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How To Calculate Sole Proprietor “Payroll” For PPP Loans

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IMPORTANT UPDATE: SINCE THE ORIGINAL PUBLISHED DATE OF THIS BLOG POST, FURTHER GUIDANCE FROM TREASURY HAS BEEN RELEASED. DO NOT FOLLOW THE INSTRUCTIONS BELOW — THIS POST IS OUTDATED. I HAVE FOUND THIS COLLEAGUE’S WRITE-UP WORTH READING INSTEAD — AND I RECENTLY RECORDED A FREE WEBINAR ON HOW TO APPLY.

Note: this post is about sole proprietors — those filing Schedule C on their personal tax returns, whether or not they have employees. For information on partners in partnerships (who are also considered self-employed for the purposes of the PPP), please see this post instead.

There has been so much back-and-forth and conjecture and guidance on how to calculate W-2 payroll for purposes of the PPP loan, but very little on the subject on how to include self-employment income in these calculations. The reason is that sole proprietors (single-member LLCs, independent contractors, gig workers, and anyone else who files Schedule C) are by law prohibited from paying themselves as an employee, through a payroll system. They therefore do not receive W-2 forms and are not included in quarterly “941” payroll reports.

The key here is that this is a “Paycheck Protection Program” — the goal is to keep people working instead of going onto the unemployment rolls. Why? Because it’s better for 1) business owners, 2) workers, and 3) the economy. Business owners are able to keep their companies afloat in a challenging environment (to put it mildly), continuing to produce products or services and maintain revenues at some level; workers generally earn more in their jobs than on unemployment (and if not, this means they are low-paid workers and probably deserve a raise for hazard pay); and the economy of course benefits because companies spend money on their vendors and landlords, and individuals spend their money on other products and services, and all of this helps to keep other businesses going, too.

So what constitutes a “paycheck” if you aren’t allowed to be on payroll?

The key here is “payroll taxes” — which are the portion of taxes that go to Social Security and Medicare programs, often known as FICA. Employees have 7.65% of each paycheck withheld for these purposes (and their employers match this amount for a total of 15.3%). Sole proprietors, on the other hand, pay estimates quarterly toward this and other taxes, and reconcile them on their annual personal tax return, using Schedule SE (Self-Employment) to calculate “self-employment tax”. This tax is the same as “payroll tax” for employees — with the painful added cost of having to pay both sides of the tax… the employee 7.65% and the matching 7.65% as they are their own “employer”. (Yes, ouch. Being self-employed is expensive.)

All net income earned by a sole proprietor is taxed for self-employment/payroll tax purposes, regardless of whether that income was pulled out of the company in the form of a draw. This amount flows through from Line 31 of Schedule C onto the Schedule SE.

So, based on the above perspective, I have been suggesting that sole proprietors should take the amount on Line 4 from Schedule SE on their personal tax returns to substantiate the amount of income from their business on which they paid “payroll taxes”. And to clarify: this is still the easiest approach for most people!

But here are the potential problems with that approach for some. If you fall into one of these groups, then keep reading for an alternative method:

  • Tax deadlines have been moved to July 15th — for many small businesses, preparing their books for taxes is the last thing on their minds, and CPAs such as myself are scrambling to help their clients apply for relief, so we’re behind on the returns from folks who have found time to submit their info. As such, many sole proprietors simply don’t have their personal returns yet.
  • Some sole proprietors have self-employment income from other businesses as well, such as a partnership or another Schedule C sole proprietorship business activity. Well, Schedule SE adds all businesses together. Guidance has not been forthcoming here, but it is likely that those in this situation will need to apply for PPP separately for each business — or at least the businesses that also have employees.

If you are in the first of those situations — no tax return yet — Treasury regulations allow you to use a reconciled Profit & Loss from your bookkeeping software to calculate these totals. (Make sure your banker knows this, as I have had some requiring 1099-MISC forms as substantiation, which is nothing short of ludicrous for many reasons — I won’t go into that here, as this post is plenty long already.) You would in this case simply take the final row, Net Income, and multiply by 92.35% to back out the employer portion of self-employment tax, as Treasury regulations for the PPP do not allow the employer portion of payroll taxes to be included in the calculation.

For sole proprietors in the latter of these situations (multiple businesses), here’s what you can do instead:

  1. Pull up each Schedule C for which you have employees and multiply Line 31 by 92.35% to back out the deductible portion — which is the Employer part of self-employment tax. (Treasury regulations for the PPP do not allow the employer portion of payroll taxes to be included in the calculation.) You can apply for a PPP loan for each one of these businesses separately. The reason you’ll have to do each one separately is that you also need to include the payroll for your staff in the calculation.
  2. Do the same for each of the other Schedule C businesses for which you do NOT have employees. Add all these together and apply for one PPP loan. There is no need to apply for each one separately.
  3. If you have self-employment income from a partnership, apply for a PPP for each partnership separately. If you have employees, add it to that partnership’s application. If you do not, apply for each one separately in your capacity as a self-employed partner. See this post for more guidance on partnership “payroll”.

