FAQ’s | Payroll Protection Program Application
*Updated 4/27/20*
ELIGIBILITY:
1. PPP vs EIDL – can I only get one or the other?
Answer – No, you can apply for both. In addition, if you do receive funds via the EIDL prior to receiving funds via the PPP, those will be rolled into your PPP loan (if you get one). Provided you don’t use the funds for the same specific costs, you can qualify and accept both loans. The bank and/or its approved Agents will take into consideration what you received via the PPP loan.
2. Are there exceptions to the 500-employee rule?
Answer – Yes, however, exceptions to the 500-employee rule are not common. Small business concerns can be eligible borrowers even if they have more than 500 employees, as long as they satisfy the existing statutory and regulatory definition of a “small business concern” under section 3 of the Small Business Act, 15 U.S.C. 632. A business can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. Go to www.sba.gov/size for the industry size standards.
3. Does foreign ownership preclude from taking advantage of PPP?
Answer – No, as long as the business qualifies as a small business concern and principal place of residence of employees are in the United States.
4.What is the difference between an independent contractor/self-employed individual and a sole practitioner; and why does it matter?
Answer – These are terms used interchangeably referring to those eligible to file the self-employed application. Please see our PPP Flowchart – Calculating Maximum Loan Amount for a more detailed tool to determine how the PPP applies to you by clicking here.
LENDERS:
5. What incentive do lenders have to make these loans? Do they receive compensation from the government for funding these loans and for processing the forgiveness applications? Are they motivated financially such that they will be on top of this entire process?
Answer – Lender fees, which are paid by the government are 1% on loans above $2M, 3% on loans between $350K and $2M, and 5% on loans not more than $350K. The interest rate for borrowers is 1%.
6. What if my lender is not participating?
Answer – Many banks are electing to not participate in the PPP. Fortunately, alternative lenders, including financial technology companies (Fintechs), are being approved by the SBA for PPP loans, including Divvy https://getdivvy.com/covid-19-squire-sba-ppp-loans/.
7. Can you have multiple loans in process with multiple lenders? I understand I wouldn’t get multiple loans, but in trying to avoid bottleneck issues with certain lenders, you would imagine people would apply to multiple lenders.
Answer – Yes, you can apply to multiple lenders, but the first lender to assign a PLP number to your application is identified as your lender with the SBA. You can ask the lender if you have been assigned a PLP number. If not assigned, you can apply with other lenders. When each lender receives your application, they eventually submit a PLP (a unique ID number) to the SBA. The SBA uses the PLP to say, “this lender is funding this owner.” As soon as you get a PLP number, then you have to go with that lender. So, you can apply to multiple lenders but stick with the one that assigns the PLP number first. Downside: if everyone applies to multiple lenders the system will become even more “clogged up”.
8. What do I do when the funds are depleted?
Answer – We expect that the government will replenish the funds if they feel there is a great need still in the economy. The best thing you can do is work with your lender to confirm they have everything needed for the application and that you are in line once the funds are again available so that your lender can submit to the SBA.
Please note that the intention of the program is to get as much funding as possible to small businesses. We need to be patient with the process, make sure our application status is in full ready mode with our lenders, and hope for the best for the next round.
PPP MAKES ME INELIGIBLE:
9. If I receive PPP am I eligible for the retention credit and payroll tax deferral incentives?
Answer — PPP recipients are not eligible for the retention credit. Employer payroll tax deferral incentive is only lost if a PPP loan is forgiven.
PAYROLL CALCULATION:
10. How do I calculate Monthly Payroll Costs for my employees?
Answer – In order to calculate monthly payroll costs for your employees, add together each of the following categories of calculations:
Gross wages, commissions, tips paid to each employee during your date range (generally 2019 Calendar year). Limit each employee to $100K for the year (or pro-rata if applicable).
Employer contributions to employee health insurance and employee retirement plans.
Employer state and local taxes assessed on employee compensation, ie state unemployment insurance tax.
Calculate the average monthly payroll cost amount by dividing your total above by 12 (or by the number of months applicable). This is your Monthly Payroll Cost. Please note that if you are including partner or owner payroll costs (see questions below), their portion will be added to your employee’s monthly payroll cost.
11. What are our date range options for calculating average monthly payroll costs?
Answer – In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. For independent contractors/sole proprietors, the applicant is required to use the calendar year 2019. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019 or March 1, 2019, through June 30, 2019. An applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.
12. How should a borrower account for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan, and the amount of a loan that may be forgiven?
Answer: Under the Act, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.
13. Are health insurance premiums and 401k match benefits included in the $100,000 per employee limit?
Answer – No, they are added into the total payroll costs even if the individual is above the $100,000 limit. However, the amount includible is only the portion of insurance costs that the company ultimately pays, not the employee.
14. If we have or had workers from a Temp Agency, how does that impact the PPP calculations?
Answer – Temp Agency employees are not counted in your employee count or payroll costs.
