By Erin Ogden
The federal Payroll Protection Program was supposedly taking first applications April 3 for small businesses and April 10 for independent contractors. I must admit I know of no one who got an application to a bank on April 3, but last week, people were filing applications, some have already received approvals, and I heard from someone today who got cash in their bank account. That means 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 most 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 Feb. 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” to each, great. Now, you must be able to answer “no” to the following:
- You are engaged in any activity that is illegal under federal, state or local law;
- You are a household employer (individuals who employ household employees such as nannies or housekeepers);
- An owner of 20% or more of the equity of the applicant is 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 has been convicted of a felony within the last five years; or
- You, or any business owned or controlled by you or any of your owners, has 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, “yes” on the top set; “no” on the bottom set.
You will want to be prepared with your payroll information. The loans are based on that. If you have celebrated your one-year anniversary, they will look at that payroll from last year. Though you should get this year’s payroll documentation ready, too. They take the average monthly payroll from Feb. 15 – June 30, 2019, if you were around then. If not, they’re looking at the last few months in 2020.
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” isn’t included); 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, if you are an independent contractor, you can get the loan, not 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. I looked at a handful of 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 the Interim Rules 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 (defined in detail below in f.) from the last 12 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 Jan. 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 Feb. 15, 2020;
- Rent, under lease agreements in force before Feb. 15, 2020; and
- Utilities, for which service began before Feb. 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 eight 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 you shouldn’t expect to get a loan for those expenses or that for some reason they magically will retroactively decide some of it isn’t eligible for forgiveness? The Interim Rules are claiming the latter. To wit, “the Administrator has determined that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll.” It’s an interim rule so maybe it will change, but I read that to 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 must 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 Feb. 15, 2020 and April 26, 2020.
So, look at how many employees you had on Feb. 15, 2020, and determine how many you can keep around. You may be able to cut some salary to keep more, but don’t go too deep. Perhaps the best part is the ability to re-hire people until June.
If it isn’t forgiven, you aren’t in too deep of hot water. The interest rate is 1%, and the maturity rate is two years. If you have read the CARES Act, that two years may come as a surprise. As the Interim Rules state, “While the Act provides that a loan will have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness (described below), the Administrator, in consultation with the Secretary, determined that a two-year loan term is sufficient in light of the temporary economic dislocations caused by the coronavirus. While the Act provides that a loan will have a maximum maturity of up to 10 years from the date the borrower applies for loan forgiveness (described below), the Administrator, in consultation with the Secretary, determined that a two-year loan term is sufficient in light of the temporary economic dislocations caused by the coronavirus.”
Let’s keep our fingers crossed they are correct on that, but I also want to point out these are “interim rules” so that provision might be modified back to the original statute language.
Another thing to know is that the non-forgiven amounts do accrue interest from the get-go. You may not have to make any payments for six months following the date of disbursement of the loan, but interest is accruing. So, yes, it is still a decent loan, but it is even better if you keep it in the “forgivable” range because the amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest as long as you use it for the above forgivable purposes. Keep in mind that if you knowingly use the funds for unauthorized purposes, you may be subject to additional liability such as charges for fraud.
This is a lot. I know. And this is just figuring out if you can apply and for how much. You must talk to your banker, your payroll provider, and your accountant or bookkeeper. I am sure your attorney will be happy to talk you through it, as well. I have been quite the virtual “happy hour” conversationalist as I keep bringing up stuff from the CARES Act. If you are lost, ask for help. We all want to see you when everything can open again. I, for one, can’t wait to toast you all with a brandy old-fashioned at a Friday Night Fish Fry!
Tech Council member Ogden is an attorney with the Madison-based firm of Ogden, Glazer + Schaefer.