If you already submitted an application and did not use the correct period or amounts, it’s by no means too late. Based on recent clarifications by the SBA and Treasury, you will be given an opportunity to revise your application — just explain the situation to your banker. It’s only “too late” once your application has already been approved — and in that case, Treasury says anything submitted based on older guidance is still considered accurate as long as it was consistent with the rules in place at the time of the application.

Keep in mind that this is only my personal interpretation of the Treasury regulations concerning what constitutes “payroll” for the purposes of the PPP, and ultimately your banker or lender will be the person with final authority on the matter. However, the Treasury is clear that they will allow lenders to rely on borrowers’ representations. Furthermore, the American Bankers Association is still in the process of seeking SBA and Treasury clarification for many issues, and as they receive it, they have to communicate it to member institutions, who then have to pass it along to the bankers themselves — who are overworked and have scarce little time for daily continuing education. You can do a favor for your banker by organizing your calculations and documents in such a way as to make their job easier, especially if you include a brief note explaining why you used the data you did, and as in middle-school math class: always show your work.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Education, IRS, Tips

How To Calculate Partner “Payroll” For PPP Loans

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IMPORTANT UPDATE: SINCE THE ORIGINAL PUBLISHED DATE OF THIS BLOG POST, FURTHER GUIDANCE FROM TREASURY HAS BEEN RELEASED. DO NOT FOLLOW THE INSTRUCTIONS BELOW — THIS POST IS OUTDATED. I HAVE FOUND THIS COLLEAGUE’S WRITE-UP WORTH READING INSTEAD, AND I RECENTLY RECORDED A FREE WEBINAR ON HOW TO APPLY.

Note: this post is about partners in a partnership — those filing Schedule SE on their personal tax returns due to flow-through income from a Form 1065 K-1. For information on sole proprietors (who are also considered self-employed for the purposes of the PPP), please see this post instead.

There has been so much back-and-forth and conjecture and guidance on how to calculate W-2 payroll for purposes of the PPP loan, but very little on the subject on how to include partner income in these calculations. The reason is that partners in a partnership (or, more commonly, multi-member LLC taxed as a partnership) are by law prohibited from paying themselves as an employee, through a payroll system. They therefore do not receive W-2 forms and are not included in quarterly “941” payroll reports.

The key here is that this is a “Paycheck Protection Program” — the goal is to keep people working instead of going onto the unemployment rolls. Why? Because it’s better for 1) business owners, 2) workers, and 3) the economy. Business owners are able to keep their companies afloat in a challenging environment (to put it mildly), continuing to produce products or services and maintain revenues at some level; workers generally earn more in their jobs than on unemployment (and if not, this means they are low-paid workers and probably deserve a raise for hazard pay); and the economy of course benefits because companies spend money on their vendors and landlords, and individuals spend their money on other products and services, and all of this helps to keep other businesses going, too.

So what constitutes a “paycheck” if you aren’t allowed to be on payroll?

The key here is “payroll taxes” — which are the portion of taxes that go to Social Security and Medicare programs, often known as FICA. Employees have 7.65% of each paycheck withheld for these purposes (and their employers match this amount for a total of 15.3%). Partners, on the other hand, pay estimates quarterly toward this and other taxes, and reconcile them on their annual personal tax return, using Schedule SE (Self-Employment) to calculate “self-employment tax”. This tax is the same as “payroll tax” for employees — with the painful added cost of having to pay both sides of the tax… the employee 7.65% and the matching 7.65% as they are their own “employer”. (Yes, ouch. Being self-employed is expensive.)

For self-employment tax purposes, both guaranteed payments to partners for services and their ownership-percentage allocation of net income are included.

Initially, many of us assumed that only guaranteed payments qualified as “payroll” for the PPP calculation, as these are in theory the amounts paid for services rendered. However, many partnerships do not use guaranteed payments, and instead split all of the profits (for various reasons, including increasing the Sec 199A deduction). Since all income to an active member of a partnership is taxed for self-employment/payroll tax purposes, it should not matter whether it is due to guaranteed payments or an allocated portion of net income — that is a distinction left to the partnership agreement and says nothing about whether it is “payroll” for these purposes or not.

So, based on the above perspective, I have been suggesting that partners take the amount on Line 4 from Schedule SE on their personal tax returns to substantiate the amount of income from the partnership on which they paid “payroll taxes”. And to clarify: this is still the easiest approach for most people!

