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Small Business PPP Frustrations – Interview with Block Club Chicago

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I was honored to be interviewed for and quoted by Block Club Chicago in their article entitled, Chicago Small Businesses Shut Out Of Federal Government’s Loan Program. (It was especially interesting to be surrounded unexpectedly by some beloved clients and former clients in the same article.)

Of course, no article can publish more than a few words here or there by any one person, so I’m sharing the entire email interview Q&A here on my blog. Feel free to quote me.

What’s it been like to be a small business accountant this last month? Are you inundated with calls and emails? 

Absolutely. The questions started right after the Families First Act came out on March 18th, with confusion about the requirement to offer paid sick and family leave, and how to get reimbursed by the government for it. Then the CARES Act came out on March 27th – and it’s been a more-than full-time job since then. Just the research and analysis portion is many hours per day… and responding to clients, writing blog posts and email blasts, and helping people with calculations has made it even busier than tax season usually is (which of course I’ve fallen behind on due to all of this).

It’s been impossible to get back in touch with everyone – there just aren’t enough hours in the day – so I decided on April 3rd to start offering a free daily Zoom Q&A for any client who’s interested, since so many people are asking the same questions, and we can all learn from each other’s experiences. That’s been a huge help, and has led to my doing similar sessions for other groups, like the Logan Square Chamber of Commerce, various professional accounting organizations, and hopefully soon, a Town Hall with our State Rep, Will Guzzardi.

There’s just so much misinformation out there caused by poor guidance, regulations that make no sense, and some terribly-written legislation that is so vague, it creates more questions than it answers. Add to that the panic everyone is feeling, and you get a lot of rumors. Dispelling those and clarifying what’s what has felt like the best way to contribute to the small business cause. I’ve decided not to charge any of my clients for work on COVID-19 relief resources, with the idea that keeping these businesses alive should be my main goal, or the fabric of the Logan Square community I’ve called home for over 20 years will be ripped apart. I don’t want the chains – those with capital to survive this period – to swoop in after all the small businesses disappear. We’ve got to do everything we can to keep them going.

What percentage (roughly) of small business owners who you work with are getting grants — city or federal — right now?

Among my clients, these are the stats:

EIDL – 5% of applicants
PPP – 6% of applicants
Chicago Resiliency Fund – 0% of applicants; in fact I don’t know anyone who has received anything from this fund, which was supposed to be a bridge loan until you could get other relief.
IL Hospitality Grant – 0% of my clients who applied; though I know in actuality the number is closer to 5% overall.

To clarify, there are other sources for relief that do not require an application and approval, such as the Employee Retention Tax Credit, or the Payroll Tax Deferral Program – both of which an employer claims on their payroll tax return; but this requires that they are still paying their employees and does not account for those who do not have sufficient revenues or savings to make that happen.

Have any of the small business owners you work with gotten the PPP loan?

Yes, one was already funded, and two more have signed with confirmations from their bankers that the money is on the way. A couple were in the 72-hr waiting period and lost it. This is out of nearly 70 applications, that we spent the past three weeks preparing. I’m seeing similar low percentages among colleagues’ clients.

UPDATE: as of April 19, a total of five of my clients received funding.

Has the PPP loan been a source of frustration among small business owners you work with?

I don’t mean to be rude, but this is an almost laughable question. At least, it would be if everything hadn’t ground to a halt yesterday, leaving hundreds of thousands of applications stranded, and along with that, many businesses that may have to declare bankruptcy. I haven’t slept for two nights because of it. A dear friend is a Senior VP at a major bank and she shared the news of the funding running out the second it came to her. She said that is was among the worst days of her career – so much anguish and angst for their customers, so many people waiting for fund replenishment, irate and desperate clients full of ire and threats, and her own emotional exhaustion and anxiety through the roof. She said – and this rings so true for me as well – “It’s not my fault, but it is my problem, and I can’t fix it”.

But even before the funding ran out, there were so many sources of frustration:

  • There were no templates or calculations released by the SBA, and the regs and guidance were so vague that multiple rounds of guidance were released. The most recent was named the “Second PPP Interim Final Rule”, if that gives you any sense.
  • Bankers were so busy at their jobs that they couldn’t take three hours a day to do continuing education from the daily guidance their companies and the SBA/Treasury were releasing; this caused them to give inaccurate guidance to their customers, who would go to their accountants for help, and find that not even their accountants necessarily knew all the rules. And when they did, they’d have to go back-and-forth and accountants would effectively train their clients’ bankers on the regs.
  • Banks are required by the federal government to follow “Know Your Customer” and “Anti-Money-Laundering” rules, which made it almost impossible to take care of anyone who wasn’t a current customer. This had small business owners freaking out, if their bank was slow to respond and they tried looking elsewhere. Congress tried to tell banks not to do this, but the courts allowed it, since it was precisely because banks were trying to follow the previously-existing federal regulations set upon them.
  • Banks said they were processing applications in order, but that turned out to be a bald-faced lie for some. I know of folks who applied with Chase for example, on the same day, and one had their money in-hand by the 15th, whereas others were still waiting to hear back from anyone, their applications presumably sucked into a black hole.
  • There was a big exception that I see as a loophole in the law: allowing anyone in the hospitality industry to consider EACH LOCATION as separate – meaning a restaurant group or chain could apply for the $20M maximum for each of their locations, effectively giving big companies a major opportunity to grab funding meant for small-to-medium businesses.
  • I think perhaps most frustrating, though, was that it’s clear that companies with capital and resources hired attorneys and accountants to jump on this the second it came available. These bigger companies have bigger payrolls and therefore were more likely to request the full $10M per location (as opposed to about $20-50K per each of my clients). They also tend to have existing relationships with banks, such as a business Line of Credit, so they had a real person they could call and get in line immediately. They used up the funding, leaving little left for those without the resources to apply immediately.

Check out these stats on PPP funding compiled by a couple of my colleagues, and you’ll see how the average loan went down over time, supporting the theory that those with resources applied first, were approved first, and were granted more money.

UPDATE: Further analysis shows how differently each state was treated with regard to PPP funding as a percentage of the eligible payroll population, and how small businesses received 74% of the loans, but only 17% of the funds. 70% of the loans were made in amounts greater than $350,000, and the average loan was over $200,000. In fact, the biggest 14 lenders, according to the SBA, had average loan amounts well over $200,000, with the biggest lender of all reporting average loans of $515,000.

