Payroll Protection Program - Advisory

Below is the SEWN Advisory on benefits and limitations of the Small Business Administration's Payroll Protection Program based on the Interim Final Rule dated April 3, 2020.

The Payroll Protection Program (PPP), provides forgivable loans to small businesses hurt by the financial crisis related to the COVID-19. The goal is to provide emergency funds to owners so that they can remain open and retain/pay employees. Most businesses with fewer than 500 employees are eligible to apply. You apply directly to your own bank. Applications are being accepted as of April 3, 2020. The application is simple. Apply immediately.

Loan Terms - PPP provides forgivable loans to small business. The

assumption of the program is that most or all of the loan will be forgiven, based on meeting simple criteria (see below). Any part of the loan that is not forgiven has an interest rate of 1.0%. No personal guarantees or collateral are required. You start repaying the loan after six (6) months.

Loan Application and How You Apply – The two-page loan application is very simple. Instructions are on page 3. Preparing to apply can take 2-4 hours. The application itself takes 20 minutes. Contact your bank and let them know you will be applying. The bank will give you a link to their bank portal. Scan it the application and submit it directly to the bank’s portal.

Calculating Your Loan Amount – Your loan amount is based on your 2019 payroll:

Take your 2019 payroll and divide it by 12 to get your “average monthly payroll”;
Multiply the average monthly payroll by 2.5 times -- This figure is your loan amount.

What Can You Include in Your Wage Calculation – In addition to salaries and wages:

Commission, tips, vacation, plus parental, family, medical/sick leave;
Also include health insurance and pension contributions (401k) that you pay;
Add State/local taxes tied to employee compensation, such as State unemployment taxes;
Independent contractors (1099s) do not count for the calculation;
Subtract the amount above $100,000 for each individual employee;
Payments to yourself as an employee count toward this total (up to $100,000 limit);

Loan Documentation – Since your bank is making the loan based on your payroll information and not on typical credit criteria, you need to provide careful documentation for the loan.

Go to your accountant or payroll service and get your actual payroll information:
Your 2019 IRS Quarterly 940, 941 or Annual 944 payroll tax reports;
Use IRS Form 941 (Quarterly) – Line 2, less adjustments and credits (Line 12); or,
Use IRS Form 944 (Yearly) Line 1, less adjustments and credits (Line 7).

Calculation of Number of Full-Time Employees – The goal of PPP is to retain your existing employees. The forgiveness part of the loan program is based on the number of employees you retain. You need to calculate your “average” number of employees for 2019. You enter this information next to the loan amount on the PPP application. Calculate this figure, as follows:

Use your payroll records to calculate the number of full-time employees;
Calculate the number of full-time employees for each month;
Add the number of hours for each part-time employee; Each 40 hours equal 1 full-timer;
Take an average of the 12 months; This is your “average” number of employees;
Insert this figure next to the loan amount on the application.

Allowable Use of Loan Funds – In order to be eligible for loan forgiveness, you need to use the funds for specific expenses through June 30, 2020. These expenses include:

Employee payroll (plus other items listed in your wage calculation listed above);
Health insurance and 401(k) pension contributions;
Rent or interest payments on a mortgage (principal payments are not allowed);
Utilities; State/local taxes based on compensation (such as unemployment taxes);
If your business is closed, you may apply. But you need to reopen for loan forgiveness;
If you do not reopen, you have a 1% interest loan for 2 years.

Loan Forgiveness Calculation – Forgiveness is based on retaining or quickly rehiring employees and maintaining salary levels. The loan forgiveness calculation is based on taking 2 months of allowable expenses (see list above). If you do not meet these requirements, you will receive partial forgiveness on a percent basis. Calculate the loan forgiveness, as follows:

For employees, you can receive forgiveness for 2 months of expenses;
You include health insurance and pension contributions to employees;
You must retain (or rehire) the average number of employees from the 2019 calculation;
You must maintain salary levels to receive the full forgiveness amount;
You must retain your employees through June 30, 2020;
For rent, interest and utilities, you can receive forgiveness for 2 months;
Payroll needs to be 75% of the loan amount in order to receive total forgiveness.
YOU NEED TO KEEP CAREFUL REORDS TO DOCUMENT THAT YOU SPENT THE FUNDS PROPERLY. You may set up a separate bank account for this purpose.