But here are the potential problems with that approach for some. If you fall into one of these groups, then keep reading for an alternative method:

  • Tax deadlines have been moved to July 15th — for many small businesses, preparing their books for taxes is the last thing on their minds, and CPAs such as myself are scrambling to help their clients apply for relief, so we’re behind on the returns from folks who have found time to submit their info. As such, many partners simply don’t have their personal returns yet.
  • Some partners have self-employment income from other businesses as well, such as another partnership or a Schedule C sole proprietorship. Well, Schedule SE adds all businesses together. Guidance has not been forthcoming here, but it is likely that those in this situation will need to apply for PPP separately for each business — or at least the businesses that also have employees.

So for partners in either of these situations, here’s what you can do instead:

  1. Pull up your client copy of the 2019 partnership tax return — Form 1065.
  2. Scroll down to the K-1 forms — there’s one set for each partner.
  3. Line 14A of each of the K-1 forms shows self-employment earnings for each partner. This includes guaranteed payments as well as the flow-through portion of net income.
  4. Take that amount and multiply it by 92.35% to back out the deductible portion — which is the Employer part of self-employment tax. Treasury regulations for the PPP do not allow the employer portion of payroll taxes to be included in the calculation.

In a partnership where all partners are actively working for the company — rather than one or more being silent investors — you’ll see that the total of Line 14A for all partners, equals Form 1065, Line 10 (Guaranteed payments to partners) + Line 22 (Ordinary Business Income).

However, if you have investor-partners, these folks usually are allocated their ownership-percentage of net income on which they do not pay self-employment taxes. And because they do not work for the business, they also will not receive guaranteed payments (which are also taxable for self-employment purposes). Therefore they are not eligible to apply for the PPP, and these amounts should not be included in the calculation. This is why I suggest sticking to Line 14A of the K-1 schedules, rather than using the amounts from the front of the 1065.

And if you are one of the unlucky partners whose 2019 1065 partnership return is still on extension, and therefore does not yet have a Schedule K-1, Treasury regulations allow you to use a reconciled Profit & Loss from your bookkeeping software to calculate these totals. (Make sure your banker knows this, as I have had some requiring 1099-MISC forms as substantiation, which is nothing short of ludicrous for many reasons — I won’t go into that here, as this post is plenty long already.) You would in this case simply add together the row for Guaranteed Payments and the final row, Net Income, and multiply by 92.35% to back out the employer portion of self-employment tax, as mentioned above. Again, if you have any silent investors, you would need to back out their percentage portion of net income.

If you already submitted an application and did not use the correct period or amounts, it’s by no means too late. Based on recent clarifications by the SBA and Treasury, you will be given an opportunity to revise your application — just explain the situation to your banker. It’s only “too late” once your application has already been approved — and in that case, Treasury says anything submitted based on older guidance is still considered accurate as long as it was consistent with the rules in place at the time of the application.

Keep in mind that this is only my personal interpretation of the Treasury regulations concerning what constitutes “payroll” for the purposes of the PPP, and ultimately your banker or lender will be the person with final authority on the matter. However, the Treasury is clear that they will allow lenders to rely on borrowers’ representations. Furthermore, the American Bankers Association is still in the process of seeking SBA and Treasury clarification for many issues, and as they receive it, they have to communicate it to member institutions, who then have to pass it along to the bankers themselves — who are overworked and have scarce little time for daily continuing education. You can do a favor for your banker by organizing your calculations and documents in such a way as to make their job easier, especially if you include a brief note explaining why you used the data you did, and as in middle-school math class: always show your work.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Education, IRS, Tips

PPP Application Checklist

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You’ve reviewed the Paycheck Protection Program summary, double-checked the newest guidance and pointers, determined you’re eligible, and reached out to your bank or lender. Now what?

Here is a list of documents to pull together so you have them ready for the application.

1) Articles of Incorporation (S-Corp or C-Corp) or Articles of Organization (Single- or Multi-Member LLC) – note: non-LLC sole proprietorships and partnerships may not have anything like this; they may have an Operating Agreement or Partnership Agreement that will suffice.

2) EIN Letter – almost every company has one of these at this point, as they are now required to open a business bank account; but if you are a sole proprietor who uses their Social Security number to file taxes and runs things through a personal bank account (not recommended), you may not have one.

3) Average monthly payroll calculation – seems like it would be easy, but it actually can be kind of complicated. I’m going to try to break it down.

First, figure out what date range you’ll need to use. You can choose from a bunch of different ones to calculate your monthly average (for Gusto users – they now allow you to change the date range on the PPP report):

a) 2019 calendar year.
b) Most recent 12-month period before your loan application.

Most businesses will select either (a) or (b).