Do you have any advice for small business owners right now?

Yes, quite a few suggestions:

  1. If you still have staff you’re paying, I recommend taking advantage of the Employee Retention Tax Credit that you get by reducing your required regular payroll deposits, and applying for the balance on Form 7200. I know that Gusto (my favorite payroll company) is helping many of its clients through this process, which provides immediate cash in the form of payroll tax payments that don’t have to be made (in essence an advance on the credit). Treasury was initially telling us that you could not do this and PPP at the same time, but it turns out they are working on a way for folks to take advantage of ERTC and simply have it deducted from the PPP forgiveness should the business end up with PPP funding.
  2. Payroll Tax Deferral – similar to the above, in the sense that you only benefit from this if you have staff still on payroll (or yourself if you are a shareholder-employee), but this one is just a delayed payment of the employer portion of Social Security taxes. Again, I know Gusto is doing this for their clients on request. And again, guidance initially indicated that you couldn’t do this and PPP, but has since indicated that you can defer these payroll taxes until the end of the PPP forgiveness period, and the original due dates for the deferment will stick. More info here:
    https://www.akerman.com/en/perspectives/interplay-between-paycheck-protection-program-loans-and-payroll-tax-provisions-under-ffcra-and-the-cares-act.html
  3. EIDL – the Economic Injury Disaster Loans are still an option. Only the advance is forgiven, and there’s no way to know how much of an advance you’ll get (though in general it seems to line up with $1K per employee), but if you need cash, you should apply. If you request $25K or less, there’s no personal guarantee or collateral required.
    (Note: since the writing of this, EIDL funding has also been exhausted, but is likely to be replenished with the upcoming relief bill expected to be signed April 23rd.)
  4. Regarding the PPP:
     – Get your PPP application in order if you do not already, and ask around to other small businesses who did get funded to identify a bank that has more of a success rate than others. Have everything ready-to-go the second that the PPP receives more funding. Keep in mind that the SBA has said that they are not maintaining a queue of applications that were submitted to them by banks. There is no saying whether your banker will keep your place in-line internally, either. So be ready just in case you have to resubmit your application. I have quite a few resources and a checklist on my blog at http://www.thedancingaccountant.com
     – Similarly, work with your accountant to establish a plan for tracking the loan for forgiveness, so you have everything set up properly from the moment the funds are received. Make a plan to structure your forgiveness-period payroll to ensure the maximum amount of the loan will be forgiven.
     – And make sure you have a business checking account! Some folks are using personal checking accounts for their business – these rules about this changed four years ago, but some were apparently grandfathered in, and these small business owners are finding that the banks will not even consider their applications as a result – even though they’ve been banking there for ages. The banks are prohibited from depositing PPP funds into a personal account.
  5. If you haven’t already, start redefining your business model now. Even once the stay-at-home order is lifted, it might be quite some time before people are comfortable shopping or dining or drinking out. Research alternative models; ask around as to what other businesses are doing; investigate new revenue streams.
    Some examples: online sales, pairing with other businesses to deliver/ship care packages, going to a 100% take-out model with a contactless pick-up window, having staff take care of customer ordering and deliveries instead of GrubHub or Caviar, increasing your marketing and social media presence and improving the website, offering in-demand products along with your usual offerings, such as groceries or alcohol, teaming up with your local Chamber of Commerce to establish a virtual neighborhood store, etc.
  6. Go on unemployment. If you’re no longer able to pay yourself, or you’re paying yourself a substantially reduced salary, you may be eligible. Shareholder-employees are already eligible (they receive W-2s from their own companies and have been paying into the system all along), and hopefully in a few weeks we’ll see sole proprietors and partners in partnerships able to apply. (IDES is simply not set up to receive their applications yet, as they need totally different information than W-2 employees. Neither their systems nor their staff have the ability to accept this info yet.)
  7. Remember that there is currently no 10% penalty for withdrawing retirement funds – if you feel confident that you can survive this period but need cash now to do it, consider accessing those accounts now.
  8. Cash flow forecasting is something I wish all small businesses did, but they don’t. Consider working with your accountant to build a cash-flow projection system to figure out how to get through this. CashFlowTool.com is a great resource, and they offer free webinars on how to forecast, if you don’t have a professional you can go to.
  9. And I know this sounds insane… but try to take moments, tiny little vacations, away from your anxiety. I have to tell myself this every day. There is so much that is out of our hands; we have to work on the things over which we have control, and try to let go of what we don’t. The world isn’t working the way we want it to, or maybe even thought it did. For a lot of us, that’s a shock, and the emotional weight of that can pull us down. To survive this, we’ll need to shake off the anxiety and plan for a brighter future.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Education, IRS, Tips

How To Calculate Sole Proprietor “Payroll” For PPP Loans

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IMPORTANT UPDATE: SINCE THE ORIGINAL PUBLISHED DATE OF THIS BLOG POST, FURTHER GUIDANCE FROM TREASURY HAS BEEN RELEASED. DO NOT FOLLOW THE INSTRUCTIONS BELOW — THIS POST IS OUTDATED. I HAVE FOUND THIS COLLEAGUE’S WRITE-UP WORTH READING INSTEAD — AND I RECENTLY RECORDED A FREE WEBINAR ON HOW TO APPLY.

Note: this post is about sole proprietors — those filing Schedule C on their personal tax returns, whether or not they have employees. For information on partners in partnerships (who are also considered self-employed for the purposes of the PPP), please see this post instead.

There has been so much back-and-forth and conjecture and guidance on how to calculate W-2 payroll for purposes of the PPP loan, but very little on the subject on how to include self-employment income in these calculations. The reason is that sole proprietors (single-member LLCs, independent contractors, gig workers, and anyone else who files Schedule C) are by law prohibited from paying themselves as an employee, through a payroll system. They therefore do not receive W-2 forms and are not included in quarterly “941” payroll reports.

