Scroll to the bottom of this post for a link to the full webinar.
As I’ve mentioned in recent posts, one of the main sources of financial relief from the congressional legislation that was finally signed recently is that the Employee Retention Credit (ERC or ERTC) will now be available to businesses who also accepted Paycheck Protection Program (PPP) funds. Not only will eligible businesses be able to claim this moving forward, but they have an opportunity to “scoop up” payroll dollars from 2020 that would have been eligible had it not been for the PPP Loan.
As a reminder, this credit is available to business owners (regardless of size) whose operations have been fully or partially suspended by government order, or who have seen a drop in income of more than 50% compared to the same quarter in the previous year. The credit comprises 50% of up to $10,000 in wages to each employee paid by an eligible employer whose business has been financially impacted by COVID-19. The credit cannot be taken on wages that were paid for by PPP funds — but as long as there is no double-dipping, PPP recipients can claim other wages for the purpose of ERC. It is claimed as a reduction of payroll taxes on quarterly Form 941 (or a prepaid refund on Form 7200). The IRS updated the form on July 1, and a handy breakdown of the new lines can be found here.
Last week, I offered a webinar to members of my favorite professional bookkeeping group, and they have been kind enough to allow me to share the recording here at no charge. The purpose of the session was to explain the credit and the related challenges, and to brainstorm how we might move forward to calculate the totals and claim it for our eligible clients. Our conclusions have been enforced since then:
1. Identify which clients might qualify and make sure their books are up-to-date (even though we are still waiting on a lot of guidance — for example: what receipts are we looking at when we calculate a 50% drop in revenue? Does it include state and local emergency grants?)
Here is the Excel template I used in class to track client eligibility:
2. Reach out to the payroll companies to see what they will need to claim the credit;
3. The likelihood that this will all happen quickly enough to claim the 2020 ERC on the 4Q Form 941 is very slim; plan on filing amendments for Q2, Q3 and Q4 later.
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.
The newest Covid-19 financial relief package was finally signed, and one of the big features is that the Employee Retention Tax Credit (ERC or ERTC) was made available to many businesses that previously were not allowed to claim it, most notably those who accepted PPP loans.
To summarize the ERC: • 50% refundable payroll tax credit on qualified wages paid between 3/13/2020 and 12/31/2020 • Claimed on quarterly payroll tax Form 941 • Qualify for quarters with full or partial shutdown due to government order =OR= 50% decline in gross receipts from prior quarter • Maximum qualified wages of $10,000 per employee during tax year 2020 period • For employers with 100 or fewer employees, all wages paid are “qualified wages” (different rules for larger employers) • PPP loan recipients were previously ineligible
Changes retroactive to 3/13/2020: • PPP loan recipients can use the credit for wages not paid for with forgiven PPP loan proceeds (no overlap) • Group health plan expenses are considered qualified wages even if no other wages were paid to employee
And the reason for this post — the employer can elect to treat newly creditable wages as paid in the quarter that includes the date of enactment of the Act (4Q 2020) if employment tax returns for prior quarters were already filed prior to the enactment of the Act.
The ERC is also being extended and expanded — but that’s beyond the scope of this blog post. A quick summary of what’s to come: The credit availability is extended to wages paid through 6/30/2021 and the following changes will apply: • Credit rate increases from 50% to 70% • Maximum creditable wages increases to $10,000 per employee per quarter • For employers with 500 or fewer employees, all wages paid are qualified wages • Qualifying gross receipts decline from prior year quarter reduced to 20% instead of 50% – Employer can elect to compare to immediately preceding quarter – Employers not in existence for all or part of 2019 can use the credit
But the point here is that the old ERC is now available to any qualifying employers who had either a 50% reduction in gross revenue or were fully or partially shut down by government order — even if they received PPP funds. They just can’t double-dip on the payroll costs that were claimed for PPP forgiveness. And so for these employers, any remaining (non-PPP) payroll costs from 3/13-12/31/20 can now be claimed on the fourth-quarter payroll tax Form 941 and 50% of up to $10,000 per employee will be credited back to them. This is not small change for some employers!
The problem, of course, is that we have to act fast — the fourth-quarter 941 forms will be filed in a matter of a week or so, depending on your payroll company. They are all scrambling to find a way for us to report which wages are eligible… but in the meantime we need to get our clients ready.
