Since the Payroll Protection Program (PPP) launched on Friday, April 3, 2020, small-business owners have been hard-pressed to find banks that will accept PPP loan applications. Many banks and small-business owners say they are struggling to understand Small Business Administration (SBA) and U.S. Department of Treasury PPP-related rules and regulations.

In addition to puzzling over these mandates that govern the distribution of funds, banks find themselves scrambling to get personnel and processes in place to properly handle the application and approval process.

Here at Stees, Walker & Company LLP, we are encouraging small-business owners who are waiting for banks to get up to speed on the Payroll Protection Program to make preparations in advance. See last week’s post, “Get Ready for the Paycheck Protection Program NOW!”

For the uninitiated, the Payroll Protection Program was established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on Friday, March 27, 2020. The PPP has allotted $349 billion to provide small businesses with low-interest loans of up to $10 million per loan to keep them afloat and their workers paid for up to eight (8) weeks.

Sole proprietors, freelancers, and self-employed individuals are also eligible. To qualify, applicants need not put up any collateral or make any personal guarantee of repayment Payments are deferred for up to six months and, most importantly, the portion of the loan proceeds used to cover payroll and qualified operating expenses (which can be up to about 25 percent of the total loan amount) are likely to be forgiven.

Part of the reason for the delay among banks and small-business owners is confusion over the rules and the process. To clarify the rules, on April 7, 2020, the Small Business Administration (SBA) issued clarifications, many of which address how small businesses should determine their payroll costs. Following is a condensed version these clarifications:

  • To qualify as a small business, your business must have no more than 500 employees OR it must meet the SBA employee-based or revenue-based size standard corresponding to its primary industry (see www.sba.gov/size).
  • When calculating payroll costs, include only those employees who reside primarily in the U.S.
  • A $100,000 per employee compensation cap applies only to wages and salaries paid. When calculating payroll costs, you can add your contributions to employee retirement and health care benefits — and payments of state and local payroll taxes — on top of that $100,000 salary limit.
  • Payroll Protection Program loans cover costs for employee vacation, parental, family, medical, and sick leave, except for qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
  • When you pay your employees using proceeds from a Payroll Protection Program loan, you must withhold federal, state, and local taxes as you normally do, and pay the amounts withheld to the pertinent government agencies.
  • When calculating payroll costs for your Payroll Protection Program loan, the SBA says not to not include your employer’s share of federal taxes (FICA). (Note: While employer-side federal payroll taxes imposed on wages are supposed to be excluded from payroll costs under the statute, some banks have posted on their websites that they want these costs included.)
  • If your business uses independent contractors, do not include payments to them in your payroll costs calculations. They can apply for their own loans under the Payroll Protection Program.
  • For the purposes of determining your average monthly payroll costs and number of employees, you may use either of the following lookback periods:
    • 2019 calendar year
    • The 12-month period prior to the date of application
  • If you operate a seasonal business whose activity increases from April to June (for example, a summer camp or company that sells items for high school and college graduations), your lender may evaluate your eligibility for a Payroll Protection Program loan by considering whether your business was in operation on Feb. 15, 2020, or for an eight-week period between Feb. 15, 2019, and June 30, 2019.
  • If you contract with a third-party payroll provider to process payroll and report payroll taxes, obtain relevant payroll documentation from your payroll processor to include in your Payroll Protection Program application.
  • Only an authorized representative of the business seeking a loan may sign on behalf of the business.

And below are clarifications for banks and lenders (which are good for business owners to know about, as well):

  • Lenders are permitted to use their own online system or form for collecting lender information as long as it asks for the same information (using the same language) as the government’s Borrower Application Form.
  • Your borrowers — not you — are responsible for providing an accurate calculation of payroll and other costs. As the lenders, you are simply expected to perform a good faith review.
  • Borrowers, not the lender, are responsible for determining which entities (if any) are their affiliates and should apply the affiliation rules to determine eligibility under the Payroll Protection Program.
    • If a minority shareholder irrevocably waives or relinquishes any of its rights specified in 13 C.F.R. 121.301(f)(1), the minority shareholder is no longer an affiliate of the business (assuming no other relationship triggers the affiliation rules).

If you already filed a Payroll Protection Program loan application following guidance that had been previously released, you’re not required to adjust your application to reflect these changes. Borrowers and lenders may rely on the laws, rules, and guidance available at the time of application.

Stay tuned for more clarification and updates as the Payroll Protection Program evolves and banks become more familiar with the rules and process. For now, locate a bank with whom you want to work and contact that institution to find out what information and documentation you will need to provide on and with your application. Being prepared will enable you to act quickly when your bank is ready and make the application and approval process much faster and smoother.

For more information, please refer to the SBA’s frequently asked questions (FAQs), many of which further address how small businesses should determine their payroll costs.

Note — For Schedule C and 1099 Businesses: As of today (April 8, 2020), we’re hearing that the only businesses successfully completing and receiving loans under the PPP are those with employees who remain on payroll. We’re also hearing that on the 10th of April, SBA and banks will open up the lending phase for Schedule C and 1099 businesses.

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About the Author: Laura Stees, CPA is a Partner and Business Strategist with Stees, Walker & Company LLP — a San Diego, Calif.-based boutique tax consulting firm focused on personalized tax and financial guidance to individuals and businesses.

Disclaimer: The information in this blog post about the Payroll Protection Program is provided for general informational purposes only and may not reflect current financial thinking or practices. No information contained in this post should be construed as financial advice from the staff at Stees, Walker & Company LLP, nor is this the information contained in this post intended to be a substitute for financial counsel on any subject matter or intended to take the place of hiring a Certified Public Accountant in your jurisdiction. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate financial planning advice on the particular facts and circumstances at issue from a licensed financial professional in the recipient’s state, country or other appropriate licensing jurisdiction.