by 2.5, which will generate your calculated loan amount.

What is included in the calculation?

  • Compensation to both your full time and part time employees.
    • This includes salary, hourly wages, commissions, bonuses, cash tips, or anything similar.
  • Payments made for vacation time, sick time, PTO, and things of that nature.
  • Healthcare coverage, including premiums.
  • Retirement claim benefits.
  • State and local taxes that were assessed on the employee’s compensation.

Who can’t be included in the loan calculation?

  • Any employee whose principal place of residence is outside of the United States.
  • Any individual employee in excess of an annual salary of $100,000.
    • It is important to note that the $100,000 cap is only on the cash compensation component. The non-cash benefits, such as health insurance and retirement benefits, will not be included in that cap.

If you are the owner of an S-corporation, are your wages included in the calculation?

Yes! If you receive traditional wages (meaning you receive a W-2 and you are including everything on your 941), then that will be a part of your payroll cost that will be included.  It is important that you take into consideration the $100,000 cap mentioned above.

Do you include the employer’s portion of payroll taxes in the calculation?


Are shareholder/member/partner distributions included in the payroll cost?

No. You are solely looking at employee salary and wages.

Can you include payments made to independent contractors or the form 1099 cost that you incur?

No. As of last week, these items were specifically excluded out of the guidance.  The reason for this is independent contractors will be eligible to file their own PPP loan.  Allowing them as a part of your business calculation would result in double-dipping into the fund.

What if I contract with a third-party payor, such as a PEO to process my payroll?

You do get to claim them as a part of your payroll calculation, as they will still be considered your employee. You may need to gather additional information for them to provide to your lender.

So, you’ve determined that you are eligible and determined your loan amount.  What next?

First, you will need to work and SBA 7A approved lender.  This will be your traditional local financial institution (includes banks and credit unions).  The SBA indicated when the program was announced that there were approximately 1,700 approved lenders, and that more lenders are being added daily.

Working with a financial institution that you currently have a relationship with will make the process easier on you.  If this is not an option for you, the SBA has a website that allows you to enter your zip code, and a list will be generated that will include all the lenders within a certain mile range.  The website can be found here.

How will the loans be distributed?

The loans will go out on a first-come, first-serve basis.  You will want to apply as soon as you can.  The first-come first-serve basis occurs when the financial application submits your application to the SBA, not when you submit your application to the financial lender.

It is important to know that all PPP loans look the same, and you can only apply for one loan.  You will not have different terms and conditions between different lenders.

One of the reasons that this loan is such a hot topic is due to the ability for it to be forgiven.  The maximum amount of a PPP loan is $10 million, with a fixed interest rate of 1%.  Any unforgiven portion has a term of 2 years.  You may defer a payment on the loan for six months from the date of disbursement.  There are no originating fees, no prepayment penalties, and no collateral or guarantees are required.

What can the PPP loan funds be used for?

Generally, it will be used for payroll costs.  It will include things like the group term health insurance, retirement benefits, mortgage interest, rent, and utilities.

How do I qualify to make my PPP loan forgivable?

The amount of loan forgivable can be up to the full principle amount of the loan, including any accrued interest.  If the following conditions are met, you will not be responsible for any loan payments.

  • The loan must be used for payroll costs, mortgage interest, and utilities.
  • Your employee and compensation levels must be maintained.
    • Your loan forgiveness will be reduced if you decrease your full-time equivalent employee headcount, or if you decrease salaries and wages by more than 25% for any employee that has made less than $100,000.
    • You will have until June 30th, 2020 to restore your employment and salary levels for any changes that were made between February 15th, 2020 and April 26th, 2020.
  • Non-payroll costs, such as mortgage interest, rent, and utilities, may not exceed more than 25% of the loan forgiveness amount.

How do I request loan forgiveness?

To request forgiveness, you will submit a request to the lender that serviced the loan.  It will need to include documents that verify the number of full-time equivalent employees, pay rate, as well as payment on eligible mortgage interest, leases, rent, utilities, etc.

It is very important right now that you develop a good way of tracking these costs.  Keep meticulous records on how the funds are spent and gather your information quickly so that you can get your loan forgiven quickly.  We are expecting additional guidance on the loan forgiveness aspect of this, so we anticipate there will be more clarity in the coming weeks.

Will the money used to fund the PPP loan run out?

As of Tuesday, the SBA announced that they had approximately $70 million in funds, which only includes the applications that had been filed with the SBA.  We believe that the funds will go quickly and are hoping that Congress will move to allow more funds for this program.

What if you need additional funds? Or need funds for something other than the items that the PPP loan provides for?

You may want to consider another loan offered by the SBA: the Emergency Injury Disaster Loan Program (EIDL).  You will apply directly to the SBA for this loan.  It will provide up to $10,000 of immediate economic relief to a business that is currently experience temporary difficulties.

This loan of $10,000 will not have to be paid back.  It is important to note that you are allowed to have an EIDL loan and a PPP loan at the same time, but the $10,000 grant will be deducted from any forgivable portion of the PPP loan that is finalized.

The interest rate for the EIDL is 3.75% for profit entities, and 2.75% for not-for-profit entities.  You may receive up to $2 million, and you don’t have to have any collateral or guarantees if you only need up to $25,000.  There are also no prepayment penalties or origination fees.  As this is a longer-term solution, the term can be up to 30 years, and you may defer payment up to one year.

Tax Incentives for Individuals and Businesses

What do these incentives provide?

These incentives provide certain tax benefits and tax law changes.

Who is eligible for the recovery rebate?