The first step is to determine which clients are already taking the credit.
There are many fine payroll companies out there (actually, there aren’t), and Gusto is hands-down my favorite, and that of many of my colleagues. (And if you use my referral link you’ll get a $100 gift card when you run your first payroll by January 31. If you’re a bookkeeper or accountant wanting to switch your clients to Gusto, this referral link will get you a $500 gift card.)
So I’ve written up instructions with screen shots on how to look up which clients of yours using this system are already claiming the ERC. Once you know this, you can then 1) reach out to them to let them know they can now apply for the PPP, and 2) reach out to the ones who haven’t to let them know they might qualify.
Step One: log into your Gusto Accountant dashboard. Step Two: click on “Clients” in the upper-left to see a list of your clients. Step Three: you’ll need to click into each client and perform the following steps.
Click “Covid-19” in the upper-left.
Scroll past the new notice about the Consolidated Appropriations Act (see screenshot at top of blog post).
There are a bunch of blocks of info on the different programs for which the client might be eligible. Click the “Claim credit” button for the Employee Retention Tax Credit.
4. You will see one of two screens — either it will say “You’re currently receiving the employee retention tax credit” or it won’t.
This is what it looks like if your client is already receiving it:
And this is what it looks like if they’re not:
If they’re not, and you’ve determined that they qualify (50% reduction of gross revenues over the same quarter in the prior year =OR= full/partial shutdown by the government), then click the button at the bottom of the screen to claim the credit and you’ll come to this screen next.
You’ll need to know the quarter in which they became eligible and had wages that qualified for the credit.
Once gross revenues climb back up to 80% of what the same-quarter prior-year revenues were, the client ceases to qualify and must stop taking the credit.
Again, remember that this is to claim wages paid from 3/13-12/31/20 (that were not paid for with PPP funds) on your fourth-quarter payroll tax Form 941. We do not yet know how Gusto (or any of the other payroll companies) will process this information, but given how soon they will need to be filed, it’s essential that we get our clients ready as quickly as possible, and this is Step Two — finding out if they’re already claiming it or not.
(In case it’s not obvious: Step One is determining if they qualify. We’re going through all our clients’ QuickBooks files to review for a 50% drop in gross revenue and then reaching out to clients accordingly, after determining whether they have taken the ERC already or not.)
Good luck!
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.
In an effort to push Congress into action, the IRS reiterated its stance on the PPP last week.
Late last week, the IRS and Treasury issued both a revenue ruling and a revenue procedure, doubling down on their stance that since businesses aren’t taxed on the proceeds of a forgiven PPP loan, the expenses aren’t deductible.
This isn’t new news, of course. The IRS is bound to statute on this one and doesn’t have any wiggle room — only Congress can legislate on the topic of what is taxable and deductible, whereas the IRS only has administrative oversight in this arena. They made it clear very early in the game — April 30th, in fact — that they had no intention of accepting deductions for expenses that were paid for with PPP funds.
But in the ensuing months, Congress — despite broad bipartisan support for a measure to render these costs deductible — has been stuck in gridlock and failed to pass legislation making it so. This recent action on the part of the IRS seems designed to signal Congress that only by their action will the original intent of the CARES Act be realized.
However, the IRS took this particular set of guidance one unfortunate step further, at least as far as my clients are concerned.
“If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not.”
Now, I have been attending the AICPA Town Halls since nearly the beginning of the pandemic, and they are still strongly recommending that no one apply for forgiveness before year-end unless: 1) they need to sell their business; 2) loan covenants are at risk; or, 3) they need to reduce FTEs after meeting a date-driven safe harbor.
Part of the reason for this suggested delay is the aforementioned statutory requirement that prohibits the IRS from permitting any deductions for expenses paid for with non-taxable income. (Also: likeliness of legislation authorizing automatic forgiveness under a certain threshold; and the need for further guidance in many areas that remain unanswered.)
The idea was that if forgiveness was not granted in 2020, then the deductions could be made as usual on tax returns filed in the first-half of 2021. When forgiveness was eventually granted on these PPP loans, one of two things would have happened: 1) Congress would since have acted to protect the deductions and therefore PPP funds could be accepted into non-taxable income; or, 2) Congress would not have acted, in which case the PPP income would effectively be made taxable in 2021.