The key here is that this is a “Paycheck Protection Program” — the goal is to keep people working instead of going onto the unemployment rolls. Why? Because it’s better for 1) business owners, 2) workers, and 3) the economy. Business owners are able to keep their companies afloat in a challenging environment (to put it mildly), continuing to produce products or services and maintain revenues at some level; workers generally earn more in their jobs than on unemployment (and if not, this means they are low-paid workers and probably deserve a raise for hazard pay); and the economy of course benefits because companies spend money on their vendors and landlords, and individuals spend their money on other products and services, and all of this helps to keep other businesses going, too.

So what constitutes a “paycheck” if you aren’t allowed to be on payroll?

The key here is “payroll taxes” — which are the portion of taxes that go to Social Security and Medicare programs, often known as FICA. Employees have 7.65% of each paycheck withheld for these purposes (and their employers match this amount for a total of 15.3%). Sole proprietors, on the other hand, pay estimates quarterly toward this and other taxes, and reconcile them on their annual personal tax return, using Schedule SE (Self-Employment) to calculate “self-employment tax”. This tax is the same as “payroll tax” for employees — with the painful added cost of having to pay both sides of the tax… the employee 7.65% and the matching 7.65% as they are their own “employer”. (Yes, ouch. Being self-employed is expensive.)

All net income earned by a sole proprietor is taxed for self-employment/payroll tax purposes, regardless of whether that income was pulled out of the company in the form of a draw. This amount flows through from Line 31 of Schedule C onto the Schedule SE.

So, based on the above perspective, I have been suggesting that sole proprietors should take the amount on Line 4 from Schedule SE on their personal tax returns to substantiate the amount of income from their business on which they paid “payroll taxes”. And to clarify: this is still the easiest approach for most people!

But here are the potential problems with that approach for some. If you fall into one of these groups, then keep reading for an alternative method:

  • Tax deadlines have been moved to July 15th — for many small businesses, preparing their books for taxes is the last thing on their minds, and CPAs such as myself are scrambling to help their clients apply for relief, so we’re behind on the returns from folks who have found time to submit their info. As such, many sole proprietors simply don’t have their personal returns yet.
  • Some sole proprietors have self-employment income from other businesses as well, such as a partnership or another Schedule C sole proprietorship business activity. Well, Schedule SE adds all businesses together. Guidance has not been forthcoming here, but it is likely that those in this situation will need to apply for PPP separately for each business — or at least the businesses that also have employees.

If you are in the first of those situations — no tax return yet — Treasury regulations allow you to use a reconciled Profit & Loss from your bookkeeping software to calculate these totals. (Make sure your banker knows this, as I have had some requiring 1099-MISC forms as substantiation, which is nothing short of ludicrous for many reasons — I won’t go into that here, as this post is plenty long already.) You would in this case simply take the final row, Net Income, and multiply by 92.35% to back out the employer portion of self-employment tax, as Treasury regulations for the PPP do not allow the employer portion of payroll taxes to be included in the calculation.

For sole proprietors in the latter of these situations (multiple businesses), here’s what you can do instead:

  1. Pull up each Schedule C for which you have employees and multiply Line 31 by 92.35% to back out the deductible portion — which is the Employer part of self-employment tax. (Treasury regulations for the PPP do not allow the employer portion of payroll taxes to be included in the calculation.) You can apply for a PPP loan for each one of these businesses separately. The reason you’ll have to do each one separately is that you also need to include the payroll for your staff in the calculation.
  2. Do the same for each of the other Schedule C businesses for which you do NOT have employees. Add all these together and apply for one PPP loan. There is no need to apply for each one separately.
  3. If you have self-employment income from a partnership, apply for a PPP for each partnership separately. If you have employees, add it to that partnership’s application. If you do not, apply for each one separately in your capacity as a self-employed partner. See this post for more guidance on partnership “payroll”.

If you already submitted an application and did not use the correct period or amounts, it’s by no means too late. Based on recent clarifications by the SBA and Treasury, you will be given an opportunity to revise your application — just explain the situation to your banker. It’s only “too late” once your application has already been approved — and in that case, Treasury says anything submitted based on older guidance is still considered accurate as long as it was consistent with the rules in place at the time of the application.

Keep in mind that this is only my personal interpretation of the Treasury regulations concerning what constitutes “payroll” for the purposes of the PPP, and ultimately your banker or lender will be the person with final authority on the matter. However, the Treasury is clear that they will allow lenders to rely on borrowers’ representations. Furthermore, the American Bankers Association is still in the process of seeking SBA and Treasury clarification for many issues, and as they receive it, they have to communicate it to member institutions, who then have to pass it along to the bankers themselves — who are overworked and have scarce little time for daily continuing education. You can do a favor for your banker by organizing your calculations and documents in such a way as to make their job easier, especially if you include a brief note explaining why you used the data you did, and as in middle-school math class: always show your work.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Education, IRS, Tips

How To Calculate Partner “Payroll” For PPP Loans

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IMPORTANT UPDATE: SINCE THE ORIGINAL PUBLISHED DATE OF THIS BLOG POST, FURTHER GUIDANCE FROM TREASURY HAS BEEN RELEASED. DO NOT FOLLOW THE INSTRUCTIONS BELOW — THIS POST IS OUTDATED. I HAVE FOUND THIS COLLEAGUE’S WRITE-UP WORTH READING INSTEAD, AND I RECENTLY RECORDED A FREE WEBINAR ON HOW TO APPLY.

Note: this post is about partners in a partnership — those filing Schedule SE on their personal tax returns due to flow-through income from a Form 1065 K-1. For information on sole proprietors (who are also considered self-employed for the purposes of the PPP), please see this post instead.

There has been so much back-and-forth and conjecture and guidance on how to calculate W-2 payroll for purposes of the PPP loan, but very little on the subject on how to include partner income in these calculations. The reason is that partners in a partnership (or, more commonly, multi-member LLC taxed as a partnership) are by law prohibited from paying themselves as an employee, through a payroll system. They therefore do not receive W-2 forms and are not included in quarterly “941” payroll reports.

The key here is that this is a “Paycheck Protection Program” — the goal is to keep people working instead of going onto the unemployment rolls. Why? Because it’s better for 1) business owners, 2) workers, and 3) the economy. Business owners are able to keep their companies afloat in a challenging environment (to put it mildly), continuing to produce products or services and maintain revenues at some level; workers generally earn more in their jobs than on unemployment (and if not, this means they are low-paid workers and probably deserve a raise for hazard pay); and the economy of course benefits because companies spend money on their vendors and landlords, and individuals spend their money on other products and services, and all of this helps to keep other businesses going, too.