If you are an individual who resides in the United Sates, with an adjusted gross income of up to $75,000 a year, you are eligible for a $1,200 rebate.  If you file married jointly and have an adjusted gross income of up to $150,000, you are eligible for a $2,400 rebate.  There is also an additional $500 rebate per qualifying child.

If you earn over those threshold amounts, the rebate will be reduced until it gets to $0. There are calculators out there that will calculate what your rebate will be.

What is the charitable donation incentive?

If you are a standard deduction filer, meaning that you take the standard deduction on your tax return, you will be allowed a $300 additional deduction for any cash contributions made.  Any non-cash contributions do not count.

If you itemize your deductions on your return, you will not get the additional $300 deduction.  However, the limit of charitable deduction on your itemized deduction has increased to 100%.

What are the employer related benefits?

Employers will be allowed to defer paying the employer portion of certain payroll taxes through the end of 2020.  The deferral is for the employer portion of the Social Security Payroll Tax.

If you defer payment for the Social Security Payroll Tax, when do you have to pay it?

The referral will be due in two equal installments.  The first installment of 50% of the balance will be due at the end of 2021.  The remaining 50% will be due at the end of 2022.  It is very important to note that this deferral is not available if your take advantage of the debt forgiveness under the PPP loan.

So, you will not get a deferral of payroll taxes if you take advantage of the debt forgiveness under the PPP loan.

What is the Employer Retention Credit?

This credit is available to certain employers carrying on business in 2020, who have had to close due to COVID-19.  This credit is intended to allow companies to continue to pay their employee wages during the period that they are closed.

If you fall under the Employer Retention Credit category, what amount will the credit be?

The credit will be equal to 50% of qualified wages, with a maximum of wages as $10,000 per employee.  These wages will be paid anytime after March 12th, 2020 through December 31st, 2020.

This credit is not available to employers receiving the PPP loan.

Other Business Tax Changes

What is the technical correction to the 2017 Tax Act?

The 2017 Tax Act had a technical error that did not allow qualified improvement property to be eligible for accelerated depreciation.  The CARES Act corrected this, so that now this improvement property is eligible for accelerated depreciation.  This accelerated depreciation is also now retroactive.  Because of this aspect, if you had to capitalize some of these improvements because of this error, this year you will be able to take a tax deduction.

There also is a change to the deductibility of interest expense.  The 2017 Tax Law change from the Tax Act provided for a limitation on interest expense deductibility that was based on adjusted taxable income.  The CARES Act is temporarily increasing this limit for 2019 and 2020 from 30% of adjusted taxable income to 50% of adjusted taxable income.  This change may allow, depending on the situation of your threshold, a greater interest expense deduction for you in 2019 and 2020 on your tax returns.

Did the CARES Act have anything to do with NOLs?

The 2017 Tax Act has some tax changes to the NOL for corporations.  This limited NOLs to 80% of taxable income and eliminated the ability to carryback in NOLs for most corporations.  The CARES Act temporarily reverses these elements and adds a 5-year carryback.

That means NOLs generated in 2018, 2019, and 2020 are eligible for a 5-year carryback and are not subject to the 80% limitation of taxable income for carrybacks or carryforwards.  If you have generated an NOL in 2018, 2019, or 2020, those for corporations are at a 21% tax rate.

Make sure that you are talking with tax advisers on what these items mean for you and your taxes, and what the impact will be for you and your company.

Retirement Plans

What is the new distribution category that has been added?

There is now a new distribution category that you can add to an existing plan.  You can permit an in-service COVID-19 distribution for a participant’s vested account balance without any regard to any of the current restrictions that you may have on withdrawals.

This distribution can be made during the calendar year of 2020. It must be before December 31st, and it must be for an eligible participant.

Who is considered an eligible participant?

The following are considered eligible participants:

  • Someone who is diagnosed with COVID-19.
  • Someone who has a spouse or dependent diagnosed with COVID-19.
  • Someone who has experienced adverse financial consequences as a result of quarantine, furlough, layoff, reduction of work hours, business closure, or lack of childcare.

Who will certify if I am eligible?

The participant will self-certify that they are eligible.  You will need to be able to certify that you have adverse financial consequences due to one of the above items.

What will these distributions look like?

  • These distributions will be limited to $100,000.
  • They will not be subject to the 20% mandatory tax withholding that you typically have.
  • They will be subject to a 10% federal tax withholding, unless you want a different or higher amount.
  • They will be exempt from the 10% early withdrawal penalty that you typically see for participants who are 59.5 or younger.
  • The amount will be taxable over a 3-year period.
    • You can repay these distributions any time over the three years.
    • If you repay the distributions that you have already included in your taxable income, you can go back and amend your tax return to get that money back.

What loan provisions were added?

If a participant wants a loan, your current limit may be temporarily increased to the lesser of $100,000, or 100% of the participants vested balance.  This will only apply to loans made on or before September 23rd, 2020.  It will only be for the same group of eligible participants that were mentioned above.  You can also modify your plan to allow participants who currently have loans to delay those payments for up to a year.  Interest will continue to accrue during this time period, but you are able to extend the term of that loan for up to another year.  If your plan does not currently allow for loans, you need to add that provision to your plan document.

What changes were made for required minimum distributions?

Participants who turned 70.5 prior to 2019 will not be required to receive an ongoing RMD for 2020.  Participants who turned 70.5 in 2019 and did not receive their first RMD for 2019 on or before January 1st, 2020, will not have to receive their RMDs for 2019 or 2020.

If a 2020 RMD has already been issued, you can roll it over into an IRA or another employer plan and not pay tax on those funds.

These provisions can be adopted immediately, and you can amend your plan later.


For additional information and articles related to the impacts of COVID-19, please click here.


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