Paycheck Protection Program Part II: What We Know Now
If you are a small business owner, we are sending a (virtual) high-five your way for enduring the last few weeks of the COVID-19 crisis. You are navigating financial and emotional stress as well as a mountain of information to apply for financial aid packages from the government. At MRPR we are aiming to update information and help you sift through the important details as you create a disaster mitigation strategy for your business.
The CARES Act was passed two weeks ago, on March 27th 2020, and applications for the Paycheck Protection Plan (PPP) in its first wave were accepted by lending institutions as early as last Friday, April 3, 2020. Though there are several loans and packages available, the PPP is promised to be funded quickly, with a simple underwriting process and has the possibility of becoming a forgivable loan.
If you are wondering if this applies to your business and if it will help you on your road to recovery, see our recent blog post; Paycheck Protection Program Loan Process to dig into the details. In general terms, the loan is based on 2.5 times your average monthly “payroll costs,” and will be forgiven to the extent the 75% of funds are used to cover payroll, and the remaining 25% of funds are used to cover rent, utilities, or mortgage interest. Forgiveness can be reduced by changes in employee head-counts, and by funds that are unspent on approved expenses in the 8 week period. The unforgiven portion is rolled into a 1% loan to be repaid over a 2-year term.
Paycheck Protection Program Updates
Where are we one week after the first applications were submitted? As you can imagine, small business owners nationwide saw the words RELIEF and LOAN FORGIVENESS, and applications came in like an avalanche. We are starting to see a few loans approved and funded this week. However, many clients are frustrated because they are having trouble even getting applications submitted. Where you are at in the process depends largely on your lending institution and how they have chosen to process the large amount of information that is being submitted for these loans. This may be frustrating, but please keep in mind that this is moving at an unprecedented pace and things are going to get better soon.
If you haven’t submitted your application yet, the US Treasury came out with some helpful PPP Frequently Asked Question’s (FAQs) this week to help smooth and understand the process.
There was also an Interim Final Rule release from the SBA last weekend that is very helpful.
Payroll Protection Program Tips
As we have been in the trenches with clients this week, here is a list of our most common advice:
- “Payroll Cost,” as defined by the PPP has been a little unclear. The Treasury did a great job of giving some clarification. Simply put, you should start with the gross, gross wages- UIA or 940 calculations, and add employer paid portions of benefits as well as state unemployment costs. Remove only gross wages over $100k for any individual employee and remember the employer portion of FICA is NOT included in the calculation.
- Verification of health, retirement, or other payroll costs varies by lending institution. We recommend providing a calculation cover sheet that corresponds to whatever backup you used to reach your loan calculation maximum, whether it is payroll tax returns, third party documentation, company financial statements and/or tax returns. Make the underwriting process a one touch. If the bank cannot quickly verify the loan max requested, they will very likely lower the loan total approved, or hold up the speed of processing your loan application. Remember, this is a very quick underwriting process.
- We are advising clients to create a new bank account for the PPP funds, and to deploy the funds from this account only for the approved list of expenses. It will be the borrower’s responsibility to request and obtain loan forgiveness. With a little extra work and forethought here, we believe clients can alleviate administrative burden for themselves later this year on the forgiveness front.
- What if...? Lastly, we have been getting a lot of “what ifs?”
- What if I get the funds and my business doesn’t open for another 4 weeks?
- What if this covers my business for two months but the economy is still ramping up and I run out of funds?
- What if I have 1099 employees?
- What if our parent company is a foreign entity?
We will keep you posted on new developments and government issued guidance. For instance, this past Friday, the IRS issued a FAQ here on the deferral of certain payroll taxes provided under Section 2302 of the CARES Act. Essentially it states that PPP Loan Applicants MAY Defer Employer Social Security Taxes.
Specifically, question 4 of the FAQ states that "businesses that have applied for and received a PPP loan may defer the deposit and payment of the employer’s share of social security tax that otherwise would be required to be made beginning on March 27th, 2020".
Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer's share of social security tax due after that date.
However, the amount of the deposit and payment of the employer's share of social security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred with 50% due on December 31, 2021 and the remaining 50% due on December 31, 2022.
We understand that during these times there can be information overload, especially when the world is changing around us on a seemingly daily basis. MRPR stands ready to help you with tax planning, tax filing and obtaining sources of capital or financing. Please do not hesitate to contact us if you need help deciding the best strategy for moving forward.