(April 8, 2020) Problems with the application process for PPP (Paycheck Protection Program) loans to small and medium-sized businesses are prompting the Federal Reserve and the Treasury Department to create a new application mechanism. Details are expected later this week, reports Today in Payments https://www.pymnts.com/news/2020/today-in-payments-fed-plans-new-facility-smb-ppp-loans-sba-computer-crash-tangles-process/.
The initial arrangement, with participating lenders taking applications for loans guaranteed by the Small Business Administration, has been bogged down by computer-system glitches, high demand, and confusion over loan requirements.
Among potential loan applicants and professionals advising them, the confusion was evident today during a hospitality-industry virtual roundtable sponsored by the Withum https://www.withum.com/ accounting firm. One participant likened the situation to “building a plane while they’re flying it.”
Profit or not?
A major question for timeshare resorts and their owners’ associations revolved around the question of a resort’s tax status as a for-profit or not-for-profit entity.
The PPP rules say no tax-exempt entities are eligible except those with 501(c)(3) status for federal income taxes. Associations in some states are treated as not-for-profit entities under state law but don’t have 501(c)(3) status under federal law.
Some associations file under Section 528, which exempts the resort’s membership income although the association itself is not exempt. Yet, if they check a box indicating a non-profit status, they are likely to be rejected.
Payroll is needed
Resorts seeking payroll loans, which later will be forgiven under the PPP rules, need to have a payroll. Some resorts have their own employees. Others lease their employees from a Professional Employer Organization (PEO, i.e., a leasing company), or contract with a management company that hires the employees and assigns them to work for the association.
Accountants in the round-table session advised owners’ associations in all of these categories to apply. Said one participant: “We don’t think these associations are non-profits if they are being billed by a management company or PEO” in a manner consistent with the CARE Act that created the PPP program.
Independent contractors who receive a 1099 income tax form instead of a W-2 should not be included in the PPP calculations. The program will forgive loan proceeds used to pay W-2 employees, but loan proceeds used to pay 1099 recipients will have to be paid back to the SBA. Nonetheless, some banks have been including 1099s on their PPP applications.
Other alternatives
Associations that aren’t eligible for or decide not to pursue a PPP loan can take advantage of two other resources: a Retention Tax Payroll Credit (RTPC) and an Economic Injury Disaster Loan (EIDL).
For a business forced to close by a government order, or one that has encountered a significant decrease in gross receipts, the RTPC allows a 50 percent refundable payroll tax credit for employees and independent contractors alike. The employer also can defer his/her portion of Social Security taxes from March 27, 2020, through the end of the year. Half of those deferred taxes will be due at the end of 2021, the other half at the end of 2022. The catch: Employers who take full advantage of that deferral can’t take the deduction for those deferred funds until they are paid.
An EIDL can offer working capital to businesses impacted by a disaster, through a loan of up to $2 million payable over a 10-year period. The interest rate is 3.75 percent or, for not-for-profit entities, 2.75 percent. To avoid double-dipping, employers who receive an EIDL after April 3 can’t apply for a PPP. Employers who already have EIDL funds and use them for payroll can’t use PPP funds for payroll.
The accountants in the Withum roundtable said employers should weigh their options, based on the amount of payroll and length of time involved. Most employers, they said, would be better off with PPP.
Don’t try this at home
Because of the complexity of these federal programs, resort boards and managers should not try to apply for them directly. Seek assistance from the resort’s professional advisors, i.e., attorneys, accountants, and—if applicable—the management company.
Most lenders are accepting applications only from their current customers.
Withum is carefully monitoring events as they evolve.
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