Knowledge and Insights

Many of you have reached out to us over the last few days in connection with determining the CARES ACT loans and other options available to you and your business.  In reference to the Paycheck Protection Program (PPP), there has been a lack of clear guidance about payroll costs eligible towards calculating your loan amount and other terms. The following items have been clarified as per the Interim Final Rule [PDF, 444.65 KB] from the SBA:

1. You are eligible for a PPP loan if you are an operating business, including an individual who operated under a sole proprietorship or as an independent contractor or eligible self-employed individual if you were in operation on Feb 15, 2020;
2. The affiliation rules to determine eligibility (< 500 employees) have not yet been issued;
3. Payroll costs for determining the maximum you can borrow do not include payments to independent contractors.  That is because they can apply for the loans themselves;
4. Payroll costs are calculated using the last twelve months meaning that if you submit a loan in April 2020, the last twelve months are 4/1/19-3/31/20
5. What qualifies as payroll costs?  (As we understand it, the major payroll companies are creating reports which will have the majority of this information readily available.)
   • Compensation to employees whose principal place of residence is the United States and paid in the form of salary, wages commission, tips or the equivalent;
   • Payment for vacation, parental family, medical or sick leave;
   • Payment for separation or dismissal;
   • Payment for the provision of employee benefits consisting of group health care coverage including premiums – the rule does not specify any coverage other than healthcare so insurances other than healthcare like dental, vision, workers compensation and life insurance may NOT qualify;
   • Retirement costs (employer share only);
   • Payment of state and local taxes assessed on the employee compensation;
6. For independent contractors and partners, you use wage, commission income or net earnings from self-employment which would include draws up to the amount of net income of self-employment and guaranteed payments;
7. Expressly excluded from payroll costs are the following items:
   • Compensation paid to employees residing outside of the US;
   • Compensation of an employee in excess of $100,000 – this means you must cap that employee’s “compensation” at $100,000.  The cost of their benefits can be added to payroll costs;
   • Federal employment taxes imposed or withheld between Feb 15, 2020 and June 30, 2020 including the employee’s share of FICA and Federal income tax withholdings;  
   • Qualified sick and family leave wages paid under the Families First Coronavirus Response Act (FFCRA);
   • Independent contractor payments;
8. The loan interest rate is 1% (not 4% and not .5%)
9. The payback period is now 2 years; not 10
10. The funds will be disbursed on a first come first served basis so apply ASAP. We suggest you attempt to apply for the PPP loan with your current financial institution first;
11. Principal and interest will not be due until 6 months following the date that you receive your loan, however interest will accrue during the 6 month deferment period;
12. The loan can qualify for forgiveness however you MUST spend 75% of the disbursements you make from the loan proceeds on payroll costs during your 8 week spend period;
13. Independent contractor payments do NOT count as employees for purposes of the loan forgiveness;
14. Submit SBA form 2483 and payroll documentation to apply for the loan;
15. You may only use the loan proceeds on payroll costs, utilities, rent and mortgage or other loan interest payments;

Please feel free to reach out to us with your questions.  Many banks have yet to open their application portals because they are still awaiting final clarification from the SBA on the guidance. 

This is an unprecedented and quickly evolving process. We will continue to follow developments and keep you informed as they occur. As more guidance is released on the subject, we will post timely updates on our website and LinkedIn page, so please be sure to visit our website and LinkedIn page on a regular basis.

This topic will also be covered at our upcoming webinar on Wednesday, April 8, to register visit https://www.mercadien.com/event/webinar-paycheck-protection-program-what-businesses-should-know/.

Stay tuned…..

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice, and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.