- Published: Monday, 06 April 2020 22:10
The following Q&A is a supplement to the April 3 COVID-19 relief webinar hosted by the Maryland Thoroughbred Horsemen's Association, Pennsylvania Thoroughbred Horsemen's Association and Pennsylvania Horsemen's Benevolent and Protective Association. The questions are listed in the order of submittal.
Disclaimer: Below are questions the MTHA received after the webinar and the answers are based on information from the two Maryland presenters, Bill Shaughnessy and Amanda Chong, attorneys with Gordon Feinblatt LLC of Baltimore. These answers are provided for general information only. This is not legal advice. Anyone seeking legal advice should reach out to an attorney directly with respect to your particular situation.
Question: I am truly struggling with this application for the Paycheck Protection Program (PPP) loan. My average payroll per month is $4,110.00 x the 2.5 = $10,275. I understood that what you didn't use for payroll would be decided later whether it would be forgiven or not. Is the 2.5 the 25% extra they are allowing for other expenses? Should I add my income to the loan amount? Should I add 25% for my business expenses such as hay, straw, and the blacksmith?
Answer: The borrower will have to request loan forgiveness at a later time. The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of mortgage interest, rent and utility payments incurred over the eight-week period following the date of the loan.
We are not aware of any interpretation providing that the 2.5 represents the 25% in non-payroll costs for which a borrower can attribute to the loan forgiveness amount. In general, the loan amount under the PPP is the lesser of either $10 million or 2.5 times you payroll costs. The SBA does plan to issue more guidance on loan forgiveness.
You should not add your own income to the loan amount, nor should you add 24% for your business expenses. According to the Small Business Association's Interim Final Rule, the following methodology should be used to calculate the maximum loan amount you can borrow.
Step 1: Determine the aggregate payroll costs from the last 12 months for employees whose principal place of residence is the U.S.
Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between Jan. 31, 2020, and April 3, 2020, less the amount of any "advance" under an EIDL COVID-19 loan (because it does not have to be repaid).
The following are some examples the SBA has provided.
Example 1: No employees make more than $100,000.
Annual payroll is $120,000
Average monthly payroll is $10,000
Multiply by 2.5 = $25,000
Maximum loan amount is $25,000
Example 2: Some employees make more than $100,000.
Annual payroll is $1,500,000
Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
Average monthly qualifying payroll: $100,000
Multiply by 2.5 = $250,000
Maximum loan amount is $250,000
Example 3: No employees make more than $100,000, outstanding EIDL loan of $10,000.
Annual payroll: $120,000
Average monthly payroll is $10,000
Multiply by 2.5 = $25,000
Add EIDL loan of $10,000 = $35,000
Maximum loan amount is $35,000
Example 4: Some employees make more than $100,000, outstanding EIDL loan of $10,000.
Annual payroll is $1,500,000
Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
Average monthly qualifying payroll is $100,000
Multiply by 2.5 = $250,000
Add EIDL loan of $10,000 = $260,000
Maximum loan amount is $260,000
Question: I have a question about Form 1099. I printed out the PPP form and on the certification paragraph it definitely states in the first item "applicant had employees for whom it paid salaries and payroll taxes or paid independent contractors as reported on 1099—misc. Your panelist was very clear about no 1099s. What am I missing here?
Answer: 1099 contractors are eligible to apply for the PPP loans. 1099 contractors are not, however, eligible to apply for Maryland's COVID-19 loans and grants. The state loans and grants are different from the federal PPP loans.
Question: If I heard correctly, that if one applies for an EIDL loan and is denied the loan, the $10,000 Emergency Advance does not have to be returned. Did I hear that right and what's the catch?
Answer: Applicants do not need to repay any advanced amounts spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue loss, even if the SBA subsequently denies the business an EIDL. Based on what we know, there does not seem to be any "catch." These advances seem to truly operate as grants.
Question: I owe the Treasury for business taxes from last year and was establishing a payment arrangement. Am I precluded from applying for funds from the PPP program?
Answer: According to the SBA Interim Final Rule, you are ineligible for a PPP loan if:
- You are engaged in any activity that is illegal under federal, state, or local law;
- You are a household employer (individuals who employ household employees such as nannies or housekeepers);
- An owner of 20% or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or
- You, or any business owned or controlled by you or any of your owners, has ever obtained a direct or guaranteed loan from SBA or any other federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
By submitting the PPP loan application, a borrower certifies, among other things, that neither the applicant nor any owner of the applicant have within the past three years been "delinquent on any amounts owed to the U.S. Government or its instrumentalities as of the date of execution of this certification." It is our understanding that, unless an individual has reached a payment arrangement with the Treasury and is current on those payments, the unpaid taxes would be considered "delinquent ... amounts owed to the U.S. Government" and would not be able to make this certification, thereby preventing participation in the PPP program.
The SBA has not clarified whether an applicant who cannot make this certification can obtain a written statement of exceptions from the SBA permitting participation in the PPP. The borrower should consult their SBA 7(a) lender for guidance on completing the PPP application in light of this certification.