15. I am a business. Are independent contractors (1099) payments included in the average monthly calculation and/or can the proceeds be spent on these individuals?
Answer – No, independent contractors are not part of the average monthly payroll costs. As a business any of the PPP loan proceeds you use to pay 1099 contractors will not be qualified for forgiveness. Independent contractors will need to apply for a self-employed PPP application on their own.
16. I am an LLC owner. Which set of calculation instructions below applies to me?
Answer – LLCs should follow the calculation instructions below that apply to their tax filing situation, for example, whether they file as a sole proprietor (Form 1040), a partnership (Form 1065), or a corporation (Forms 1120 or 1120S).
17. I am an S-Corp business. Are officers’ salaries included in the average monthly calculations?
Answer – Yes, officer salaries that are included on a W2 are included in the average just like all other employees. No changes to the Monthly Payroll Cost calculation.
18. I am a 1065 Partnership business. Are owners’ salaries, guaranteed payments, and flow-through income included in the average monthly calculations?
Answer – Owner salaries that are included on a W2 are included in the average just like all other employees. Guaranteed payments and flow-through income for active general partners (meaning the income is subject to self-employment tax) are included in the average payroll costs but are limited to $100K annualized for each owner, and is termed “partner payroll cost”.
To calculate: Each partner’s amount will be recorded on Form 1065, Schedule K-1, Box 14a, Net Earnings from Self Employment. Multiply Box 14a by .9235 (percentage ultimately subject to self-employment tax on the partner’s 1040 return). This reduced amount is limited to $100K, resulting in each partner’s annual payroll cost. To calculate the Monthly Payroll Cost, simply divide each partner’s annual payroll cost by 12 and add the partners’ monthly amounts together. If you also have employees, this Monthly Partner Payroll cost will be added to the Monthly Payroll cost calculated for your employees.
Please note that you will be required to provide a prepared (not necessarily filed) 2019 Form 1065, Schedule K-1 for each partner included as your support for your partner payroll cost.
19. I am a Sole Proprietor, Independent Contractor, or Single Member LLC business. Are owners’ salaries and flow-through income included in the average monthly calculations?
Answer – Income reported on a 1040, Schedule C, Line 31 is eligible to be included in the average payroll costs but is limited to $100K annualized for each owner and is termed “owner payroll cost”. Multiple Schedule C’s should be combined for a single application. Each spouse is eligible to apply IF they each have their own business(es).
To calculate: Start with the amount on Form 1040, Schedule C, Line 31. This amount is limited to $100K. To calculate the Monthly Payroll Cost, simply divide Line 31 (up to $100K) by 12. If you also have employees, this Monthly Owner Payroll cost will be added to the Monthly Payroll cost calculated for your employees.
Please note that you will be required to provide a prepared (not necessarily filed) Form 1040, Schedule C as your support for your owner payroll cost.
20. I am a Sole Proprietor, Independent Contractor, or Single Member LLC business, but I report my income on a Form 1040, Schedule F. Am I still eligible?
Answer – Self-employed farmers should use Form 1040, Schedule F in lieu of Schedule C, and Schedule F line 34 net farm profit should be used to determine loan amount in place of Schedule C, line 31. The calculation is otherwise the same as the question above.
Please note that you will be required to provide a prepared (not necessarily filed) Form 1040, Schedule F as your support for your owner payroll cost.
21. Are owners draws that are in lieu of wages included in the average monthly calculations?
Answer – No, owner draws are not included. Instead, partner and owner payroll costs are determined using self-employed income as noted above, dependent on income tax filing method.
22. How do I calculate the headcount to be included in the PPP application?
Answer – The applicant could elect to use either (a) the average number of FTEs employed from January 1, 2020 to February 29, 2020, or (b) the average number of FTEs employed from February 15, 2019 to June 30, 2019. However, for purposes of forgiveness, we suggest that you use the lender approved calculation that provides the lowest headcount, as that becomes the headcount you are required to maintain. For including “partner payroll costs”, add one headcount for each applicable partner. When including “owner payroll costs”, add a single headcount for the independent contractor.
23. How is the payroll calculation affected if I changed my entity structure (i.e. LLC to S-Corporation, etc.) or method of taxation (i.e. an LLC being taxed as a partnership to being an LLC taxed as an S-Corporation, etc.) during 2019.
Answer – If the operations have continued, then partners/owners/officers are likely now included in payroll costs. Payroll calculations for each entity type will apply for the part of the year that the entity was in that structure. Each individual’s total should be added together (wages + self-employed owner/partner costs) and limited to $100K. For employees, there is no effect.
If the operations of the business were significantly altered, a new EIN created, or significant employee shifts were made, then the new entity structure would be treated like a new company and monthly payroll costs would be calculated for the part of the year applicable instead of considering the entire years’ activity.