To me, whether the expenses paid with PPP proceeds were deductible hinged on whether forgiveness was obtained; as a result, I strongly maintained that those expenses did NOT become nondeductible until that “condition subsequent” occurred. As a result, if a business were filing its 2020 tax return before word on its forgiveness application had come down from the SBA, the expenses would be fully deductible. After all, we have a little something called the “tax benefit” rule, which allows a taxpayer a full deduction if at the time of filing the return, no event has occurred to render the amount nondeductible. Then, if a future event occurs that is fundamentally inconsistent with the premise on which the previous deduction was based (for example, an unforeseen refund of deducted expenses, or in this case, the forgiveness of a loan), the taxpayer must take the deducted amount into income. Applying the principles of Section 111 to PPP loans, the taxpayer would be entitled to a full deduction in 2020, with a potential income pick-up in 2021 when the loan was forgiven.
But with this recent IRS guidance, as Tony points out — he was wrong (again).
According to the Ruling, it matters not whether the application for forgiveness has been filed by the time the tax return is ready to go; rather, what matters is that the taxpayer apparently knows, in their heart of hearts, that the loan will ultimately be forgiven. After all, as the Ruling explains, “Section 1106(b), (d), and (g) of the CARES Act, and the supporting loan forgiveness application procedures published by the SBA, provide covered loan recipients… with clear and readily accessible guidance to apply for and receive covered loan forgiveness,” a sentence which I would have found laughable had the lies contained within it not ruined the past six months of my life.
I won’t get into the details of what it means to “reasonably expect” forgiveness, or determine partial forgiveness, or whether or not the new safe harbor applies if you “reasonably expect” wrong. (I’ll let Alan Gassman, another fan of Tony’s, dive into those weeds.) But as a short summary: 1) You can deduct expenses on your 2020 return if you find out before the return is filed that the PPP loan didn’t get forgiven or if you decide not to apply for forgiveness; 2) If you guessed wrong about the amount of forgiveness (and therefore deductions), you can either a) amend the 2020 return to adjust the disallowance, or b) deduct the improperly disallowed expenses for 2020 in the year forgiveness is determined.
Somehow, with not only a revenue procedure but also a revenue ruling, the IRS managed not to address two big issues that their rulings raise: 1) How should a Schedule C filer handle the deduction question? For a self-employed person, it’s not the expenses that determine forgiveness, but rather a calculation based on their 2019 income. 2) Which deductions will be limited, and in what order (payroll, rent, mortgage interest, utilities)? This has serious ramifications for the §199A Qualified Business Income deduction, Research & Development credits, and the §163(j) Interest Deduction limitation.
But I am not even going to touch on those two issues. Why? Because I truly believe the IRS made this announcement to rile up Congress members into finally taking action. It might have worked.
The leaders of the Senate Finance Committee, chairman Chuck Grassley, R-Iowa, who is now battling a coronavirus infection, and ranking member Ron Wyden, D-Oregon, blasted the guidance issued by the Treasury. “Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses,” they said in a joint statement Thursday. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless. Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.”
Grassley and Wyden said they would continue their efforts to clarify in any end-of-year legislation the intended relief in the CARES Act to help small businesses at this critical time. “We encourage Treasury to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most,” they added.
In the meantime… as an accountant, what do you tell your clients? As a small business owner, what do you do?
Well, if I’m right, and Congress is duly riled, then hopefully we’ll finally see some movement here, preferably before the end of the year, but (dear lord please) at least before tax season. At which point — poof — it becomes a non-issue (with the exception of the countless hours I and others have spent worrying and writing about it).
Tax Filing Approaches for Consideration 1) Wait and see • Use extensions until additional guidance or legislation is available • Pass-through entities don’t need to be concerned until March/April 2021 deadlines 2) File return and pay taxes • Assumes expenses paid with PPP funds will not be tax deductible • If this changes, the borrower can file an amended return 3) File return and deduct expenses** • Contrary to current guidance (but in the spirit of the PPP legislation)
For what it’s worth, Bill describes himself as a “wait and see” kind of guy. (I strongly suggest watching Bill’s participation in the most recent AICPA Town Hall — from 32:00 through 52:40. His logical process, description of history and legislative intent, and arguments are thought-provoking.)