Question: I have tried unemployment, and the PPP loan. Last Friday, the banks said they were not prepared to take applications, and Monday they said they have stopped taking applications. Unemployment said they are not ready for 1099 workers. Disaster loans say they will email me shortly. It has been two weeks. Any other ideas?
Answer: Your question says: "Unemployment said they are not ready for 1099 workers," so I assume that you are an independent contractor. Independent contractors cannot begin applying for PPP loans until April 10, 2020. As for Economic Injury Disaster Loans, there is no definitive time-frame for when the SBA will process applications. However, if an applicant has requested an Economic Injury Disaster Advance, in addition to a loan under the disaster program, the SBA is supposed to provide those advances within three business days of receiving the application. Unfortunately, independent contractors are not eligible for Maryland's Small Business COVID-19 Emergency Relief loans or grants.
If you are in need of urgent cash while waiting for a decision on the disaster loan and you did not request an Economic Injury Disaster Advance, you may qualify for an SBA Express Bridge loan. The Express Bridge Loan program allows SBA Express lenders to provide expedited financing to small businesses located in declared disaster areas. Express Bridge loans are intended to be interim loans. Businesses use these funds for disaster-related purposes while they apply for and await long-term financing.
Only lenders that were already participating in the SBA Express program at the time of the disaster can issue Express Bridge loans. These lenders may issue Express Bridge loans only to eligible small businesses that had an existing banking relationship with the lender at the time of the disaster. The maximum bridge loan amount is $25,000 and the maximum maturity is seven years. Lenders may require a borrower to pay down or pay off the Express Bridge loan if the borrower is approved for long-term disaster financing that may be used to reimburse the Express Bridge loan. The loan must be used to support the survival and/or reopening of the small business within the affected county.
For complete details about the Express Bridge loan program, read the program guide here. The program expires Sept. 30, 2020.
Question: If my payroll now is larger than the average from last year, which can I use?
Answer: For non-seasonable employers, borrowers can calculate their aggregate payroll costs based on either the previous 12 months prior to the date of the loan application or from calendar year 2019.
Question (four parts):
(a) I have several trainers who are single member S Corporations. Some issue 1099s to themselves and some just pass it through as officer compensation which they report on a Schedule C. Either way, the amount subject to Social Security is always less than the total profit the company makes, which is why you form the S Corporation to begin with. When applying for the PPP, I can only use the amount from the Schedule C for their SE income, right?
(b) I usually report my trainers' purse earnings as royalties/other income on Schedule E, often allocating a reasonable amount to Schedule C for feed, vet, blacksmith, labor, etc., that can't be easily differentiated from expenses for outside owners' horses. Again, to reduce Social Security liability. I have done this for 30 years. So I see in some PPP banks' instructions that Schedule Es should be included when calculating total net income.
(c) What if someone is a sole proprietor and has employees? Then can the PPP cover one month of Schedule C profits—and going back to my earlier question, Schedule E purse profits—which would be added to payroll paid to other employees?
(d) I file a Schedule C and I have employees. What is the best way to maximize grant relief? Can my net earnings be added to the wages?
Answer (two parts):
(a) This answer addresses questions (a), (c) and (d). Assuming that the applicant is the individual taxpayer, and not an entity, the self-employment income reported on a Schedule C and any W2 wages paid to employees would be used in the payroll cost calculation.
(b) Again, assuming that the applicant is the individual taxpayer, and not an entity, only the self-employment income reported on a Schedule C would be used in the payroll cost calculation. The SBA has not provided any clarifying guidance on the issue of whether K-1 earnings reported on a Schedule E would qualify as eligible payroll costs. It is our opinion based on existing federal guidance that, even though K-1 earnings are treated by the IRS as self-employment income, such earnings would not seem to qualify as eligible "payroll costs" as it is not earnings from a sole proprietorship.
Question: How is the loan to be spent in order for it to be forgiven. What expenses?
Answer: According to the SBA, the loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). The loan funds must be spent within the eight weeks following loan disbursement for the proper expenses. For the self-employed, eligible "payroll costs" include wage, commissions, income, or net earnings from self-employment, and salary, wages, commissions, or similar compensation paid to any W2 employees. Eligible "payroll costs" also include any payment for vacation, parental, family, medical, or sick leave, payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums and retirement, and payment for state and local taxes assess on compensation of employees.
Payroll costs in the form of cash compensation are capped at $100,000 on an annualized basis for each employee or the self-employed. Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
Question: I have a client with both breeding and racing partnership entities. Over 40 separate entities. I just want to confirm that the racing entities cannot file for an EIDL grant, while the breeding entities can..Is this correct?
Answer: In the absence of further guidance from the federal government, we can only give you our best interpretation of existing rules.
EIDL loans are issued under Section 7(b) of the Small Business Act, which pertains to disaster loans. Section 7(b) excludes "agricultural enterprises" from the types of businesses that may obtain Section 7(b) disaster loans. Regulations under Section 7(b) define "agricultural enterprises" as follows: "Agricultural enterprise means a business primarily engaged in the production of food and fiber, ranching and raising of livestock, aquaculture and all other farming and agriculture-related industries." 13 CFR 123.201.
