THE CARES ACT:
Confusion over the PPP Loan Program (analysis as of April 5, 2020)
As you’ve probably noticed applying for a PPP Loan has been fraught with conflicting instructions, contradictory rules, lenders not prepared to accept applications and constant last minute changes in the application form. Borrowers and Lenders are both confused. [UPDATE : Treasury Department issued FAQ’s on April 6, 2020 to clarify many of the following items].
The items noted below are some of the confusing items that we have noted, but there may be others surrounding affiliation rules and other aspects of the law and the regulations concerning the PPP loan application process. We’ve identified some of the more significant items that have been confusing to borrowers and lenders alike, and require further clarification from the SBA and U.S. Treasury Department.
Maximum Loan Amount
a) The regulations under Step 1 of “How do I calculate the maximum amount I can borrow?” indicate the applicant aggregates payroll costs from the last twelve months, as does the actual text of the law. However, under “What do lenders have to do in terms of loan underwriting?” the regulations instruct lenders to confirm the Payroll Costs for the 2019 calendar year. The PPP loan application says “For purposes of calculating “Average Monthly Payroll,” most Applicants will use the average monthly payroll for 2019…….” This was and remains an open question and source of confusion for those trying to calculate their maximum eligible PPP loans. The American Institute of Certified Public Accountants (AICPA) has contacted Treasury to get clarification on what period of time to use in the calculations. [UPDATE : Treasury Department issued FAQ’s on April 6, 2020 to clarify this].
b) Another contradiction between the law and regulations concerns whether federal income tax and FICA tax withheld and employer FICA taxes need to be deducted in calculating payroll costs. The four maximum loan calculation examples in the regulations do not mention a deduction for these taxes. However on page 10 of the regulations the question is asked “Is there anything that is expressly excluded from the definition of payroll costs?” and one of the answers says “Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees;” is one of the excluded items. This is also mentioned in the law. We have noted that a ADP programmed its special reports to assist the PPP loan applicants and deducted these taxes from payroll costs for the period mentioned above, but also for all periods in 2019, which clearly doesn’t seem to track with the law or the regulations. The AICPA has contacted Treasury to get clarification on what period of time to use in the calculations and whether the intent of the law was to deduct these items at all, as it seems contradictory to what the lawmakers intended.[UPDATE : Treasury Department issued FAQ’s on April 6, 2020 to clarify this]. [UPDATE April 6, 2020: ADP has contacted its customers with the following: “As a result of the latest guidance from the government on April 2, 2020 regarding the Paycheck Protection Program under the CARES Act, we updated our payroll cost reporting tool so that payroll costs do not exclude federal employment taxes or federal income taxes on employees withheld by the employer. If you ran your payroll cost report before April 5, 2020, we encourage you to re-run your report, and as close in time as possible to submitting your application to your lending institution. As a result of this change in the method of calculation, you may be eligible for a higher PPP loan amount than if you ran a report before April 5. If you already filed your SBA loan application, you will need to work with your SBA lender to determine whether and how you can submit revised information.”
c) Some commentators have said that the $100,000 limitation on Salary, wages, commission, or tips as described in the CARES Act law applies to all of the payroll costs. For instance a major media outlet reported “However, payroll costs are capped at $100,000 on an annualized basis per employee. And while that might be sufficient for many parts of the country, it could fall short in some of the more expensive metro areas – like New York City – where the cost of living is higher.” This appears to agree to the four examples in the regulations (in the Interim Final Rule). However both the law and the Treasury’s PPP INFORMATION SHEET for borrowers seems to contradict the regulations. The law says “the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period” [is excluded] and the PPP INFORMATION SHEET is contradictory in two places in that document. Firstly it says “Payroll costs [these are salary, wages, commissions,or tips, employee benefits, state and local taxes assessed on compensation]are capped at $100,000 on an annualized basis for each employee” but further down there is a question and answer that says “What counts as payroll costs? Payroll costs include:”Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)” with no mention of the other costs that are in the definition of “payroll costs.” [UPDATE : Treasury Department issued FAQ’s on April 6, 2020 to clarify this].
Independent Contractors and Self Employed
We now know that independent contractors and self-employed individuals must apply for their own PPP loan and should not be included in the businesses’ that paid them. A question remains regarding active LLC members and active partners in a partnership. There is no specific guidance about if and how active members of LLC’s and active partners of partnerships that are allocated self-employment income should report their self-employment income for purposes of a the maximum loan computation under the Paycheck Protection Program, and whether they are even entitled to receive a PPP loan. We’ve heard one bank tell its customer to remove the active LLC member’s self-employment income and distributions from payroll costs.
a) With respect to item 1 b) above, the deduction for FWT and FICA taxes in computing payroll costs would affect the amount of loan forgiveness. If these costs reduce payroll costs, as defined in the law, then loan forgiveness will be that much less, and borrowers will be caught holding the bag for the taxes which will wind up being a loan payable in two years. Effectively the government would only be forgiving the amount equal to net pay (plus other eligible costs, i.e. rent, utilities and mortage interest) instead of gross pay plus those other eligible costs that are paid over the following eight weeks after receiving the PPP loan. The AICPA has contacted Treasury to get clarification on whether to use Gross or Net Pay and for what periods. [UPDATE : Treasury Department issued FAQ’s on April 6, 2020 to clarify this].
b) The law indicates PPP loan principal is eligible for forgiveness and interest could be deferred but would eventually be payable by the borrower. The regulations, under “Can my PPP loan be forgiven in whole or in part?” indicates that loan forgiveness can be up to the full principal amount of the loan and any accrued interest. You should seek clarity on this aspect from your lender.
c) It’s been clarified by the regulations that not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs. The SBA has determined that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll.
RotenbergMeril will continue to provide you with the latest information on the above issues and other matters concerning the CARES Act. Stay tuned!
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