Yesterday the SBA released the sample Paycheck Protection Program (PPP) loan application and adjusted several other terms that will have an impact on your planning strategies. The decision to apply now or wait until a later date is dependent on weighing when you believe you will be able to reopen and your risk tolerance that funds will run out quickly. There is no clear guidance related to either piece, so this is a personal choice.
What changed?
There are four aspects the program that we clarified or adjusted. Please take note of the following-
1. As we had discussed, we had hoped there would be the possibility to apply yet defer receipt of the funds. This would allow you to be in line for the loan (so funds did not run out) but still be able to use the funds when you were ready to open your doors again (so the funds could be used in line with your increased production). There are thoughts that if funding did run out quickly, there would be additional rounds of funding available. Since this is such a unique situation with many factors at play, we do not know for certain if this will happen, so it is likely best to proceed with the application.
2. From a big picture stand point, 8 weeks of eligible expenses will be forgiven starting the day you receive the funds. Originally any funds not used during this time period would then be subject to 4% interest over the next 10 years. This was recently changed so that the funds would be subject to 0.5% over 2 years. Nevertheless, you still have the option of returning an excess funds at the end of the 8 week period without any repercussions.
3. There are two pieces to the program with different calculations – A) the amount you can qualify for and B) the amount that is eligible for forgiveness. The amount you can qualify for is based upon 2.5 times your average payroll, whereas once you qualify additional costs, such as rent, interest, and utility costs could be eligible for forgiveness. Originally payments to certain independent contractors could be included in the calculation to determine how much you qualify for, but this has since been revised. Additionally, the time period used to calculate the amount you qualify for has been changed to reflect 2019 to ease reporting.
4. The most recent guidance states that no more than 25% of the amount that is forgiven can be used for purposes other than payroll. This will be important to take note of when you take receipt of the funds as it could possible mean that you will need to bring employees back to work sooner rather than later, although this will be determined by when you receive the funds and how long you will be closed.
How to Submit the Application
You will need to fill out the PPP Application and file it with your lender. Most banks have SBA loan programs, but not all. We suggest first checking with the bank with which you have your business checking account. A copy of the sample PPP loan application is attached here.
Lenders can begin accepting applications for small businesses as early as April 3rd and for independent contractors and self-employed individuals as early as April 10th. Most lenders believe they will be able to accept your application early, but it will not be processed until this timeframe.
The timeline of when you will receive the funds is still in question, it may be as early as 2 weeks but likely will be several weeks longer.
Technical Questions
While the application itself is short (only 1 ½ pages), the first question may present the most challenges. It asks for the average monthly payroll for your business. To calculate this, you will want to include wages paid to employees as well as any other benefits paid on their behalf (paid leave, health care, and retirement benefits). If wages in excess of $100k are paid to anyone individual, you will need to limit theirs to 100k.
The most straight forward way to handle this would be by reviewing your 2019 W2s/ payroll reports, and making several adjustments for each employee. Please note, there may be additional guidance related to this so you will need to confirm the following calculation is applicable before proceeding.
Step 1: Calculate eligible compensation per employee-
1. Add wages from your 2019 940, but reduce to $100k for any individual who earns more than $100k
2. Add the portion of benefits you pay on each employee’s behalf (for example, if you pay 50% of their health insurance premiums, you will include the 50% cost here)
3. Add the portion of retirement benefits you pay to each employee (the calculation from your TPA will have this information by employee. You will want to include the employer match and any profit-sharing component that you fund).
4. Add any state or local taxes you paid on behalf of your employees (in most cases this is unemployment tax and is reported on quarterly payroll filings)
Step 2: Calculate average total
1. Add all amounts in step 1
2. Divided by 12
Step 3: Calculate PPP Loan amount (which is stated on the application)
1. Multiple step 2 by 2.5
This process is ever evolving so we will continue to monitor the situation as additional information comes available