So what constitutes a “paycheck” if you aren’t allowed to be on payroll?

The key here is “payroll taxes” — which are the portion of taxes that go to Social Security and Medicare programs, often known as FICA. Employees have 7.65% of each paycheck withheld for these purposes (and their employers match this amount for a total of 15.3%). Partners, on the other hand, pay estimates quarterly toward this and other taxes, and reconcile them on their annual personal tax return, using Schedule SE (Self-Employment) to calculate “self-employment tax”. This tax is the same as “payroll tax” for employees — with the painful added cost of having to pay both sides of the tax… the employee 7.65% and the matching 7.65% as they are their own “employer”. (Yes, ouch. Being self-employed is expensive.)

For self-employment tax purposes, both guaranteed payments to partners for services and their ownership-percentage allocation of net income are included.

Initially, many of us assumed that only guaranteed payments qualified as “payroll” for the PPP calculation, as these are in theory the amounts paid for services rendered. However, many partnerships do not use guaranteed payments, and instead split all of the profits (for various reasons, including increasing the Sec 199A deduction). Since all income to an active member of a partnership is taxed for self-employment/payroll tax purposes, it should not matter whether it is due to guaranteed payments or an allocated portion of net income — that is a distinction left to the partnership agreement and says nothing about whether it is “payroll” for these purposes or not.

So, based on the above perspective, I have been suggesting that partners take the amount on Line 4 from Schedule SE on their personal tax returns to substantiate the amount of income from the partnership on which they paid “payroll taxes”. And to clarify: this is still the easiest approach for most people!

But here are the potential problems with that approach for some. If you fall into one of these groups, then keep reading for an alternative method:

  • Tax deadlines have been moved to July 15th — for many small businesses, preparing their books for taxes is the last thing on their minds, and CPAs such as myself are scrambling to help their clients apply for relief, so we’re behind on the returns from folks who have found time to submit their info. As such, many partners simply don’t have their personal returns yet.
  • Some partners have self-employment income from other businesses as well, such as another partnership or a Schedule C sole proprietorship. Well, Schedule SE adds all businesses together. Guidance has not been forthcoming here, but it is likely that those in this situation will need to apply for PPP separately for each business — or at least the businesses that also have employees.

So for partners in either of these situations, here’s what you can do instead:

  1. Pull up your client copy of the 2019 partnership tax return — Form 1065.
  2. Scroll down to the K-1 forms — there’s one set for each partner.
  3. Line 14A of each of the K-1 forms shows self-employment earnings for each partner. This includes guaranteed payments as well as the flow-through portion of net income.
  4. Take that amount and multiply it by 92.35% to back out the deductible portion — which is the Employer part of self-employment tax. Treasury regulations for the PPP do not allow the employer portion of payroll taxes to be included in the calculation.

In a partnership where all partners are actively working for the company — rather than one or more being silent investors — you’ll see that the total of Line 14A for all partners, equals Form 1065, Line 10 (Guaranteed payments to partners) + Line 22 (Ordinary Business Income).

However, if you have investor-partners, these folks usually are allocated their ownership-percentage of net income on which they do not pay self-employment taxes. And because they do not work for the business, they also will not receive guaranteed payments (which are also taxable for self-employment purposes). Therefore they are not eligible to apply for the PPP, and these amounts should not be included in the calculation. This is why I suggest sticking to Line 14A of the K-1 schedules, rather than using the amounts from the front of the 1065.

And if you are one of the unlucky partners whose 2019 1065 partnership return is still on extension, and therefore does not yet have a Schedule K-1, Treasury regulations allow you to use a reconciled Profit & Loss from your bookkeeping software to calculate these totals. (Make sure your banker knows this, as I have had some requiring 1099-MISC forms as substantiation, which is nothing short of ludicrous for many reasons — I won’t go into that here, as this post is plenty long already.) You would in this case simply add together the row for Guaranteed Payments and the final row, Net Income, and multiply by 92.35% to back out the employer portion of self-employment tax, as mentioned above. Again, if you have any silent investors, you would need to back out their percentage portion of net income.

If you already submitted an application and did not use the correct period or amounts, it’s by no means too late. Based on recent clarifications by the SBA and Treasury, you will be given an opportunity to revise your application — just explain the situation to your banker. It’s only “too late” once your application has already been approved — and in that case, Treasury says anything submitted based on older guidance is still considered accurate as long as it was consistent with the rules in place at the time of the application.

Keep in mind that this is only my personal interpretation of the Treasury regulations concerning what constitutes “payroll” for the purposes of the PPP, and ultimately your banker or lender will be the person with final authority on the matter. However, the Treasury is clear that they will allow lenders to rely on borrowers’ representations. Furthermore, the American Bankers Association is still in the process of seeking SBA and Treasury clarification for many issues, and as they receive it, they have to communicate it to member institutions, who then have to pass it along to the bankers themselves — who are overworked and have scarce little time for daily continuing education. You can do a favor for your banker by organizing your calculations and documents in such a way as to make their job easier, especially if you include a brief note explaining why you used the data you did, and as in middle-school math class: always show your work.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Education, IRS, Tips

PPP Application Checklist

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You’ve reviewed the Paycheck Protection Program summary, double-checked the newest guidance and pointers, determined you’re eligible, and reached out to your bank or lender. Now what?

Here is a list of documents to pull together so you have them ready for the application.

1) Articles of Incorporation (S-Corp or C-Corp) or Articles of Organization (Single- or Multi-Member LLC) – note: non-LLC sole proprietorships and partnerships may not have anything like this; they may have an Operating Agreement or Partnership Agreement that will suffice.

2) EIN Letter – almost every company has one of these at this point, as they are now required to open a business bank account; but if you are a sole proprietor who uses their Social Security number to file taxes and runs things through a personal bank account (not recommended), you may not have one.

3) Average monthly payroll calculation – seems like it would be easy, but it actually can be kind of complicated. I’m going to try to break it down.