Pro tip: If you’re trying to get the highest loan possible, pick the period that is higher. If you’re worried about hitting 75% of your prior-year monthly average, pick the period that is lower.

c) Seasonal business that has its highest payroll this time of year: use info between February 15, 2019 and June 30, 2019.
d) New businesses, or ones that expanded this year (i.e., FTEs and payroll were higher during the first part of 2020 than they were during the other acceptable reporting periods): use the alternative reporting period of Jan 1-Feb 15, 2020.

Second, if you use a payroll processor; and are on payroll yourself (S-Corp or C-Corp); and your health insurance, retirement and other benefits are tracked through your payroll system; then you should be able to simply run a report specific to the PPP through them. Change the date range if needed and you’re done with this step. (Yay!)

If you have employees (or you are an employee of your own company) but do not use a payroll processor, or your payroll processor doesn’t have this report for you, then you’ll have to calculate this yourself (and switch to Gusto as soon as this is over). Take the 12-month total for the period you chose above (if you’re using the 2019 calendar year, just take Box 5 from each employee’s W-2) and follow the steps in this article, under “How did you calculate my average monthly payroll costs?“

If you are a sole proprietor and do not have employees, then you have two options for calculating the average monthly “payroll”. Either take the amount on Line 3 on Schedule SE from your 2019 tax return, or take the Net Income from your reconciled QuickBooks Profit & Loss report for whichever date range you selected above. Add health insurance and retirement benefits. Divide by 12. (Make sure you attach the calculations when you fill out the application.)

Lastly, if you are a partner in a partnership and do not have employees, then you have two options for calculating the average monthly “payroll”. Take the amount on Line 3 on Schedule SE from each partner’s 2019 tax return, or use the company’s reconciled QuickBooks Profit & Loss report to find each partner’s Guaranteed Payments, plus their ownership percentage times the Net Income — this second method is complicated enough that you may want to reach out to your bookkeeper or accountant for assistance if you choose it. Add health insurance and retirement benefits. Divide by 12. (Make sure you attach the calculations when you fill out the application.)

Pro tip: If you’re trying to get the highest loan possible, pick the method that is higher. If you’re worried about hitting 75% of your prior-year monthly average, pick the method that is lower.

4) Payroll Reports – if you have employees. Print these payroll reports from Gusto or ADP (or whatever payroll provider you use).

2019 all four quarters:
IRS 941
IDOR IL-941
IDES 3/40

2020 first quarter:
IRS 941
IDOR IL-941
IDES 3/40

2019 annual:
IRS W-2s
IRS 940

5) Health insurance and retirement contribution invoices – to support info reported by your payroll software; you will probably not need these until you apply for forgiveness, but pulling them now will help ensure that you’re reporting the correct amount of benefits with your average monthly payroll costs.

6) SBA Borrower Application Form — not the “Lender” Form! I’ve had bankers give more than one client the Lender Form accidentally (which is the form the banker is supposed to fill out and submit with your application). Here’s a sample, which you may want to fill out while you’re waiting for the lender to contact you. However, it’s likely that they’ll make you fill out their own copy when the time comes.

7) Monthly Rent and Utilities – some lenders are also asking for this info in anticipation of eventually applying for forgiveness, but it does not figure into the calculation of your actual loan. The loan itself is simply 2.5 times your monthly average payroll cost. Also, remember that you will only be able to spend 25% of the loan on rent and utilities in order to have the loan forgiven.

That’s it! There you go. Easy peasy, lemon squeezy.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Education, IRS, Tips

Payroll Protection Program – New Guidance and Important Reminders

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I woke up today ready to finally get some real client work done — tax returns have been sitting floundering for over two weeks now and I have a backlog of emails that gives me bad dreams — and found that new guidance on the Payroll Protection Program (PPP) was given to bankers last night by the Treasury Department and the SBA. Game on!

But in actuality it’s all really good news, because it ends the constant obsession with researching all the different possible interpretations, weighing the consequences of taking each approach, worrying about accidentally advising a client to ask for too much or too little, bickering with colleagues about differing opinions, and second-guessing an approach in the face of a banker who says otherwise.

(If you’d like a summary of the total mess Congress and the Treasury Department created when they rolled out this program, see this excellent article by my favorite tax writer, Tony Nitty.)

(And if you’d like a clear summary of the PPP program as it now stands, see this article from earlier today by another great Forbes writer, Kelly Anne Smith.)

So, first: here’s the new guidance that was given to bankers last night — and here’s the audio for the call itself.