Apart from the above definition, there is little guidance as to whether horseracing businesses would be characterized as "agricultural enterprises" that would not be eligible for 7(b)/EIDL loans. Given the lack of guidance under SBA regulations, some advisers look to other federal statutes to gain insight as to whether employees in the horse racing industry might be considered part of an "agricultural enterprise."
Under the Fair Labor Standards Act (FLSA) there are exemptions from overtime wage requirements afforded to certain employees engaged in "agriculture." There is some specific guidance given with regard to activities relating to race horses. 29 CFR 780.122 provides:
29 CFR § 780.122 - Activities relating to racehorses.
§ 780.122 Activities relating to race horses.
Employees engaged in the breeding, raising, and training of horses on farms for racing purposes are considered agricultural employees. Included are such employees as grooms, attendants, exercise boys, and watchmen employed at the breeding or training farm. On the other hand, employees engaged in the racing, training, and care of horses and other activities performed off the farm in connection with commercial racing are not employed in agriculture. For this purpose, a training track at a racetrack is not a farm. Where a farmer is engaged in both the raising and commercial racing of race horses, the activities performed off the farm by his employees as an incident to racing, such as the training and care of the horses, are not practices performed by the farmer in his capacity as a farmer or breeder as an incident to his raising operations. Employees engaged in the feeding, care, and training of horses which have been used in commercial racing and returned to a breeding or training farm for such care pending entry in subsequent races are employed in agriculture.
From the above regulation, activities "on the farm" are considered "agricultural" and activities "off the farm" such as a training track at a racetrack are not considered "agricultural." We emphasize that the above regulation deals with what is "agriculture" for purposes of the FLSA, not what is an "agricultural enterprise" for purposes of the SBA's EIDL. It is, however, indicative of how "agriculture" might be interpreted for purposes of an EIDL loan.
Without knowing what you mean by "breeding entities," if any of the activities involve the breeding and raising of horses "on the farm, then it would appear that the breeding entities would not qualify for EIDL loans. Racing activities related to training and racing "off the farm" (at racetracks and training centers) would not appear to be disqualified from such loans as "agriculture." Also, the exclusion related to revenue from "legal gambling activities" appears not to apply to the racing entities, but this also is unclear.
This is a complex area and you should seek specific advice and guidance from your personal accountant and legal advisers. You might want to apply for both programs (EIDL and PPP). You can only get relief from one, but you might get clarity that we cannot provide.
Question: I was informed about the PPP loan program but I am not sure as to what or who qualifies. I have currently 4 horses in training at Laurel, all Pennsylvania-bred. Although my spouse and me claim expenses every year for our breeding/racing operations with the IRS, I am not sure whether we would qualify for this PPP assistance program. We are both named as breeders, but they race only in my name. We also live on the West Coast, so other than bills we do not have day-to-day involvement directly other than via electronic means.
We have, however, a company we own that provides professional (mainly consulting) services, but currently not involving any horse racing-related activities. It potentially could be used as an umbrella for a PPP loan, where all of the breeding/training activities would be included (e.g. bills paid for and income, etc.)
Can you provide me some guidance here as to the possibilities that we can pursue, with the constraints I describe? Or point us in the right direction?
Answer: If you do not have any W-2 employees, your only option is to apply as an individual with self-employment income and who files a Form 1040, Schedule C. Without knowing exactly what your “expenses” constitute, we note that there is a possibility that you may not be able to use the PPP loan proceeds to cover your claimed expenses. For the self-employed without employees, PPP loan proceeds are to be used for the following:
- Owner compensation replacement, calculated based on 2019 net profit. Please note that forgiveness of owner compensation is limited to eight weeks’ worth (8/52) of 2019 net profit, but excluding any qualified sick leave or family leave equivalent amount for which a credit is claimed under the Families First Coronavirus Response Act (FFCRA);
- The following business expenses:
- Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property (e.g., the interest on your mortgage for the warehouse you purchased to store business equipment or the interest on an auto loan for a vehicle you use to perform your business)
- Business rent payments (e.g., the warehouse where you store business equipment or the vehicle you use to perform your business)
- Business utility payments (e.g., the cost of electricity in the warehouse you rent or gas you use driving your business vehicle)
- Please note that you must have claimed or be entitled to claim a deduction for the above expenses (e.g, mortgage interest payments, business rent and utility payments) on your 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the first disbursement of the loan. For example, if you did not claim or are not entitled to claim utilities expenses on your 2019 Form 1040 Schedule C, you cannot use the proceeds for utilities during the covered period;
Interest payments on any other debt obligations that were incurred before February 15, 2020. SBA Guidance is clear that such amounts are not eligible for PPP loan forgiveness;
if you received an SBA Economic Injury Disaster Loan, refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020 (maturity will be reset to PPP’s maturity of two years).
SBA guidance makes clear that, for purposes of loan forgiveness, 75% of the PPP loan proceeds must be used to cover “payroll costs,” which includes net earnings from self-employment. Although the SBA’s Economic Injury Disaster Loan Program is no longer accepting new applications, should that change, you should consider potentially applying for a disaster loan.