I’ve already spoken with my tax partner, and our plan is to put all partnership and corporate clients on extension to avoid the unnecessary cost of approach #2 and the unnecessary risk of approach #3. Haven’t yet decided how to handle Schedule C self-employed filers… but also hoping we won’t have to cross that bridge.
In the meantime, it’s business as usual, trying to close out books and prepare for 1099s… as if it were any other pandemic year-end.
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.
UPDATE: THIS POST IS ALMOST A YEAR OLD AND NO LONGER IS USEFUL INFORMATION.
(Way too many folks are landing on this page and I want to dissuade them from using this as a reference — there have been so many changes to the PPP since this was published. Make sure you restrict any internet searches to posts made in the past month!)
I’m getting this question a lot:
I have someone telling me that they can use all 100% of their PPP for payroll instead of the 75/25 rule of payroll/rent+utilities. Is that correct?
Yes, it is — and yes, you absolutely want to include all of your payroll costs in the forgiveness application calculations!
Some folks are in the situation whereby they have more payroll costs than 75% of the loan will cover. In fact, in some cases, the entire PPP loan — 100% — will be used on payroll costs. And that’s a good thing when it comes to requesting forgiveness, for reasons I’ll explain.
In my firm, for example, I’m paying staff tax-season rates right now, and I have a new employee as of January 2020… but my loan total was calculated based on the average of all of 2019 — so it’s much lower than my actual current payroll costs. I’ll be using 100% of my PPP funds for payroll (and then some). By including all my payroll costs in the forgiveness application and projection calculations, I don’t have to worry about going to the effort of submitting rent/mortgage interest and utilities costs (which are very low for me anyway, as my staff is entirely work-from-home).
But it’s not just a matter of having low overhead and not wanting to spend administrative effort to gather mortgage interest and utilities cost substantiation… it’s more importantly because for forgiveness, we’re all aiming to hit three important tests: the FTE reduction, wage/salary reduction, and 75% of forgiveness hurdles. These are all based on payroll measurements, so it’s best when plugging in your forecasting calculations to first include all the payroll you can… and then just make up the difference with non-payroll costs. The total forgiveness cannot exceed the loan total, so there is no harm in taking this approach.
It is, after all, a Paycheck Protection Program.
Reminder: owners themselves (be they sole proprietors, partners, or shareholder-employees) cannot have more than 8/52 of their 2019 compensation forgiven for PPP purposes, which does mean that for a business owner with no employees, they will not be able to use 100% of the funds for payroll. But for everyone else, yes!
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.
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:
Pull up your client copy of the 2019 partnership tax return — Form 1065.
Scroll down to the K-1 forms — there’s one set for each partner.
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.
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.
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 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.
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.
IMPORTANT: This blog post is now out-of-date due to new guidance released on April 6th — see new post here.
The new CARES Act has introduced the “Paycheck Protection Program” (PPP) — $350 billion in loans to be administered by the SBA. The loans may be used to cover a borrower’s payroll and payroll taxes, mortgage interest, rent and utilities for eight weeks from the date of the loan.
But this is the key: if an eligible borrower uses the loan for qualifying expenses “while maintaining its workforce”… the loan may be forgiven. This makes the PPP way more valuable than most other federal, state and city aid (with the exception of flat-out grants, and possibly some credits).
The loans aren’t available yet — hopefully we’ll begin seeing these within the next two weeks. This legislation is hot off the press, and lenders do not yet have guidelines or checklists in place to know how to process applicants. I know this sounds awful to ask of you at a time like this, but: please be patient. Use the time to get your books and documentation in order, select and reach out to your favorite lender, and get everything ready to apply the moment they open the gates.
Qualification and Terms
To qualify for the loan program, a borrower:
(1) must have been in operation on February 15, 2020;
(2) have no more than 500 employees; and,
(3) must certify that the uncertainty of current economic conditions makes necessary the loan request to support its ongoing operations.
The amount of a loan cannot exceed 250% of the borrower’s average total monthly “payroll costs” during the one-year period leading up to loan origination. “Payroll costs” include salaries, wages, commissions, tips, paid time off, health insurance, retirement benefits, and state and local taxes not to exceed $100,000 per employee.
Loans are subject to a maximum of $10 million.