And here’s a very brief summary of the highlights:

a) Use Gross Payroll (Not Net) – you will not subtract federal withholding or the employee portion of SS/MC after all — just like we all understood it from the beginning, before this whole fiasco with the interim guidance (because, we said… otherwise it would be silly, we said). You should not add in the employer portion of federal taxes, but you can still add in the employer portion of state taxes, like SUTA (state unemployment tax — in Illinois, that’s IDES).
b) Add Benefits to Payroll – the salary cap of $100K only refers to salary itself, and not benefits — you can add health/retirement benefits on top of this. I recommend using the W-2 Box 5 for the payroll portion, since it’s rarely adjusted for anything.
c) Don’t Worry If You Used the Wrong Rules – If a loan application has already been processed by a lending institution, then the applicant need not do anything more — they will be processed accordingly, given the interpretation of the law at the time it was processed. If a submitted loan application has not been processed, the applicant may revise their application and should work with their lender to do this.
d) Applications Are Not Going Into a Black Hole – 78,000 PPP loans have been approved, worth about $22 billion so far (though how many borrowers have actually received their money so far has not been shared). The banks are accepting applications and submitting them to SBA as their online systems can take it (they keep going offline). Treasury has said they will go back to Congress for more money if necessary — and as of tonight it seems we’re likely to get another $250B.

In addition to these new guidance clarifications, I wanted to list of some reminders about what we already know — specifically, things I keep noticing clients and colleagues are missing in their understanding of the program — as well as a few tips.

  • BEWARE OF SCAMS — especially from people who say they can get you a loan faster for a fee. They’re all over the place and easy to fall prey to, especially with all the confusion regarding the PPP. Remember, you shouldn’t have to pay a cent to submit a Paycheck Protection loan application.
  • The total amount of the loan is 2.5 times your average monthly payroll costs, period. Rent, mortgage interest, and utilities do not enter into this part of the calculation — they only are in the calculation for loan forgiveness.
  • No more than 25% of the PPP can be used on non-payroll items (again: rent, mortgage interest, and utilities).
  • Self-employed folks — sole proprietors and partners in partnerships — are eligible to apply for the PPP, and to include their self-employment earnings as if it were payroll. If they have employees, they can apply now; if not, they can apply starting April 10th. I recommend using Form SE (part of the personal tax return, not the business) to substantiate the full amount of their own “payroll” income, plus (as mentioned above) Box 5 of the W-2s for your staff (up to a $100K limit per person).
  • For full loan forgiveness, a borrower cannot let the dollar amount of payroll or the number of FTE (full-time employee equivalent) hours dip below 75% of the prior-year monthly average; but it won’t all be lost — it will be phased out.
  • You can choose from a bunch of different date ranges to calculate your monthly average (Gusto now allows you to change the date range on the PPP report):
    a) 2019 calendar year.
    b) Most recent 12-month period before your loan application.
    Most businesses will select either (a) or (b).
    Pro tip: If you’re trying to get the highest loan possible, pick the period that is higher. If you’re worried about hitting 75% of your prior-year monthly average, pick the period that is lower.
    c) Seasonal business that has its highest payroll this time of year: use info between February 15, 2019 and June 30, 2019.
    d) New businesses, or ones that expanded this year (i.e., FTEs and payroll were higher during the first part of 2020 than they were during the other acceptable reporting periods): use the alternative reporting period of Jan 1-Feb 15, 2020.

This is a lot of info to take in, I know… but hang in there and run the numbers — if you already own a small business, you’ve had to deal with way worse calculations than this. Now that we have reliable guidance and clarity on what will be accepted for the loan calculation and forgiveness calculation, it’s just a matter of crunching the numbers and preparing the documentation.

Speaking of which: next blog post — a checklist of information, calculations and documents to pull together so you have them ready for your PPP application!

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Education, IRS, Tips

SBA Economic Injury Disaster Loans (EIDL)

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UPDATE 6/10/20:
Sec. Carranza indicated today that new EIDL applicants will begin to be accepted next week — they are still working through the queue of previous applicants, but as they get a handle on that, the system will be available again (currently it is only available to farmers). I have a client who applied on April 8th who received their loan this past week, so I can confirm that they really are still in-motion… when you see money suddenly show up in your bank account with “SBA TREAS” in the description, that’s probably it.

UPDATE 4/27:
As of 11:15 am Central, the SBA now notes on their website that they are continuing to review the existing queue of EIDL applications and will provide further information on new applications soon. More information in a new blog post here.

UPDATE 4/25: the EIDL program has had some funds replenished in the most recent round of legislation, and full information on it and how to apply can be found here.

We’ve spent so much time talking about PPP loans that we’ve left its older sibling, the Economy Injury Disaster Loan (EIDL), in the shadows.

The idea when you apply for an EIDL is that you need cash fast to save your business (historically, these types of loans are given out to businesses hit by a natural disaster of some type). So when you apply, they try to fund an advance of up to $10k (not necessarily the full $10k) in approximately three days — you even give them your bank info when you apply so they can deposit the funds stat.