First, figure out what date range you’ll need to use. You can choose from a bunch of different ones to calculate your monthly average (for Gusto users – they now allow you to change the date range on the PPP report):

a) 2019 calendar year.
b) Most recent 12-month period before your loan application.

Most businesses will select either (a) or (b).

Pro tip: If you’re trying to get the highest loan possible, pick the period that is higher. If you’re worried about hitting 75% of your prior-year monthly average, pick the period that is lower.

c) Seasonal business that has its highest payroll this time of year: use info between February 15, 2019 and June 30, 2019.
d) New businesses, or ones that expanded this year (i.e., FTEs and payroll were higher during the first part of 2020 than they were during the other acceptable reporting periods): use the alternative reporting period of Jan 1-Feb 15, 2020.

Second, if you use a payroll processor; and are on payroll yourself (S-Corp or C-Corp); and your health insurance, retirement and other benefits are tracked through your payroll system; then you should be able to simply run a report specific to the PPP through them. Change the date range if needed and you’re done with this step. (Yay!)

If you have employees (or you are an employee of your own company) but do not use a payroll processor, or your payroll processor doesn’t have this report for you, then you’ll have to calculate this yourself (and switch to Gusto as soon as this is over). Take the 12-month total for the period you chose above (if you’re using the 2019 calendar year, just take Box 5 from each employee’s W-2) and follow the steps in this article, under “How did you calculate my average monthly payroll costs?“

If you are a sole proprietor and do not have employees, then you have two options for calculating the average monthly “payroll”. Either take the amount on Line 3 on Schedule SE from your 2019 tax return, or take the Net Income from your reconciled QuickBooks Profit & Loss report for whichever date range you selected above. Add health insurance and retirement benefits. Divide by 12. (Make sure you attach the calculations when you fill out the application.)

Lastly, if you are a partner in a partnership and do not have employees, then you have two options for calculating the average monthly “payroll”. Take the amount on Line 3 on Schedule SE from each partner’s 2019 tax return, or use the company’s reconciled QuickBooks Profit & Loss report to find each partner’s Guaranteed Payments, plus their ownership percentage times the Net Income — this second method is complicated enough that you may want to reach out to your bookkeeper or accountant for assistance if you choose it. Add health insurance and retirement benefits. Divide by 12. (Make sure you attach the calculations when you fill out the application.)

Pro tip: If you’re trying to get the highest loan possible, pick the method that is higher. If you’re worried about hitting 75% of your prior-year monthly average, pick the method that is lower.

4) Payroll Reports – if you have employees. Print these payroll reports from Gusto or ADP (or whatever payroll provider you use).

2019 all four quarters:
IRS 941
IDOR IL-941
IDES 3/40

2020 first quarter:
IRS 941
IDOR IL-941
IDES 3/40

2019 annual:
IRS W-2s
IRS 940

5) Health insurance and retirement contribution invoices – to support info reported by your payroll software; you will probably not need these until you apply for forgiveness, but pulling them now will help ensure that you’re reporting the correct amount of benefits with your average monthly payroll costs.

6) SBA Borrower Application Form — not the “Lender” Form! I’ve had bankers give more than one client the Lender Form accidentally (which is the form the banker is supposed to fill out and submit with your application). Here’s a sample, which you may want to fill out while you’re waiting for the lender to contact you. However, it’s likely that they’ll make you fill out their own copy when the time comes.

7) Monthly Rent and Utilities – some lenders are also asking for this info in anticipation of eventually applying for forgiveness, but it does not figure into the calculation of your actual loan. The loan itself is simply 2.5 times your monthly average payroll cost. Also, remember that you will only be able to spend 25% of the loan on rent and utilities in order to have the loan forgiven.

That’s it! There you go. Easy peasy, lemon squeezy.

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Payroll Protection Program – New Guidance and Important Reminders

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I woke up today ready to finally get some real client work done — tax returns have been sitting floundering for over two weeks now and I have a backlog of emails that gives me bad dreams — and found that new guidance on the Payroll Protection Program (PPP) was given to bankers last night by the Treasury Department and the SBA. Game on!

But in actuality it’s all really good news, because it ends the constant obsession with researching all the different possible interpretations, weighing the consequences of taking each approach, worrying about accidentally advising a client to ask for too much or too little, bickering with colleagues about differing opinions, and second-guessing an approach in the face of a banker who says otherwise.

(If you’d like a summary of the total mess Congress and the Treasury Department created when they rolled out this program, see this excellent article by my favorite tax writer, Tony Nitty.)

(And if you’d like a clear summary of the PPP program as it now stands, see this article from earlier today by another great Forbes writer, Kelly Anne Smith.)

So, first: here’s the new guidance that was given to bankers last night — and here’s the audio for the call itself.

And here’s a very brief summary of the highlights:

a) Use Gross Payroll (Not Net) – you will not subtract federal withholding or the employee portion of SS/MC after all — just like we all understood it from the beginning, before this whole fiasco with the interim guidance (because, we said… otherwise it would be silly, we said). You should not add in the employer portion of federal taxes, but you can still add in the employer portion of state taxes, like SUTA (state unemployment tax — in Illinois, that’s IDES).
b) Add Benefits to Payroll – the salary cap of $100K only refers to salary itself, and not benefits — you can add health/retirement benefits on top of this. I recommend using the W-2 Box 5 for the payroll portion, since it’s rarely adjusted for anything.
c) Don’t Worry If You Used the Wrong Rules – If a loan application has already been processed by a lending institution, then the applicant need not do anything more — they will be processed accordingly, given the interpretation of the law at the time it was processed. If a submitted loan application has not been processed, the applicant may revise their application and should work with their lender to do this.
d) Applications Are Not Going Into a Black Hole – 78,000 PPP loans have been approved, worth about $22 billion so far (though how many borrowers have actually received their money so far has not been shared). The banks are accepting applications and submitting them to SBA as their online systems can take it (they keep going offline). Treasury has said they will go back to Congress for more money if necessary — and as of tonight it seems we’re likely to get another $250B.

In addition to these new guidance clarifications, I wanted to list of some reminders about what we already know — specifically, things I keep noticing clients and colleagues are missing in their understanding of the program — as well as a few tips.

