The Payroll Protection Program supposedly was taking first applications on April 3, 2020.   I have to admit that I know of no one that got an application in to a bank on that day.   But last week, people were actually getting applications in, and some have already received approvals.  That means that if you are eligible and haven’t talked to your bank yet, you better send an email or call them – yeah, like right now. 

So, are you eligible? 

  • Are you a “business”?  That includes nonprofits, veterans organizations, Tribal business concerns, sole-proprietorships, self-employed individuals, and independent contractors.
  • Do you have 500 or fewer employees?
  • Were you in business as of February 15, 2020?
  • Do you have a payroll that will be the same now as it will be two months from now?
  • Have you been adversely impacted by the COVID-19 pandemic?  (The specific certification is that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

If you answered YES, great.  Now, you want to answer NO to the following:

  • Are you engaged in any activity that is illegal under federal, state, or local law?
  • Are you a household employer (individuals who employ household employees such as nannies or housekeepers)?
  • Is any owner of 20% or more of the equity of the applicant incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or been convicted of a felony within the last five years?
  • Have you, or any business owned or controlled by you or any of your owners, ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent, or has defaulted within the last seven years and caused a loss to the government?

Those will all cause you to be ineligible.  So for eligibility’s sake, we are looking for a YES on the top set and a NO on the bottom set of questions.

You will want to be prepared with your payroll information.  The loans are based on that.  If you have celebrated your business’s 1-year anniversary, then they will look at the payroll from last year.  However, get this year’s payroll documentation ready, too.  They take average monthly payroll.

What counts as payroll costs?  Payroll costs include:

  • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee – that means if someone earned more than $100,000, the overage doesn’t get forgiven);
  • Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
  • State and local taxes assessed on compensation (notice the word “federal” seems to be missing); and
  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, again capped at $100,000 on an annualized basis for each employee.

That means that if you are an independent contractor, you can get the loan.  It does not mean that you can claim what you paid an independent contractor towards the payroll.  It is a bit confusing because the SBA template application says you can apply if you paid independent contractors as shown by 1099s.  HOWEVER, the guidelines make it clear that independent contractors have the ability to apply for a PPP loan on their own, so they do not count for purposes of a borrower’s PPP loan calculation.  Confusing?  Yes.  It took me looking at 3-5 different documents to be sure before I typed it out.  But don’t include independent contractor payments as part of the loan (either as the request or payout).

Here is the payroll calculation example that the draft regulations are giving:

The following methodology, which is one of the methodologies contained in the
Act, will be most useful for many applicants.

Step 1: Aggregate payroll costs from the last twelve months for employees whose principal place of residence is the United States.

Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.

Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).

Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.

Step 5: If you received an Economic Injury Disaster Loan (EIDL), add the outstanding amount that EIDL made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).

So, what can you use these loans for?  If you want the loans forgiven, you should use the borrowed amounts on your:

  • Payroll costs, including benefits for employees;
  • Interest on mortgage obligations, incurred before February 15, 2020;
  • Rent, under lease agreements in force before February 15, 2020; and
  • Utilities, for which service began before February 15, 2020.

Now for the big question: How much of my loan will be forgiven?  You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan

In a nicely cryptic message, guidelines have said, “Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.” Does that mean that you shouldn’t expect to get a loan for those expenses, or that for some reason they magically will retroactively decide that some of it isn’t eligible for forgiveness?  I think it is the former, but it does mean that you should document what you are spending the money on and make it payroll heavy.

Speaking of payroll, you will also owe money if you do not maintain your staff and payroll.  That means that you have to maintain the number of staff and level of payroll.

  • Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
  • Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
  • Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

This is a lot.  I know.  We try to keep our posts short enough to read in line for a latte at your local coffee shop.  But since none of us are waiting in those lines, I’m thinking more like how long it takes to brew a pot in your kitchen.  And this is just figuring out if you can apply and for how much.  You have to talk to your banker, your payroll provider, or accountant/book-keeper.  We are happy to talk you through it as well.  I have been quite the dinner conversationalist as I keep bringing up stuff from the CARES Act.  So let me enliven your day, too!