As guidance in this area is being released regularly, we recommend you read all of our blogs on this subject. All the blogs in the Paycheck Protection Program series are here: Updates #1, #2, #3, #4, #5, #6, #7, #8, #9, #10
Over the past week we’ve provided several updates on the evolving, and sometimes, inconsistent guidance provided by the U.S. Department of Treasury and the Small Business Administration (SBA) regarding the Paycheck Protection Program (PPP) introduced by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). We began with an introduction, provided an update when the first draft of the application and unofficial guidance was issued on April 2, and most recently addressed the final borrower application and related regulations on April 3. On Monday, April 6, via a newly issued frequently asked questions (FAQs) document, the U.S. Department of Treasury essentially acknowledged the inconsistencies and lack of clarity in its previously issued guidance.
PROCEED WITH CAUTION: The FAQs indicate the document will be updated regularly, and has been updated on April 7, from the original April 6 post.
As of April 7, FAQ #17 states the borrower and lender may rely upon the laws, rules, and guidance available at the time of application. We suggest that when you are ready to apply for a PPP loan, you visit the Treasury website before commencing preparation of your application and immediately prior to submission. Additionally, consider printing a copy of the FAQs as of your submission date and maintain this documentation with your other PPP-related documents to support the basis upon which you performed calculations in your application.
The April 7 version of the FAQs provide an opportunity to maximize the PPP loan amount via favorable interpretations of prior guidance, address various issues that needed clarity, create further ambiguity in other areas, and comfort lenders relative to risk.
Opportunities to Maximize PPP Loan Amount
In prior guidance, significant confusion existed around what period a borrower should use to compute payroll costs.
- form the basis of the PPP loan amount
- are later eligible for loan forgiveness
- limit the use of PPP loan proceeds (75% of the loan proceeds must be used on payroll costs)
In our last blog, we pointed out the inconsistency in the regulations where the borrower was instructed to use the trailing twelve months to calculate payroll costs but the lender was instructed to review data for the prior calendar year. FAQ #14, clarifies that a borrower can calculate payroll costs using data from either the previous 12 months or calendar year 2019. This provides the borrower the opportunity to do the calculation using both data sets and apply using the higher amount.
FAQ #15 reiterates payments made to independent contractors or sole proprietors are excluded from an eligible business’s payroll costs because independent contractors and sole proprietors may be separately eligible to apply for the loan.
Since issuing the regulations, there has been no hotter issue than that addressed by FAQ #16. FAQ #16 confirms that employee wages used in calculating payroll costs are the gross wages paid by the employer ignoring the employee and employer share of income & payroll taxes. We’ll spare you the lengthy analysis of why this was a significant misunderstanding now that we have clarity.
FAQs #2, #3, #5 & #6 address how to determine if a business is eligible when determining the number of employees including when/how to review the SBA size standards (FAQ #2), whether/not an applicant must meet the normal small business concern requirements (FAQ #3), and whether/not/how the affiliation rules must be applied to determine the number of employees (FAQ #5 & #6). Interestingly, in counting the number of employees, FAQ #14, which addresses a different issue, defines how the SBA usually counts the number of employees to apply the employee-based sizing standards.
If you’re a seasonal employer, who was not open and operating on February 15, 2020, and thought you were excluded from the program, FAQ #9 provides the relief you were looking for. FAQ #9 clarifies that if you were open and operating during any 8-week period between February 15, 2019, and June 30, 2019, you qualify to apply for the loan.
If you’ve made the business decision to use a Professional Employer Organization (PEO), a review of the documentation requirements provided by most banks left you thinking you could not supply supporting payroll documentation because your payroll is filed under the Employer Identification Number (EIN) of the PEO. FAQ #10 addresses the information you should provide, and that the bank should accept, and clearly states the employees are still your employees and not those of the PEO.
FAQ #7 confirms the $100,000 cap on compensation applies only to cash compensation and not to non-cash benefits including employer-paid retirement contributions, employer-paid group health insurance, and employer-paid state and local taxes assessed on employee compensation. One item missing from the list in FAQ #7 is the payment for vacation, parental, family, medical, or sick leave. A look at FAQ #8 may add to the confusion as it indicates the PPP loan can be used for these items but does not address the issue within FAQ #7. The law lists the payment for vacation, parental, family, medical, or sick leave as a separate line item like the other benefits above causing many to think it was also excluded from the $100,000 cap. Its exclusion from FAQ #7 has now called this into question. We suggest you discuss this ambiguity with your lender prior to finalizing your application.
PPP Lenders Need Clarity Too
Lenders have not had it any easier than borrowers or their advisors throughout the quick evolution of the PPP loan process. They, too, have minimal, and constantly changing, guidance to establish their loan platforms.
One example, reflected in the graphic below, taken directly from the Treasury website on April 8, shows two Lender Application choices: 1) Lender Application Form and 2) New Lender Application Form; with no clear guidance as which one a lender should use, other than the word “New” for one option.
In the FAQs, the Treasury acknowledges it has placed lenders in a difficult position. The FAQs state the U.S. government will not challenge lender PPP actions that conform to the FAQs, the Interim Final Rule regulations and any subsequent rulemaking in effect at the time of application processing.
FAQ #1 addresses lender expectations relative to the calculation of payroll costs, which are the basis for PPP loans. The FAQ states the lender is not required to recompute the components of payroll costs but should make a good faith effort to review the calculations and consider the quality of the supporting documentation provided.
Other FAQs of interest to lenders are:
- FAQ #4 – Responsibility for review of affiliation rules
- FAQ #11 – Ability to accept a single signature on behalf of an applicant and all owners owning greater than 20% of the applicant
- FAQ #13 – Ability for the bank to setup its own online portal, but still must submit the required information via the SBA interface
- FAQ #18 –Normal lending requirements to verify beneficial ownership for existing customers
We anticipate continued issuance of guidance regularly as questions arise and the Treasury and SBA attempt to provide clarity. Visiting the Treasury website both before and immediately before submission of your application is recommended. If you have questions about how to navigate the PPP loan application process, or how other CARES Act incentives may apply to your business, please call on us. You can stay up to date on PPP guidance and tax issues relating to the coronavirus at our COVID-19 Tax Resource Center.
Topics: FAQs, coronavirus, COVID-19, Steve Mnuchin, CARES Act, Taxpayer, liquidity, payroll costs, loan forgiveness, Paycheck Protection Program, Small Business Administration, Payroll Protection Loans