Please note: On April 8, 2020 we added the update below to this article originally published on March 30, 2020
Much has transpired since we wrote our original “20 Question Answered” piece. It has only been a little over a week but it seems like it’s been a year! After much guessing on the part of businesses, their accountants and lenders, the Small Business Administration issued a loan application with instructions, then changed it to final along with issuing guidance in an “Interim Final Rule”, revised the final application one more time and also issued an 18-point FAQ that addressed many, but not all, of the questions that the previous guidance and Interim Final Rule failed to answer.
Here are some of the major changes we gleaned from these updates, rules and guidance:
- The “go-live” date was April 3rd. I use the term “go-live” loosely. The answer to question 2 of our article stated that the loans would be available “no later than April 11th and probably sooner”.
- We received additional guidance that modified our answer for Question 6: Independent contractors are no longer eligible to be included in payroll costs and the documentation needed to be provided to qualify for the loans now includes payroll records and payroll tax returns.
- Our answer to Question 19 said that the term of the loan was up to 10 years; it was set at 2 years. We also said that the rate would be up to a maximum of 4%. It was finally set at 1% after initially being set at .5%
- There was much confusion over what period to use in calculating average monthly payroll. The instructions to the form said use the 2019 calendar year. The Interim Final Rule said use the twelve trailing months. The 18-point FAQ finally said use either one.
- Another question we all had was how did non-wage compensation, such as health insurance and retirement benefits paid for an employee, figure into the $100,000 cap on compensation? Were they included and thus limited, or could they be added on top of the $100,000 wage? The 18-point FAQ came through on this again and said you get benefits on top of the $100,000 wage limit in your computation of payroll costs.
- The last major clarification we received had to do with whether we use gross payroll or payroll net of employee withholdings of FICA, medicare and income tax. A literal reading of the Act led many to say net payroll, including ADP and other payroll vendors. The 18-point FAQs came to a rescue again and clarified that we are to use gross payroll.
We will update you on major changes as we receive them.
Original article posted on March 30, 2020
One of the most exciting and most confusing provisions of the CARES Act, which was signed into law by the President on Friday, March 27th, is the Paycheck Protection Program.
Since many of you are at home and spending more time with your families, we thought it appropriate to answer all the critical questions you may have by playing the good ol’ family game of 20 Questions. Up for it? Here we go!
- What are these new SBA loans that I keep hearing about? The CARES Act created the Paycheck Protection Program Loans. Let’s just call them PPPL. The SBA may guarantee up to $349 billion in loans to small businesses which are defined as generally having fewer than 500 employees.
- When will these loans be available? No later than April 11th. Probably sooner.
- What do I have to do to apply for the loan? Call your banker. We expect these loans to be very popular and you want to get on the list. In the application, you will have to certify that the loan request is necessary because of the uncertainty caused by the Coronavirus. The statute presumes this to be true.
- How do I have to use the proceeds from the loan? You may use the loan proceeds to pay for payroll costs, debt service, rents, and utilities.
- Am I eligible?
a. Do I have to have employees that I have laid off? I’m not in a highly impacted industry. No. The goal of this program is to encourage employment and prevent layoffs. Because of the economic uncertainty caused by the Coronavirus, all businesses are considered to be impacted.
b. I am a sole proprietor with only two employees. Can I count my self-employed income as well? Yes. You can count up to $100,000 in self-employment earnings.
c. I am an employer with 200 employees. Our company is a subsidiary of a holding company which controls three other sister companies each with 200 employees. Do we look at each sister company separately to see if we qualify? Maybe. While the affiliation rules still apply for many employers, each location is looked at separately for the accommodation and food service industries. Franchise businesses are exempt from the affiliation rules as well.
- What documentation will I have to provide to qualify for the loan? You will need to demonstrate that your business was operating on February 15, 2020 and that you have employees or independent contractors.
- Will I have to provide a personal guarantee or collateral? No, and no.
- Will I have to pay any application or loan fees? No. Your SBA lender will be paid a fee between 1% and 5%, but it will be paid by the SBA. It will not be added to your loan amount.
