Posted on April 10 2020

Coronavirus Update 4/10/20 — frequently asked questions about Paycheck Protection Program

EMERGENCY UPDATE — Friday, April 10 —

To our clients:

It’s been a week since our last update to you regarding the Small Business Administration (SBA) loan program available to assist small businesses known as the Paycheck Protection Program (PPP).  The date – Friday, April 3 – coincided with the first day you could submit applications for a PPP loan.

Since that time, we have received countless calls and emails, all asking the same questions and expressing similar frustrations.  Most of those frustrations surround the application process itself and, in particular, the spreadsheet that is used to determine the maximum amount of the loan.  Following are some of your most common questions:

— Can my business apply for both the EIDL in the PPP loan?

— Do I use gross pay or net pay of my employees to calculate my maximum loan amount?

— What state and local taxes are included as payroll costs?

— When determining excluded payroll costs, what exactly is meant by the $100,000 maximum amount of payroll costs per employee?

— What are taxes imposed under Chapter 21, 22, or 24 of the IRS that are considered excluded payroll costs for purposes of determining the maximum loan amount?

— Can my loan amount calculation include payments to independent contractors?

— What do I do if the funds are disbursed before my employees are able to come back to work, because our business is still under shutdown orders?

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We would be lying to you if we told you we knew all the answers. We are going to attempt to answer those questions in this update to the best of our ability based on our understanding of the facts as they exist today. Before doing so however, you should understand that the confusion and frustration you’re experiencing is no different from the angst being suffered by other small businesses who are trying to apply for the same pool of funds; their advisers such as attorneys, accountants, and payroll preparation services; and their bankers.

Yesterday’s Morning Call (Lehigh Valley, Pennsylvania) reported the following – “As of 2 PM Thursday, SBA spokeswoman Carol Wilkerson said more than 497,000 applications have been approved through the Paycheck Protection Program, totaling more than $127 billion and involving over 3,900 lenders.”

In our last update, we told you that Congress authorized $349 billion for the PPP program.  Based on yesterday’s SBA report, $127 billion is gone, and it funded 497,000 loans.  That’s an average of $256,000 per loan.  At that rate, a total of 1,363,000 loans will be made to small businesses – far less than the 3.5 million small businesses we said would receive loans based on an average loan of $100,000.  So, as the amount of the average loan grows, the number of successful applicants shrinks.

Congress is aware of this problem, and is currently considering legislation that would add $250 billion more to the PPP program.  If the average loan continues at $255,000, this additional funding will provide for 980,000 more loans, bringing the total of small businesses receiving loans to 2,343,000 – about 8% of the 3.5 million small businesses in the United States.

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Now, for the answers to the above questions:

Can my business apply for both the EIDL and the PPP loan? 

Despite comments by authoritative groups to the contrary, while we continue to believe that you can apply for both types of loans, we recommend that you discuss this issue with your bank.

Do I use gross pay or net pay of my employees to calculate my maximum loan amount?

Per guidance posted on the SBA’s website on April 8, 2020, “Under the Act, payroll costs are calculated on a gross basis…” 

What state and local taxes are included as payroll costs? 

In Pennsylvania, the amount of state unemployment taxes paid by employers on their employees’ compensation is considered a payroll cost.

When determining excluded payroll costs, what exactly is meant by the $100,000 maximum amount of payroll costs per employee? 

Per guidance posted on the SBA’s website on April 8, 2020, “the exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including employer contributions to defined-benefit or defined-contribution retirement plans, payment for provision of employee benefits consisting of group health care coverage, including insurance premiums, and payment of state and local taxes assessed on compensation of employees.”

It is unclear to many advisors, including us, what this guidance means.  Initially, the $100,000 referenced “compensation” as including retirement plan contributions, health care coverage, etc.  Subsequent interim guidance referenced an “annual salary” of $100,000.  Now the most recent guidance references “cash compensation.”  How you interpret the preceding paragraph, which was taken directly from the SBA website, depends on how you read “only to cash compensation, not to non-cash benefits, including…”  Does “including” pertain to cash compensation or non-cash benefits?  We think it pertains to non-cash benefits, meaning that the $100,000 per employee cap applies to “annual salary,” consistent with the SBA’s interim guidance. 

What are taxes imposed under Chapter 21, 22, or 24 of the IRS that are considered excluded payroll costs for purposes of determining the maximum loan amount?

Chapters 21-24 provide for the withholding of social security and Medicare taxes, the corresponding employer match, and for the withholding of federal income taxes from employees’ compensation. Per guidance posted on the SBA’s website on April 8, 2020, “Under the Act, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees.”

“As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.”  Therefore, the amount of social security and Medicare taxes for which the employer is responsible (i.e. the employer match) is excluded from the determination of payroll costs.

Can my loan amount calculation include payments to independent contractors?

Per guidance posted on the SBA’s website on April 8, 2020: “No, any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs.” 

I understand that the amount of potential loan forgiveness of a PPP loan depends on the borrower’s payroll costs over an eight-week period, which begins on the day that the lender makes the first disbursement of the PPP loan. What do I do if the funds are disbursed before my employees are allowed to come back to work because our business is still under shutdown orders as a non-life essential business here in Pennsylvania? 

Solely for purposes of maximizing your loan forgiveness, you will need to bring your employees back and pay them.  Hopefully, your business will be allowed to reopen soon, or you can find some way to utilize their services and generate some income.  If not, you are essentially replacing unemployment compensation being paid to your employees (which is not a cost to your business) with PPP loan proceeds which, if not forgiven, will become a cost to your business. 

When you consider that some employees, as a result of state and federal unemployment benefits, may now be making more than you normally pay them, they may resist returning to work.  If they don’t, your ability to show that you used at least 75% of the PPP loan proceeds for payroll (one of the requirements for loan forgiveness) will be limited and what you thought would effectively become a tax-free grant now potentially becomes a true loan, payable over two years at 1% interest. 

What can you do?  The obvious recommendation would be to wait to apply for a PPP loan until you have a better idea when your business may be able to reopen.  The problem with waiting to apply is that the funds available for PPP loans may be gone by that time. 

If you are approved and your business has yet to reopen, you can ask the lender to defer making disbursement of the loan.  The SBA has indicated that “the lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.”  Delaying disbursement of the loan by ten days also delays the start of the critical eight-week period.

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The answers to your questions may not be what you were hoping to hear.  Unfortunately, because of the speed with which the PPP program was designed and implemented, as we have stated in previous Emergency Alerts, there were bound to be changes and clarifications.  Some of the changes and clarifications will benefit PPP loan recipients while others may not.

As always, we will continue to keep you informed of future changes.  Visit our website to see all the Emergency Updates that we have issued since the start of the COVID-19 crisis. 

MillerSearles LLC | Certified Public Accountants | Advisors