Paycheck Protection Program Update
Paycheck Protection Program Update 4-6-2020
Since the CARES Act (the “Act”) became law on March 27, 2020, small businesses have eagerly anticipated the lifeline coming their way in the form of the Paycheck Protection Act (the “PPP”). This anticipation, however, has now turned into frustration and confusion as banks and the SBA struggle to create consistency in the application process and administration of the PPP program. Just when we think we understand the law, SBA comments (or in some instances its silence) turn us on our heads. To say this is a moving target is an understatement, and I can’t assure you that within the hour things I write in this update won’t change. I certainly understand and appreciate the complexity of rolling out a $349 billion-dollar aid package in an unprecedented timeframe, but hopefully the next couple days provide final clarity on the program and its requirements. Nevertheless, in reference to what I have written before, and in light of the various directional shifts since that time, the following highlights some of the key open issues and concerns as of this morning. Most of the open issues concern calculation of “payroll costs” to determine the borrowers loan amount as discussed below.
A. The Application Process: Last Friday, many small businesses reached out to their banks and applied for the PPP loan. The reality was that most banks simply provided a link where the prospective borrower provided the business EIN and their contact information. The automated response thereafter was that someone from the bank would be in touch to continue the application process; so, nothing really happened. Some banks across the country apparently did process applications, but I don’t understand how they did this considering there is no consensus on the application requirements and process. It is likely those applications will need to be resubmitted to comply with whatever final regulations are reached in the next few days. Recommended Action: Maintain contact with your bank to determine the next steps in the PPP process and have all background information ready to submit in accordance with this update and our previous recommendations.
B. The SBA Application Form: Previously I provided a copy of the sample PPP application. This has now changed. The latest application, which we believe will be the final, can be found https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf Recommended Action: Prepare the fill in pdf document so that you are prepared to upload the application to your bank when required to do so.
C. Independent Contractors Are Not Included in the Calculation of Payroll Costs: Based on confusing language in the Act, applicants were led to believe that independent contractors paid by an employer were counted in the calculation of “payroll costs” to determine the amount of their loan. This has now changed, albeit it remains confusing and some bank applications wrongly continue to allow a loan applicant to include payments to independent contractors in their loan amount calculation. In the SBA Interim Final Rules issued at the end of last week, the SBA on the one hand references independent contractors as likely included in the payroll cost calculation but in the same document later states that “independent contractors have the ability for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation”. This issue, therefore, is seemingly resolved. Recommended Action: Remove all payments to 1099 independent contractors from your payroll cost calculations and supporting background documents. You should further inform any independent contractors you work with that they should pursue a PPP loan on their own.
D. Agricultural Producers are Eligible for the PPP. Recent commentary confirms that agricultural businesses can now apply for PPP loans. Accordingly, for those of our clients who operate in the food supply chain, you can now apply for PPP loan assistance. Recommended Action: Farmers and food producers should apply for PPP loan assistance.
E. Use Employee Gross Pay to Calculate Payroll Costs. Much confusion has arisen regarding the use of “gross” or “net” employee payroll numbers in calculating payroll costs. Language in the Act indicates that taxes withheld pursuant to chapters 21, 22 and 24 of the Internal Revenue Code (withholding and payroll taxes) are excluded from the calculation of payroll costs under the PPP. But this exclusion only applies to such taxes during the “covered period” and the covered period is defined as February 15, 2020 through June 30, 2020. While this is certainly confusing, when looking at this text in conjunction with comments from the SBA it is illogical to think that federal taxes paid on an employee’s behalf are excluded from the payroll cost calculation, especially when the excluded “covered period” has not yet occurred. Rather, we believe that this language applies to the loan forgiveness calculation, and not the payroll cost calculation, to prevent a borrower from receiving forgiveness on future payments the borrower would otherwise owe to the government during the period following the loan (the government won’t, and shouldn’t, allow an employer to pay income and payroll taxes with forgiven money). Additionally, on April 4, 2020, Senator Marco Rubio, who played a significant role in passing the Act, reaffirmed that the intention of Congress was to use the gross payroll number. Recommended Action: Based on our reading of the Act and supporting information, use the gross amount paid to an employee in 2029 (inclusive of withholding and payroll taxes) to calculate your payroll costs in determining your loan amount.