In other words, if you meet the minimum qualification criteria to apply for an EIDL loan, and submit an online application to the SBA, you will receive up to a $10,000 advance in short order — that does not need to be repaid.

From Nav.com, a lending site I’ve used in the past for clients: If you meet the minimum requirements to apply for a disaster loan, the grant will be available to you whether or not your loan application is approved. With that in mind, if you need access to capital quickly, and don’t need a larger loan amount, this may be a good option for you.
These working capital loans (including the grant) may be used only to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred. The loans are not intended to replace lost sales or profits or to pay for expansion. Funds cannot be used to pay down long-term debt. They also cannot be used to consolidate debt.

So you certainly could receive an advance, and then not be granted a loan, and yet still get to keep the advance.

But as to a question I was recently asked during one of my daily client Q&A sessions: could you get the advance… but not apply for a loan, or decide against the loan if granted? And if not, then what’s the lowest amount you could request as a loan?

From what research I’ve done (by no means authoritative, so please reach out if you discover otherwise), it sounds like you do have to apply for some sort of loan. I have not yet found an answer about how small a loan you could request. If you apply for $25k or less, there is no personal guarantee and no collateral required. Over that amount, but under $200k, will require a personal guarantee and collateral — but it will avoid some additional costs that come with higher loan amounts.

There is an interesting note on the SBA site, however:
There is no obligation to repay the grant. To receive the $10,000 emergency grant, it is not necessary to have an approved EIDL loan. However, if you are able to secure a PPP loan, the $10,000 grant will be subtracted from the forgiveness amount.

I am unsure about whether this is still true or not — it certainly was initially, but in the past week it’s been widely reported that you may receive both a PPP and an EIDL loan as long as both are not paying for the same expenses, so it’s possible that the info on the SBA site is outdated. It remains important to have a good relationship with your lender to get these kinds of questions answered before signing.

I’ll leave you with some additional info from Brian Thompson over at Forbes:

The EIDLs expanded provisions include: 

  • Can be approved by the SBA based solely on an applicant’s credit score (not repayment ability and no tax return is required).
  • EIDLs smaller than $200,000 can be approved without a personal guarantee. They are also not requiring real estate as collateral and will take a general security interest in business property. 
  • Borrowers can receive $10,000 in an emergency grant cash advance that can be forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue loss. 
  • It expands access to sole proprietors or independent contractors, as well as tribal businesses, cooperatives, and ESOPs with fewer than 500 employees and all non-profits including 501(c)(6)s. 

Because lending decisions are based on self-certification and the applicant’s credit score, the review process should go quickly. CARES also waives the requirement that you be unable to obtain credit elsewhere. That means you can apply even if you already have a credit line.

You apply for these loans directly through the SBA at www.SBA.gov/disaster.  There are no loan fees, guarantee fees or prepayment fees. As of March 30, the new streamlined online application is up and running. Make sure to apply for Economic Injury for the Coronavirus, rather than physical damage due to another disaster (that is a different declaration number).

UPDATE 6/13/20: Although there is much disagreement among colleagues on this topic, according to the AICPA it is likely that EIDL grant advances will have to be subtracted from PPP forgiveness when the time comes.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

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Payroll Protection Program Calculation Template

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IMPORTANT: This blog post is now out-of-date due to new guidance released on April 6th — see new post here.

The most recent interim guidance for the Payroll Protection Program makes a few vague and misunderstood items clearer… and creates some new issues in the process.

From my colleagues over at KMK Law:

Material Changes in PPP

  • Independent contractors do not count as employees for PPP loan calculations or loan forgiveness.
  • All federal employment taxes, including employee’s federal income tax withholding and both employer and employee’s share of FICA from February 15, 2020-June 30, 2020 are excluded from “payroll costs”.
    • This means that businesses are eligible for loan forgiveness based on the after-tax pay to employees (after FICA and income tax are withheld), not the gross pay made by the employer.
    • This exclusion applies only during the Feb. 15, 2020-June 30, 2020 period, which seems to imply that borrowers do not have to deduct employee income tax withholding and FICA when calculating the loan amount from 2019 payroll costs, except to the extent total payroll costs exceeds $100,000 per employee (including FICA and income tax withholding).
  • Interest rate is 1.0%.
  • At least 75% of PPP loans proceeds must be used on payroll costs (whether or not used in the 8-week period eligible for forgiveness; and to be eligible for forgiveness such payroll cost must be paid during the 8-week period).
  • Borrowers knowingly using PPP loan funds for unauthorized purposes may result in additional liability, including fraud.  In addition, if one of the borrower’s shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against that shareholder, member or partner.