  • BEWARE OF SCAMS — especially from people who say they can get you a loan faster for a fee. They’re all over the place and easy to fall prey to, especially with all the confusion regarding the PPP. Remember, you shouldn’t have to pay a cent to submit a Paycheck Protection loan application.
  • The total amount of the loan is 2.5 times your average monthly payroll costs, period. Rent, mortgage interest, and utilities do not enter into this part of the calculation — they only are in the calculation for loan forgiveness.
  • No more than 25% of the PPP can be used on non-payroll items (again: rent, mortgage interest, and utilities).
  • Self-employed folks — sole proprietors and partners in partnerships — are eligible to apply for the PPP, and to include their self-employment earnings as if it were payroll. If they have employees, they can apply now; if not, they can apply starting April 10th. I recommend using Form SE (part of the personal tax return, not the business) to substantiate the full amount of their own “payroll” income, plus (as mentioned above) Box 5 of the W-2s for your staff (up to a $100K limit per person).
  • For full loan forgiveness, a borrower cannot let the dollar amount of payroll or the number of FTE (full-time employee equivalent) hours dip below 75% of the prior-year monthly average; but it won’t all be lost — it will be phased out.
  • You can choose from a bunch of different date ranges to calculate your monthly average (Gusto now allows you to change the date range on the PPP report):
    a) 2019 calendar year.
    b) Most recent 12-month period before your loan application.
    Most businesses will select either (a) or (b).
    Pro tip: If you’re trying to get the highest loan possible, pick the period that is higher. If you’re worried about hitting 75% of your prior-year monthly average, pick the period that is lower.
    c) Seasonal business that has its highest payroll this time of year: use info between February 15, 2019 and June 30, 2019.
    d) New businesses, or ones that expanded this year (i.e., FTEs and payroll were higher during the first part of 2020 than they were during the other acceptable reporting periods): use the alternative reporting period of Jan 1-Feb 15, 2020.

This is a lot of info to take in, I know… but hang in there and run the numbers — if you already own a small business, you’ve had to deal with way worse calculations than this. Now that we have reliable guidance and clarity on what will be accepted for the loan calculation and forgiveness calculation, it’s just a matter of crunching the numbers and preparing the documentation.

Speaking of which: next blog post — a checklist of information, calculations and documents to pull together so you have them ready for your PPP application!

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SBA Economic Injury Disaster Loans (EIDL)

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UPDATE 6/10/20:
Sec. Carranza indicated today that new EIDL applicants will begin to be accepted next week — they are still working through the queue of previous applicants, but as they get a handle on that, the system will be available again (currently it is only available to farmers). I have a client who applied on April 8th who received their loan this past week, so I can confirm that they really are still in-motion… when you see money suddenly show up in your bank account with “SBA TREAS” in the description, that’s probably it.

UPDATE 4/27:
As of 11:15 am Central, the SBA now notes on their website that they are continuing to review the existing queue of EIDL applications and will provide further information on new applications soon. More information in a new blog post here.

UPDATE 4/25: the EIDL program has had some funds replenished in the most recent round of legislation, and full information on it and how to apply can be found here.

We’ve spent so much time talking about PPP loans that we’ve left its older sibling, the Economy Injury Disaster Loan (EIDL), in the shadows.

The idea when you apply for an EIDL is that you need cash fast to save your business (historically, these types of loans are given out to businesses hit by a natural disaster of some type). So when you apply, they try to fund an advance of up to $10k (not necessarily the full $10k) in approximately three days — you even give them your bank info when you apply so they can deposit the funds stat.

In other words, if you meet the minimum qualification criteria to apply for an EIDL loan, and submit an online application to the SBA, you will receive up to a $10,000 advance in short order — that does not need to be repaid.

From Nav.com, a lending site I’ve used in the past for clients: If you meet the minimum requirements to apply for a disaster loan, the grant will be available to you whether or not your loan application is approved. With that in mind, if you need access to capital quickly, and don’t need a larger loan amount, this may be a good option for you.
These working capital loans (including the grant) may be used only to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred. The loans are not intended to replace lost sales or profits or to pay for expansion. Funds cannot be used to pay down long-term debt. They also cannot be used to consolidate debt.

So you certainly could receive an advance, and then not be granted a loan, and yet still get to keep the advance.

But as to a question I was recently asked during one of my daily client Q&A sessions: could you get the advance… but not apply for a loan, or decide against the loan if granted? And if not, then what’s the lowest amount you could request as a loan?

From what research I’ve done (by no means authoritative, so please reach out if you discover otherwise), it sounds like you do have to apply for some sort of loan. I have not yet found an answer about how small a loan you could request. If you apply for $25k or less, there is no personal guarantee and no collateral required. Over that amount, but under $200k, will require a personal guarantee and collateral — but it will avoid some additional costs that come with higher loan amounts.

There is an interesting note on the SBA site, however:
There is no obligation to repay the grant. To receive the $10,000 emergency grant, it is not necessary to have an approved EIDL loan. However, if you are able to secure a PPP loan, the $10,000 grant will be subtracted from the forgiveness amount.

I am unsure about whether this is still true or not — it certainly was initially, but in the past week it’s been widely reported that you may receive both a PPP and an EIDL loan as long as both are not paying for the same expenses, so it’s possible that the info on the SBA site is outdated. It remains important to have a good relationship with your lender to get these kinds of questions answered before signing.

I’ll leave you with some additional info from Brian Thompson over at Forbes:

The EIDLs expanded provisions include: 

  • Can be approved by the SBA based solely on an applicant’s credit score (not repayment ability and no tax return is required).
  • EIDLs smaller than $200,000 can be approved without a personal guarantee. They are also not requiring real estate as collateral and will take a general security interest in business property. 
  • Borrowers can receive $10,000 in an emergency grant cash advance that can be forgiven if 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. 
  • It expands access to sole proprietors or independent contractors, as well as tribal businesses, cooperatives, and ESOPs with fewer than 500 employees and all non-profits including 501(c)(6)s. 

Because lending decisions are based on self-certification and the applicant’s credit score, the review process should go quickly. CARES also waives the requirement that you be unable to obtain credit elsewhere. That means you can apply even if you already have a credit line.