24. How is the payroll calculation affected if I change the employer (i.e. move my employees from one entity to another entity) during 2019 and shut down the original entity?
Answer – First, it is likely that moving employees between entities is happening between entities that have common management or ownership and therefore, affiliation rules should be consulted. If the applicant meets the SBA affiliation rules with the two entities, we think a reasonable approach would be that they should file a single PPP application, using payroll from both entities and therefore there would be no effect of the employees moving. If they are not affiliated, then the calculation will follow the wages in the respective companies.
Please note that forgiveness will be based on actual payroll costs during the eight-week period following the loan funding, so the calculations should optimize the ability to have the funding available to pay the wages. This would include a consideration of the new entity using a shorter time frame of its existence for monthly payroll calculations. See date range question (#11) above.
SUPPORTING DOCUMENTATION:
25. Do you need to deduct from the Gross Payroll the non-taxable items so that the number ties to the 941’s?
Answer – No. The payroll calculation is using Gross Wages. So, if you have health insurance withheld, it reduces your 941 amounts, so Gross Wages would NOT tie to the 941s and that would be correct. We recommend a reconciliation be prepared to tie to the 941s to the average annual payroll calculation. However, if you have access to your 940 (year end payroll form), line 3 (“Total Payments to All Employees”) should tie to your gross wage number if the 940 instructions were followed. HOWEVER, it depends if your payroll software is programmed to report it that way. In our experience, software is not always programmed to report it this way.
26. What documentation will I need to provide if I lease my employees from a PEO?
Answer – For purposes of the PPP, the employees paid under a PEO or employee leasing company should be counted by the business for which the employees provided the service. The PEO should provide the necessary documentation for those leased employees or “common law employees”. PEO or leasing companies would use their “own employees (i.e. those used in the actual operations of the PEO or leasing company) for purposes of filing for the PPP loan,
27. Will lenders require a per employee detail of the health and 401K match amounts spent?
Answer – the interim final regulations state, “You must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.” Each lender will have their own preference on level of detail for amounts spent.
28. What supporting documentation will I need to provide to prove my independent contractor/sole proprietor owner payroll costs?
Answer – you will be required to submit a prepared Form 1040, Schedule C for 2019 as support for your owner payroll costs. You are not required to have filed your 2019 return. But you will want to work with your accounting professional to prepare this form.
29. What supporting documentation will I need to provide to prove my partner payroll costs for inclusion in the partnership’s loan?
Answer – you will be required to submit a prepared Form 1065, Schedule K-1 for 2019 for each partner as support for your partner payroll costs. You are not required to have filed your 2019 return. But you will want to work with your accounting professional to prepare this form(s). Only partners with amounts in Form 1065, Schedule K-1, Box 14a will be allowed to be included.
AFFILIATION:
30. Are lenders required to make an independent determination regarding applicability of affiliation rules?
Answer — No. It is the responsibility of the borrower to determine which entities (if any) are its affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications.
31. Is a 20% owner an affiliate or must the owner be able to either exert positive or negative control over the business;
Answer – The affiliate rules are targeted to group entities under common ownership AND common management. Therefore, a 20% owner who has no ability to exercise control (positive or negative) would not be considered an affiliate of the business. For an owner with 50% or more ownership, that is deemed an ability to control and therefore would be considered an affiliate.
32. The borrow application, question #3, asks the following: Is the Applicant or any owner of the Applicant an owner of any other business, or have common management with, any other business? If yes, list all such businesses and describe the relationship on a separate sheet identified as addendum A.
My business (“Applicant”) has many owners, who own 100s of entities. Do all of these 100s of entities need to be listed on addendum A? The Applicant has one single investor (“Fund”) that owns 20% or more of the Applicant and no single investor controls.
Answer – Identify Fund on the application form under Addendum A and use the following wording, which is not official guidance from the SBA, but seems to be a reasonable approach:
Addendum A
As indicated under “Applicant Ownership,” the Fund, as of the date of the Application, holds a 20%+ ownership stake in the Applicant. However, as of the date of the application:
Neither the Fund or any investor of the Applicant does not own 50% or more of the Applicant’s voting securities; and neither the Fund or any investor, alone, does not have the right to prevent a quorum or otherwise block action by the board of directors or shareholders under the Applicant’s charter or bylaws or pursuant to a shareholders agreement, as determined pursuant to 13 CFR § 121.301 (the “Applicable Affiliation Rules”).
The Applicant has further determined that the Fund or any investor is not an affiliate of the Applicant under the Applicable Affiliation Rules. Because the Applicant is not an affiliate of Fund or any investor under the Applicable Affiliation Rules, and because Section 1102 of the CARES Act specifically applies SBA’s affiliation rules to the PPP program, Sec. 36(D)(vi), no further information regarding the Fund or any investor or the relationship between Fund or any investor and the Applicant, or other businesses in which the Fund and any investor has invested or with which it has common management, is being provided with the Application.