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Last Chance (This Time) For PPP Funds: APPLY NOW

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The popular and problematic Paycheck Protection Program is up and running again starting 10:30 am tomorrow, Monday, April 26th.

But given the number of client emails and texts I’ve received today on the topic, I realized that there is still a lot of confusion about what a small business’s next steps should be. So here are a few urgent reminders:

Apply Today — Do Not Wait Until Tomorrow

The SBA is opening their e-Tran system Monday, April 26th at 10:30 am — that’s when banks and other lenders are able to begin submitting their completed application packages from customers. In other words, don’t wait until tomorrow to apply. Make sure your bank has your information ready-to-submit the moment e-Tran goes live. If you haven’t already applied (or cannot find out the status of your existing application), get your completed information to your (possibly new) chosen lender today. This means pull together all your documentation now and submit it in one package. Do your banker and yourself a favor and avoid delays that will require them to follow up with you for missing information.

Confirm Status of Existing Applications

Because the PPP has gone through so much flux and so many iterations and guidance/ FAQ releases, a lot of early applications seem to have gotten “stuck” — the banks were not prepared for how to communicate with so many customers at-once, so in cases where there was missing documentation, some applications were held up in limbo. Most banks have been working through those piles frantically since the program ran out of money, in order to be ready for the second tranche — but if you have not yet heard from your lender about the status of your application, it’s time to check in with them now. Many banks, including Chase, have (finally) included a link to application status information on the customer landing page (you must sign in first).

If you have access to a real human being, such as a branch manager or loan officer, try reaching out to them if the usual channels aren’t working. I had one client show up in-person one morning when the bank opened — they initially told him they couldn’t assist with PPP issues; then he explained his unique situation, and it turned out they were able to fix the problem. But please remember — I beg you — that these are real people. They are overworked, are sometimes given poor training, do not have enough hours in the day to analyze the constantly-changing guidance thrown at them, and are often being forced to come into an office without sufficient PPE or social-distancing opportunities. They are exhausted, anxious, and yelling at them will not help. It’s not their fault that Congress wrote a sloppy law that allowed multi-million-dollar companies to access money that was theoretically meant for you. Be nice.

Apply With Multiple Lenders If Your Application Has Stalled

There has been a lot of confusion here — the rules still aren’t quite clear. According to many unofficial sources (most of them lenders), you may apply with multiple companies. What the law indicates is that you may not accept more than one loan.

So there’s a lot of complexity here. Obviously, applying with multiple lenders clogs up the system for other applicants. And while multiple applications aren’t against the rules, some banks are claiming that they could result in applications being voided or delayed.

But if not all lenders — and not all staff processing these loans — are created equal, then why should you be penalized because your bank (or more likely, your small business department within your bank) doesn’t have its act together? My advice (unofficial “don’t sue me” advice), at least to my own clients, is that if your bank isn’t communicating with you — if you don’t know the status of your existing application and have no idea if it’s even being moved forward — then by all means reach out to one or more other lenders.

From Brit Morse in a recent article in Inc.:
But that doesn’t mean you should only apply at a single lender. The chaos of the program’s roll out along with the fact that different banks have deployed different resources and processes to address the influx of these loans, might necessitate applying at multiple lenders.

If you have the opportunity, you may wish to request a guarantee that they’ll reach out to you before submitting your file to SBA, to make sure that a fraud alert isn’t triggered, holding up all your applications.

List of Lenders and Partners Still Accepting Applications

I will not be able to keep this list updated, but as of now, here are some recommendations I’ve compiled from various sources.

FinTech companies with access to multiple lenders seem to be doing the best job getting these things turned around fast. Here’s an article from Inc. on the topic, with a good list.

Forbes is also maintaining an updated list of banks and FinTech offering access to the loans (scroll to the bottom for the list and links to FinTech).

Also, for clients using the Gusto payroll platform, they have been offering since almost the beginning to connect its customers with lenders. Go here and then sign in — you’ll be given the option to submit your info.

And here’s Gusto‘s public list of lenders that are certified for PPP loans. I went through the list and pulled out the ones indicating they are still accepting applications from non-customers:

Cross River Bank – I have had folks reporting good success with them.
Divvy – Fintech company that has access to multiple lenders.
First Bank
Fulton Bank
Fundera – I have had folks reporting good success with them. Fintech company that has access to multiple lenders.
Funding Circle –  Fintech company that has access to multiple lenders.
Kabbage – Fintech company that has access to multiple lenders.
Solera National Bank
Womply – Fintech company that has access to multiple lenders.
Zions Bank

If You Need The Money, Apply — Even If You’re Late To The Game

This second round is expected to go quickly, but don’t let that discourage you from applying. Rob Scott, a regional administrator for the SBA, told CNBC that “If someone didn’t qualify or didn’t apply, they should absolutely apply for the second round.” (Of course, this is insensitive blockhead who also said, “Overwhelmingly, the funds have been used for what it has been intended to do,” Scott said. “There are outliers. There are outliers in every program.”)

