On April 8, 2020, the U. S. Treasury Department updated its “Frequently Asked Questions (FAQs)” guidance on the Paycheck Protection Program (PPP) that is being administered by the Small Business Administration (SBA). While this document was previously issued by the Treasury Department, it has been updated to address some of the questions that borrowers and lenders have raised as lenders have been inundated with applications for the forgivable loans under the PPP. Congress is currently considering allocating another $200 to $250 billion to the PPP.
Here of some of the highlights under the FAQs:
- Computing the $100,000 Cap. For purposes of computing a borrower’s “payroll costs” (which is then multiplied by 2.5 to determine a borrower’s loan amount up to $10 million), the $100,000 cap on an individual’s compensation is limited to “cash compensation,” and does not include employer contributions to defined-benefit or defined-contribution retirement plans (e.g. employer 401(k) contributions), group health care coverage including insurance premiums, and state and local taxes assessed on employee compensation.
- Vacation, Family Leave, Etc. PPP loans cover payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, this does not include qualified sick and family leave wages for which a credit is allowed under the recently passed Families First Coronavirus Response Act.
- Time frame of Payroll Costs Calculation. In calculating “payroll costs” for purposes of determining a borrower’s loan amount, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019.
- Independent Contractors. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor are excluded from the “payroll costs” calculation. However, independent contractors and sole proprietors are themselves eligible to apply for their own PPP loans.
- Use Gross Wages for Calculation. “Payroll costs” are based upon an employee’s gross compensation (i.e. not after-tax withholdings). However, the employer-side federal payroll taxes imposed on employee’s compensation is excluded from the payroll costs calculation.
- Spending the PPP Money. For purposes of computing the loan amount that is eligible to be forgiven under PPP, the borrower must spend the loan proceeds within eight weeks beginning on the date “the lender makes the first disbursement of the PPP loan to the borrower.” The SBA has previously indicated that, for purposes of the loan forgiveness requirement, no more that 25{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} of the loan proceeds can be used for non-payroll costs permitted under PPP (i.e. rent, interest on mortgage obligations and utility payments).
The FAQs still do not address whether the income allocation to partners in a business taxed as a partnership are included in the payroll costs calculations. Our experience is that lenders have varying interpretations of this issue. Hopefully, more guidance with continue to be provided by the SBA and Treasury Department on this and other issues that have arisen under the PPP.
Michael D. Walker is a business, tax and estate planning attorney who has worked with individuals and small to medium-sized businesses for nearly 30 years. A careful listener, Michael skillfully guides his clients to meet the wide variety of legal challenges they face in our current complex world.