You apply for these loans directly through the SBA at www.SBA.gov/disaster.  There are no loan fees, guarantee fees or prepayment fees. As of March 30, the new streamlined online application is up and running. Make sure to apply for Economic Injury for the Coronavirus, rather than physical damage due to another disaster (that is a different declaration number).

UPDATE 6/13/20: Although there is much disagreement among colleagues on this topic, according to the AICPA it is likely that EIDL grant advances will have to be subtracted from PPP forgiveness when the time comes.

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Payroll Protection Program Calculation Template

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IMPORTANT: This blog post is now out-of-date due to new guidance released on April 6th — see new post here.

The most recent interim guidance for the Payroll Protection Program makes a few vague and misunderstood items clearer… and creates some new issues in the process.

From my colleagues over at KMK Law:

Material Changes in PPP

  • Independent contractors do not count as employees for PPP loan calculations or loan forgiveness.
  • All federal employment taxes, including employee’s federal income tax withholding and both employer and employee’s share of FICA from February 15, 2020-June 30, 2020 are excluded from “payroll costs”.
    • This means that businesses are eligible for loan forgiveness based on the after-tax pay to employees (after FICA and income tax are withheld), not the gross pay made by the employer.
    • This exclusion applies only during the Feb. 15, 2020-June 30, 2020 period, which seems to imply that borrowers do not have to deduct employee income tax withholding and FICA when calculating the loan amount from 2019 payroll costs, except to the extent total payroll costs exceeds $100,000 per employee (including FICA and income tax withholding).
  • Interest rate is 1.0%.
  • At least 75% of PPP loans proceeds must be used on payroll costs (whether or not used in the 8-week period eligible for forgiveness; and to be eligible for forgiveness such payroll cost must be paid during the 8-week period).
  • Borrowers knowingly using PPP loan funds for unauthorized purposes may result in additional liability, including fraud.  In addition, if one of the borrower’s shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against that shareholder, member or partner.

Note in particular the bit about payroll taxes: as a result, a lot of folks could be caught by surprise due to the fact that the initial loan request amount is based on gross pay, and the loan forgiveness is based on net pay. Most of us are pretty sure this was not the law’s intent, but we have to work with the most recent regulations released by the Treasury.

This excellent template by Joey Brannon at Axiom takes the new regs into account and explains his analysis by referring directly to each passage in the most recent release. Keep in mind that if you use Gusto or ADP, they will have calculated much of this for you — just make sure to gut-check the results.

The Treasury has also released a PPP Fact Sheet (it’s a little vague, but relatively simple to follow).

Of course, the entire small business community, accountants, advisors, lawyers, banks and other lenders are all frustrated beyond compare that this calculation couldn’t have been standardized and applied consistently. My favorite tax writer, Tony Nitti at Forbes, wrote an excellent article in the form of an open letter to the Treasury Secretary that outlines everything we’re thinking and feeling (but more intelligently, backed up with data, and without swear words).

Furthermore, Gusto is getting push-back from some clients and lenders who disagree with the interpretation of the new regs, and they have released an updated report that allows users to choose either method of calculation.

Hopefully this is just a glitch that will be remedied in the next week, after the ten days of comments are up — but just in case, you may wish to have all employees go to 9 exemptions for those eight weeks, making up the under-withholding later in the year. (And it serves the dual purpose of getting cash into the hands of people now, rather than at tax-time.)

Are we having fun yet?

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BCBS Relaxes Eligibility Requirements for Current Health Insurance Group Members

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I honestly never truly expected to see this day come. Hoping against hope two weeks ago, I spent many hours on calls with my benefits advisors, health insurance reps, and every HR resource I could find, to no avail. But apparently, since then, even big bad for-profit health insurance corporations have recognized that forcing millions of furloughed Americans into losing their group health insurance is maybe a bad idea.

Here’s the issue — let’s say you run a small business and you want to start a group insurance plan for your staff. Group plans tend to be less expensive, give you more for your money, and allow access to a wider network of health providers. (Don’t get me started on why all plans aren’t group plans, or why discrimination against self-employed or single-owner businesses is allowable.) But here’s the trick: they require you to have at least one non-owner on the plan. And the second hurdle: with a group plan they require employees to work at least 20-30 hours per week to qualify for coverage (depending on the plan). You’d think the employer would get to choose the number of hours, but no — the for-profit health insurance company does. (Again: do not get me started.)

Enter the COVID-19 crisis. Suddenly small business owners are having to lay off or furlough their staff left-and-right. Hopefully they’ll be able to hire them back when PPP funds, grants or loans come through, but in the meantime, they’re on unemployment. So this means:
1) Employees who have been furloughed or laid off don’t have health insurance unless they can afford to reimburse the employer via COBRA. Which they can’t. Because they just lost their job.
2) The employer may be generous enough to pay for the health insurance for the employee in the meantime, at least to the extent they were previously contributing to it if not more, but they’re not technically allowed to do this if the employee is no longer working 20-30 hours per week (30 hours for BCBS). Some small businesses were doing it anyway and hoping insurance companies were turning a blind eye; or they were technically putting folks on COBRA but not requiring employees to pay for it, booking it instead as an “advance” to be paid back when the business could hire them back.
3) Lastly — and this part stung the most: remember I said earlier that a business owner had to have at least one non-owner in order to have a group plan? Well, what happens if you have to lay off all your employees? The group plan would be terminated and now the owner and their family aren’t even covered anymore. (This is so messed up.)

So you can imagine my shock and thrill when I received the email below last night! Blue Cross Blue Shield of Illinois is actually relaxing the eligibility requirements for currently-enrolled group members, at least through April 30th: this includes staff who are laid off, are on a leave of absence, are furloughed, or are working fewer hours. The relief will last at least through April 30th.

They are also opening up a special enrollment period for staff who had previously declined coverage to be able to get on the company health insurance plan now, or for covered employees to add dependents. This is extremely helpful for staff who may have been covered under a spouse who just lost their job. However, these folks don’t get the same flexibility I mentioned above (which is totally ridiculous, but whatever — I don’t write these rules; if it were up to me we’d all be on a single-payer system).