F. Use of the Twelve-Month Payroll Period for 2019 to Calculate Payroll Costs. This has also been an area of significant confusion. The Act reads that the payroll cost calculation is determined by taking the average monthly payroll costs a for the one-year period “before the date on which the loan is made”, and multiplying this number by 2.5. The recent SBA application, however, specifically allows for the use of 2019 employee records to support the payroll cost calculation. Nevertheless, some banks are requiring calculations and payroll records for the 3 trailing twelve-month (“TTM”) period from the loan origination date. It is certainly easier to use 2019 information to calculate payroll costs as opposed to scrambling to compile a TTM calculation, so hopefully 2019 will be the final standard. Recommended Action: The SBA has made it clear that the 2019 twelve-month period is acceptable. Nevertheless, in order to be prepared for document submission it may make sense for a business to calculate both the 2019 numbers and the TTM numbers considering banks are not universally following the 2019 calculation period. You should further discuss this issue with your banker.
G. The $100,000 Employee Compensation Cap. Banks and borrowers are also confused regarding the $100,000.00 employee compensation cap. The text of the Act reads that “compensation of an individual employee in excess of an annual salary of $100,000.00, as prorated for the covered period”, is excluded from the payroll cost calculation (note that the covered period of February 15, 202 through June 30, 2020 for proration is moot if you use the 2019 payroll numbers in accordance with Section F above). By using the word “salary” alone in the Act, it is our belief that this does not limit other applicable payroll costs paid on behalf of an employee, e.g., retirement benefits, healthcare benefits and state and local taxes, certain leave and other items as defined in the Act as “payroll cost” (refer to my prior updates for this information). Recommended Action: Only use up to $100,000.00 of wages and salary for each employee in the payroll cost calculation. Add to this amount all other applicable and defined “non-wage” payroll costs for your final calculation.
H. Calculation of the Eight-Week Timeframe for Loan Forgiveness Purposes. This issue is one of the hardest to figure out, and that is saying something. The calculation of the eight-week post loan period is critical when applied practically. We know for certain that restaurants and bars in Illinois (regarding dine-in operation), as well as other non-essential businesses, are closed until at least May 1, 2020. Obtaining a loan now and starting the eight-week clock is not the most effective business decision considering generation of revenue remains significantly limited, if not non-existent, until the doors reopen. While we understand the employee issue in its entirety, it simply makes more sense to pay employees for work performed that can generate revenue for the business to survive. Some senatorial comments, and comments by the U.S. Senate Committee on Small Business and Entrepreneurship, opine that the borrower can choose the eight-week period between February 15, 2020 and June 30, 2020. Unfortunately, the SBA has not confirmed this. Recommended Action: We will continue to watch for direction on this issue. If the eight-week loan forgiveness calculation period can indeed be chosen, it makes most sense for those businesses with ceased or significantly reduced operations to start on a date that incorporates a full eight-week period ending on or near June 30,2020. Thus, hopefully business can re-open in May, employees can be brought back upon such opening and paid with PPP funds, and the businesses can generate revenue to pay for the significant costs outside of the covered payroll costs. This recommendation should also be done on a case-by-case analysis.
I. General Provisions (as of April 5, 2020):
Loan Terms:
Interest rate remains 1.0% for the loan term
Loan term is 24 months
Loan repayment is deferred for six (6) months 4
75% of the loan proceeds must be used for payroll costs to qualify for loan forgiveness
The remaining 25% may be used for rent, mortgage interest and utilities
Loan Forgiveness:
Loan forgiveness is calculated over the eight (8) week period from loan origination (although a borrower may be able to choose the eight (8) week period subject to further direction from the SBA as noted above).
Any portion of the loan that is not forgiven is subject to the Loan Terms
Loan forgiveness is subject to reduction based on a reduction in employee headcount or a 25% reduction in an employee’s salary at the end of the eight-week period
Application Questions:
If you are asked how you intend to use the loan proceeds make sure you allocate at least 75% of the amount to payroll costs and the remaining 25% to lease, interest payments and utility costs. From a practical standpoint, once the 75% is allocated to payroll costs the remaining 25% will likely be allocated to rent in most cases (generally the highest cost of allowed use of loan proceeds), but this is a case-by-case analysis.
You may be asked how many employees you have and how many employees you intend to retain after the 8-week period (for loan forgiveness purposes). Remember to calculate your number of full-time equivalent employees for the “look back” period of February 15, 2019 through June 30, 2019 OR January 1, 2020 through February 29, 2020. If asked, this look-back number should match the number of employees you intend to retain after the 8- week calculation period.
Again, this is a very fluid situation and we will continue to keep you advised as quickly as possible. Until then keep clicking the “refresh” button to see what changes by the minute. Thanks, and stay safe and healthy.
This article is for informational purposes only. If you have any questions, please contact our team at Troglia•Kaplan Attorneys.