Note in particular the bit about payroll taxes: as a result, a lot of folks could be caught by surprise due to the fact that the initial loan request amount is based on gross pay, and the loan forgiveness is based on net pay. Most of us are pretty sure this was not the law’s intent, but we have to work with the most recent regulations released by the Treasury.

This excellent template by Joey Brannon at Axiom takes the new regs into account and explains his analysis by referring directly to each passage in the most recent release. Keep in mind that if you use Gusto or ADP, they will have calculated much of this for you — just make sure to gut-check the results.

The Treasury has also released a PPP Fact Sheet (it’s a little vague, but relatively simple to follow).

Of course, the entire small business community, accountants, advisors, lawyers, banks and other lenders are all frustrated beyond compare that this calculation couldn’t have been standardized and applied consistently. My favorite tax writer, Tony Nitti at Forbes, wrote an excellent article in the form of an open letter to the Treasury Secretary that outlines everything we’re thinking and feeling (but more intelligently, backed up with data, and without swear words).

Furthermore, Gusto is getting push-back from some clients and lenders who disagree with the interpretation of the new regs, and they have released an updated report that allows users to choose either method of calculation.

Hopefully this is just a glitch that will be remedied in the next week, after the ten days of comments are up — but just in case, you may wish to have all employees go to 9 exemptions for those eight weeks, making up the under-withholding later in the year. (And it serves the dual purpose of getting cash into the hands of people now, rather than at tax-time.)

Are we having fun yet?

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Education, IRS, Tips

Paycheck Protection Program Loans: What We Know So Far

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IMPORTANT: This blog post is now out-of-date due to new guidance released on April 6th — see new post here.

The new CARES Act has introduced the “Paycheck Protection Program” (PPP) — $350 billion in loans to be administered by the SBA. The loans may be used to cover a borrower’s payroll and payroll taxes, mortgage interest, rent and utilities for eight weeks from the date of the loan.

But this is the key: if an eligible borrower uses the loan for qualifying expenses “while maintaining its workforce”… the loan may be forgiven. This makes the PPP way more valuable than most other federal, state and city aid (with the exception of flat-out grants, and possibly some credits).

The loans aren’t available yet — hopefully we’ll begin seeing these within the next two weeks. This legislation is hot off the press, and lenders do not yet have guidelines or checklists in place to know how to process applicants. I know this sounds awful to ask of you at a time like this, but: please be patient. Use the time to get your books and documentation in order, select and reach out to your favorite lender, and get everything ready to apply the moment they open the gates.

Qualification and Terms

To qualify for the loan program, a borrower:
(1) must have been in operation on February 15, 2020;
(2) have no more than 500 employees; and,
(3) must certify that the uncertainty of current economic conditions makes necessary the loan request to support its ongoing operations.

  • The amount of a loan cannot exceed 250% of the borrower’s average total monthly “payroll costs” during the one-year period leading up to loan origination. “Payroll costs” include salaries, wages, commissions, tips, paid time off, health insurance, retirement benefits, and state and local taxes not to exceed $100,000 per employee.
  • Loans are subject to a maximum of $10 million.
  • Amounts not forgiven (explained below) will have a maximum maturity date of 10 years from the date the borrower applied for loan forgiveness.
  • Interest on the loans shall not exceed 4% until June 30, 2020, but may be subject to change afterwards. All loan payments (principal, interest and fees) are deferred for at least six months, and up to one year.
  • Loans are “non-recourse” (which means company owners are not responsible for payments if the company defaults), except to the extent the loan proceeds are used for a purpose other than borrower’s payroll, mortgage interest, rent and/or utilities expenses.
  • Borrowers/owners will not need to provide any collateral or personal guarantee during the “covered period” (February 15-June 30, 2020). (It’s unclear whether lenders will require collateral and/or a personal guarantee to spring into effect upon the loan continuing to remain outstanding — or not completely forgiven — after June 30, 2020.)

Loan Forgiveness

The total of all payroll costs, mortgage interest payments, rent and utility payments incurred and made by a small business PPP borrower during the eight weeks following the loan — capped at the total loan principal amount — is potentially eligible for forgiveness. Unlike other forms of forgiveness of indebtedness, the amount of forgiveness received by a borrower will not be taxed as income. So this is kind of a big deal.

However, the maximum forgiveness amount will be reduced if the company reduces its number of Full-Time Equivalent Employees (FTEs) and/or reduces wage or salary compensation in excess of 25%. The reduction of forgiveness is reduced in proportion to the decrease in the number of FTEs during the eight-week period following the loan origination date, and the borrower’s monthly average FTEs from either (1) February 15, 2019 – June 30, 2019 or (2) January 1, 2020 – February 15, 2020.