The take-away: PLEASE DO NOT FLIP THE SWITCH TO COBRA YET FOR YOUR COVERED EMPLOYEES, REGARDLESS OF THEIR CURRENT EMPLOYMENT STATUS. They will remain covered, hopefully up through when the PPP or other funds come to fruition and you can hire them back. If you need to be reimbursed by your employees for their portion of insurance, consider working with them on a case-by-case basis to see who is best able to afford it. Make sure to treat them fairly, but also understand that some have more means than others. For those whose hours are reduced, work with them to make sure they have sufficient pay in their paycheck to have their contribution portion withheld as usual.

And if you are a furloughed employee in danger of losing your coverage, contact your employer to negotiate an extension of benefits at your prior contribution amount — many are willing to make exceptions to reward staff loyalty. Check out this 1-minute video on how to maintain your insurance benefits.

The full text of the email I received from BCBS is here:

Special Enrollment Period and Resources for Group Members Losing Coverage
We are committed to standing with our customers and members in this changing environment. As part of that commitment, we want to let you know about some of the options that may be available to you and several different ways we can help group members who may need coverage support due to COVID-19.

Eligibility Requirements
We have relaxed the eligibility requirements for currently enrolled/covered group members. 

  • From now through April 30, employers can maintain employees who were enrolled on their plans as of March 20, regardless of the eligibility definition stated in their plan or the BPA. 
  • This includes reduced work hours, furlough, leave of absence or layoffs.
  • Groups do not need to do anything. No paperwork or email is needed, as we will accept current and accurate eligibility files.
  • This flexibility does NOT apply to those who are newly electing coverage via the special enrollment period (see below).

Special Enrollment Period
We are also offering groups an optional special enrollment period from March 30 to April 30. This would apply to eligible employees and their dependents who previously declined coverage and now want to enroll, or currently enrolled employees who wish to add an eligible spouse or dependent to their existing coverage.

  • Applicable enrollment changes must be received on or before Friday, May 1. 
  • Effective date of coverage will be the group’s standard coverage effective date/billing date – for most groups this will be April 1.
  • This enrollment event will be for medical/pharmacy and dental coverage only.
  • Employers should notify their account representative if they plan to use this special enrollment option and use the standard eligibility process to add employees.

Other Coverage Options
If you have employees losing coverage through your group health plan, those employees may have several options for alternative coverage.

Federal COBRA: Eligible employers with 20 or more employees must offer coverage under federal COBRA. Employees losing coverage due to a qualifying event, which can include job loss or a reduction in hours, may have the opportunity to enroll in COBRA coverage to continue their current group health plan.

Individual coverage:

Marketplace plans – Any individual can enroll in a Marketplace plan, and some may qualify for financial assistance, depending on their income. Employees can view their benefit plan options at Selectbcbsil.com. 

Medicaid plans – Eligibility for Medicaid depends on income and other state requirements. Employees can view their benefit plan options at bcbsil.com/bcchp.

Additional Resources
We have created materials to help you communicate these options to employees:

  • An email template you can use to explain their coverage options
  • A flier that can be printed or shared electronically

We are here to help our customers and our members during this difficult time. Please don’t hesitate to reach out to your account representative with any questions.

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City of Chicago Small Business Resiliency Fund

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Applications for the Chicago Small Business Resiliency Fund are now open. The loan application went live yesterday afternoon (March 31st).

The Chicago Small Business Resiliency Fund is designed to provide small businesses and non-profits with emergency cash flow during this health crisis. Funds will be provided to eligible businesses as low-interest loans.

Most importantly, the Resiliency Fund is structured to complement the new federal Paycheck Protection Program that the Small Business Administration (SBA) is launching.

The way it works is that when you apply for Chicago’s fund program, they assign you a community lender who can help you navigate all the options you have as a small business. So it’s worth applying even if you decide not to take the Chicago Fund loan, just for the free assistance in navigating these difficult waters.

The loans are available on first-come, first-served basis, but they will be taking measures to make sure that they are distributing them equitably. See their FAQ here.

This loan program is intended to be a small loan that is a stop-gap measure so you can pay your staff and bills in the short term while you are searching for other options. There is no application fee. Terms are listed here. The fixed annual interest rate on the loan will be 1% for the first 18 months. After 18 months, the rate will increase to 5.75% for the duration of the loan.

You can borrow up to $50k, based on revenue prior to the crisis. Funds are to be used for working capital, with 50% going to payroll. Borrowers must commit to retaining workforce at at least 50% of level prior to crisis, but there will flexibility for closed businesses and other situations that might prevent this.

More requirements to qualify:
– Must have suffered at least 25% revenue decrease due to the crisis.
– 0-50 employees (sole props can apply)
– Gross revenues <$3M
– Located within City of Chicago – show business license or address
– 50% or more of employees must live in Chicago
– Must have been in operation at least one year at time of receiving the loan
– Non-profits are eligible
– If you have multiple businesses, you apply for one loan that covers them all

Required documentation:
– Business address within City of Chicago
– If you have a Chicago business license, provide it
– Bank statements dating back to October 2019
– Most recent tax return (whatever the year)
– Photo ID of at least one of the owners
– You will get a debt check to see if you currently owe the city

For application support, contact your local Neighborhood Business Development Centers (NBDC). The Resiliency Fund staff will also be able to assist in the application.

Supposedly, the lender you are connected with will help you navigate the full landscape of what is available to you: not only this loan, but other SBA loans, PPP loans/forgiveness, grants and other funds and resources.

They suggest you apply regardless, just so you are connected with a neighborhood lender, BACP fund staff, and your local Neighborhood Business Development Fund just to get info on what your options are about all resources that might be available to you.

However, if you have the time and resources, please continue to contact other SBA preferred lenders so you have the opportunity to choose the path that is ultimately most quick, cost-effective, and appropriate for your business.

Other Chicago Resources
Chicago has deferred all tax payments until April 30th — you still must collect restaurant, bag, amusement, etc. taxes from consumers, but the tax payments themselves will not be due until April 30th.

Though the Business Affairs & Consumer Protection (BACP) offices are closed, they are still processing business licenses, but late and renewal fees are deferred until April 30, 2020.

www.chicago.gov/coronavirus
www.chicago.gov/BACPCOVID19
www.chicago.gov/nbdc
www.chibizhub.com/covid19support
www.chicagobusinessdirect.org

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