Amounts not forgiven (explained below) will have a maximum maturity date of 10 years from the date the borrower applied for loan forgiveness.
Interest on the loans shall not exceed 4% until June 30, 2020, but may be subject to change afterwards. All loan payments (principal, interest and fees) are deferred for at least six months, and up to one year.
Loans are “non-recourse” (which means company owners are not responsible for payments if the company defaults), except to the extent the loan proceeds are used for a purpose other than borrower’s payroll, mortgage interest, rent and/or utilities expenses.
Borrowers/owners will not need to provide any collateral or personal guarantee during the “covered period” (February 15-June 30, 2020). (It’s unclear whether lenders will require collateral and/or a personal guarantee to spring into effect upon the loan continuing to remain outstanding — or not completely forgiven — after June 30, 2020.)
Loan Forgiveness
The total of all payroll costs, mortgage interest payments, rent and utility payments incurred and made by a small business PPP borrower during the eight weeks following the loan — capped at the total loan principal amount — is potentially eligible for forgiveness. Unlike other forms of forgiveness of indebtedness, the amount of forgiveness received by a borrower will not be taxed as income. So this is kind of a big deal.
However, the maximum forgiveness amount will be reduced if the company reduces its number of Full-Time Equivalent Employees (FTEs) and/or reduces wage or salary compensation in excess of 25%. The reduction of forgiveness is reduced in proportion to the decrease in the number of FTEs during the eight-week period following the loan origination date, and the borrower’s monthly average FTEs from either (1) February 15, 2019 – June 30, 2019 or (2) January 1, 2020 – February 15, 2020.
In addition, the maximum forgiveness amount will be reduced dollar-for-dollar for any wage or salary reduction of an employee (who is paid less than $100,000 year) in excess of 25% (measured against the wage and salary for that employee during the most recent full quarter prior to the loan origination date).
If the small business previously reduced its workforce or the salary/wages it pays its employees, they can still qualify for loan forgiveness if FTEs are re-hired and/or wages are restored by June 30, 2020.
After an application is submitted for loan forgiveness, the lender will have 60 days to make a determination as to whether the loan will be forgiven. Lenders will then work with the SBA to be reimbursed for the forgiven amount; this won’t be something the small business owner has to do.
Information on Lenders
The Paycheck Protection Program will be administered by the existing network of approved SBA lenders, but the SBA and Treasury Department have said they are adding qualified lenders to disburse and service loans made with the guarantee of the SBA. Supposedly it’s not that hard to qualify as a lender, so if you have a good business relationship with a bank or other lending organization, encourage them to apply to become a qualified lender ASAP.
Lenders can make borrower eligibility determinations without SBA approval, using only the program eligibility rules. A borrower does not need to show it is unable to obtain credit elsewhere (a customary SBA loan requirement). This is also kind of a big deal.
Loans under the program are fully guaranteed by the federal government, which is an increase to the existing guarantee percentages under the current SBA loan program. (Ditto on the big deal.)
The SBA and the Department of Treasury are in the process of developing the guidelines lenders will use to administer the Payroll Protection Program loans. They must issue regulations within 15 days of enactment of the CARES Act, which means it’s possible that lenders could begin taking loan applications in two weeks. Just to be clear here: this is light-speed for a newly-enacted government program.
Recommendations for Potential Borrowers
I’m hearing from clients and colleagues that none of the lenders have received guidance yet for these PPP loans. However, if you have your books in order and gather all the appropriate documentation that you expect they’ll ask for, then you’ll be ready when the time comes.
In addition to getting the books in order for 2018, 2019 and up-to-date through 3/31/20 (if they’re not already), I’m recommending to clients who may be interested in the program, as potential borrowers, start working on documentation to verify the following: 1) the number of full-time equivalent employees on payroll and pay rates for the applicable periods: including payroll tax filings, state income, payroll, and unemployment insurance filings (basically, payroll from a comparable period one year ago); and, 2) payments on mortgage obligations, lease obligations and utilities: including payment receipts, transcripts of accounts, or other documents (to prove you had a lease or mortgage and utilities in service before February 15th of this year). 3) You’ll need some type of certification by an “authorized individual” (presumably an owner, partner or officer) as to the business having been negatively impacted by COVID-19; 4) And of course you’ll need some relationship with an SBA-approved Sec 7a lender, which means start calling around now.
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