- Which lending institutions will offer these loans? Virtually all SBA lenders will be originating these loans. Many lenders who don’t currently handle SBA loans will be in the near future. Both the SBA and the Treasury may authorize additional lenders.
- How can I calculate what the maximum amount of the loan will be? Two and a half months of payroll. Just kidding. Of course, it’s not that simple. If you have been in business for over one year, the loan amount is generally 2.5 times your average monthly payroll cost over the 12 months prior to the loan funding date. And, there’s a wrinkle. Payroll costs are calculated on an employee by employee basis and are limited to $100,000 per employee. In other words, the maximum loan amount is $20,833 per employee or $100,000 times 2.5 divided by 12.
- I hate to ask, but how are “payroll costs” defined? Payroll costs include almost anything that you pay to or for your employees, except expense reimbursements. It includes salary, wage, commission, vacation, leave (sick, parental, or family), health care benefits (including employer paid insurance premiums), retirement plan contributions, and State payroll taxes. (Federal payroll taxes may be subject to other deferrals and forgiveness.)
- I have been considering getting the SBA EIDL loan. What is the difference between that loan and this one, and how do they relate to each other? This PPPL covers up to 2.5 months of payroll costs and is expected to be forgiven. Amounts not forgiven will be amortized over 10 years. The EIDL may be for up to $2,000,000 and is amortized over 30 years. It may be for payroll and/or other business purposes. A Coronavirus related EIDL may be rolled over into a PPPL, but not the reverse. Generally, there is no double dipping. So, if you get an EIDL after January 31, 2020 for payroll or payroll related costs, it appears that you will not qualify for a PPPL.
- How do the Employee Retention Credit and the Sick/Paid Leave Credit provisions work with this loan? Again, just think no double dipping. When you take either of these credits on your payroll tax returns, you may need to reduce your payroll costs when calculating the loan forgiveness amount. See question 15 below.
- The law says that the loan is for expenses from February 15th to June 30th. If I spend more during this period, do I get more of a loan? No. The loan is limited to 2.5 times your average monthly payroll as described in question 10. If you need additional financing, you may qualify for an EIDL, as well. EIDLs will not be forgiven.
- Is it really true that I will be forgiven a portion of the loan without tax consequences? If so, how can I estimate what the amount of forgiveness will be? Yes. Loan forgiveness under this program is excluded from taxable income. In the 8 weeks after your loan is funded, you may be forgiven payroll costs, mortgage interest, rent and utilities. Payroll costs are net of any other loans and tax credits provided by the federal government. Only the principal of the PPPL may be forgiven, not the interest. Reductions in headcount, hours worked, and rates of pay may limit your forgiveness. To maximize your loan forgiveness, you should keep your workforce employed as much as possible.
- Do I have to provide proof that I would have laid off employees in order to get loan forgiveness? What proof will I need to provide? No. Imminent layoffs are not a requirement for loan forgiveness. You will need to provide: federal and state payroll tax returns; proof of payment, both for payroll and other expenses; and, a certification that the provided documentation is correct.
- When will I need to provide this proof and when will the loan be forgiven? This is unclear. The Administrator of the SBA has until April 26, 2020 to issue regulations. We do know that the lender has a maximum of 60 days to decide on any application for forgiveness.
- When will I need to start paying back the portion of the loan not forgiven? Payments on the unforgiven portion will be deferred six months and may be deferred up to 12 months from the loan origination date.
- What will be the terms (interest rate, term of payback) of the unforgiven portion? Principal and interest will be fully amortized over a term of up to 10 years. The interest rate will not exceed 4%.
- This sounds too good to be true. Yes, it does, but it it true!
So how did you do? As you can gather by now, nearly every small to medium sized business is a big winner under the PPP.
Your action steps now:
- Contact your banker and tell them you want a PPP loan and to put you at the head of the queue in getting one once the program is started.
- Contact your partner or manager directly, or email us. We can offer guidance and assist you with the process.