The SBA did not maintain a queue after money for the first tranche ran out — any application that was in-process was dumped. So when lenders go to the e-Tran system on Monday, they’ll be evenly-matched.

We have no way of knowing how long this disaster will last, and whether there will be a third wave of funding at some point. From Business Journal Daily:
“Whether there is a third round of funding – Bank of America has suggested it would take $900 billion in relief to get all small businesses the money they need – will likely be determined closer toward the end of the second round.”

This will give you an opportunity to build a relationship with a lender that may prove helpful in the future in ways you can’t predict.

Forgiveness? Not So Fast.

I keep working on a spreadsheet to help my clients determine how best to spend their PPP funds for maximum forgiveness — and it keeps changing with each morsel of guidance we receive from the Treasury and SBA. For now, just know that for businesses that already received their funds, the SBA is working on developing the guidance for how business owners will prove they retained staff to have their loan forgiven. I’m sure I’ll be posting plenty on that here on my blog in the upcoming weeks.

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, Illinois, Site News, Tips

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 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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Education, IRS, Tips

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!

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.

Illinois, Tips

Arts for Illinois Relief Fund

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From the Chicago Department of Cultural Affairs and Special Events:

Today, Mayor Lori E. Lightfoot joined Governor JB Pritzker to announce the Arts for Illinois Relief Fund, providing financial assistance to artists, artisans and cultural organizations impacted by the Coronavirus (COVID-19).

The fund is a partnership between the City of Chicago, the State of Illinois and the broader philanthropic community. Arts for Illinois Relief Fund is administered by Arts Alliance Illinois in partnership with 3Arts and Arts Work Fund.

Grant applications for artists, artisans and cultural organizations open today. Individual artists and artisans – including stage and production members and part-time cultural workers – experiencing an urgent need will be able to apply for one-time grants of $1,500 distributed by 3Arts. Grants will be awarded through a lottery system and will be disseminated quickly. Additionally, nonprofit arts and cultural organizations of any size will be able to apply for relief through the Arts Work Fund. Based on their demonstrated financial need, organizations will be awarded grants from $6,000 – $30,000. Artists, artisans and cultural organizations impacted by COVID-19 are urged to apply for grants through www.artsforillinois.org.

To date, more than $4M has been committed from public and private sources to seed an upcoming statewide campaign that will provide additional funding to meet the growing and critical needs of the state’s creative sector. DCASE has contributed $1 million to the relief effort, along with leadership gifts from Walder Foundation and John D. and Catherine T. MacArthur Foundation. Fundraising activities will be co-chaired by First Lady MK Pritzker and First Lady Amy Eshleman, with support from other civic leaders. Individuals, corporations and charitable foundations are encouraged to donate to the Arts for Illinois Relief Fund by visiting www.artsforillinois.org.

Arts for Illinois also launched an online platform that features talented artists – performers, singers, poets, painters, writers and other creatives from across Illinois – who have generously made their works available for the public’s enjoyment while at home during these challenging times. Visit www.artsforillinois.org to explore a wide-range of art experiences, as well as learn more about the Arts for Illinois Relief Fund. Share your art using #ArtsforIllinois.

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

Paycheck Protection Program Loans: What We Know So Far

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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 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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Education, Illinois, Tips

Furlough vs. Layoff: What’s the Difference?

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UPDATE 6/11/20 — an excellent, straightforward article by Accounting Web was released entitled, “How to Help Clients Conduct Layoffs and Furloughs While Mitigating Their Risk“. It explores the differences between various strategies: furloughs, paycuts, and layoffs — and how to navigate which to choose and what pitfalls each entails.

Today’s topic: when times are tough, and you need to put the pause on employment… which is the correct choice, furlough (temporary planned absence) or layoff (more likely permanent dismissal)?

The key, in my opinion, is that a temporary furlough is more likely to allow employees to keep their health insurance benefits. In most states, both furloughs and layoffs qualify workers for unemployment benefits (for sure in Illinois during the current lockdown).

Lots of good info in here — take a read: Furlough vs. Layoff: What’s the Difference? | Gusto.

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.