In addition, the maximum forgiveness amount will be reduced dollar-for-dollar for any wage or salary reduction of an employee (who is paid less than $100,000 year) in excess of 25% (measured against the wage and salary for that employee during the most recent full quarter prior to the loan origination date).

If the small business previously reduced its workforce or the salary/wages it pays its employees, they can still qualify for loan forgiveness if FTEs are re-hired and/or wages are restored by June 30, 2020.

After an application is submitted for loan forgiveness, the lender will have 60 days to make a determination as to whether the loan will be forgiven. Lenders will then work with the SBA to be reimbursed for the forgiven amount; this won’t be something the small business owner has to do.

Information on Lenders

The Paycheck Protection Program will be administered by the existing network of approved SBA lenders, but the SBA and Treasury Department have said they are adding qualified lenders to disburse and service loans made with the guarantee of the SBA. Supposedly it’s not that hard to qualify as a lender, so if you have a good business relationship with a bank or other lending organization, encourage them to apply to become a qualified lender ASAP.

Lenders can make borrower eligibility determinations without SBA approval, using only the program eligibility rules. A borrower does not need to show it is unable to obtain credit elsewhere (a customary SBA loan requirement). This is also kind of a big deal.

Loans under the program are fully guaranteed by the federal government, which is an increase to the existing guarantee percentages under the current SBA loan program. (Ditto on the big deal.)

The SBA and the Department of Treasury are in the process of developing the guidelines lenders will use to administer the Payroll Protection Program loans. They must issue regulations within 15 days of enactment of the CARES Act, which means it’s possible that lenders could begin taking loan applications in two weeks. Just to be clear here: this is light-speed for a newly-enacted government program.

Recommendations for Potential Borrowers

I’m hearing from clients and colleagues that none of the lenders have received guidance yet for these PPP loans. However, if you have your books in order and gather all the appropriate documentation that you expect they’ll ask for, then you’ll be ready when the time comes.

In addition to getting the books in order for 2018, 2019 and up-to-date through 3/31/20 (if they’re not already), I’m recommending to clients who may be interested in the program, as potential borrowers, start working on documentation to verify the following:
1) the number of full-time equivalent employees on payroll and pay rates for the applicable periods: including payroll tax filings, state income, payroll, and unemployment insurance filings (basically, payroll from a comparable period one year ago); and,
2) payments on mortgage obligations, lease obligations and utilities: including payment receipts, transcripts of accounts, or other documents (to prove you had a lease or mortgage and utilities in service before February 15th of this year).
3) You’ll need some type of certification by an “authorized individual” (presumably an owner, partner or officer) as to the business having been negatively impacted by COVID-19;
4) And of course you’ll need some relationship with an SBA-approved Sec 7a lender, which means start calling around now.

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IRS, Tips

Coronavirus Stimulus Checks: Calculate How Much You Will Receive

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Great, short article from the Washington Post that answers many questions about the stimulus payments and helps you calculate yours:

Coronavirus stimulus checks: Calculate how much you’ll get, $1,200 or more – Washington Post

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Illinois, IRS, Tips

Changes in Tax Return, Tax Payment & Estimated Payment Due Dates

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  • MyTaxIllinois Quick Links

UPDATE: On April 9, the IRS issued Notice 2020-23, which expands the deadline extension to many more tax returns and payments. The most important is that second-quarter estimated tax payments are also due July 15th now, rather than the original date of June 15th. More here.

Obviously things have been changing daily in the surreal and crazy world we’re all living in right now. As of March 28, 2020, here are the new deadlines for 2019 income tax returns and 1st & 2nd-Quarter Estimated Tax Payments — for both the IRS and Illinois Department of Revenue.

Both Federal and Illinois income tax returns and payments that were due on April 15 are now due July 15. (This includes both calendar and fiscal-year filers, as well as fiscal-year extended due dates that land on April 15th.)

However, keep in mind that the new stimulus checks will be based on 2018 tax returns if the 2019 return is not filed soon — more on that in this excellent article by Tony Nitti. And of course, if you are due a refund, it is best to get that filed sooner rather than later.

An extension can be filed before July 15 to extend the filing date (but not payment date) until October 15, the usual extension date.

Federal 1Q estimated tax payments are also now due July 15 — BUT Illinois 1Q payments are still due April 15.

Federal and State 2Q estimated tax payments are currently still due on June 15. (One month before Fed 1Q, yes.) UPDATE: the federal but not Illinois 2Q payment due date has now been moved to July 15th as well.

Note: payroll, gift and excise tax returns, as well as international filers and informational returns retain their original deadlines. UPDATE: most of these have since also been extended, though not payroll returns.

New automatic, systemic liens and levies are suspended for now. New delinquent accounts will not be forwarded to debt collection for now.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

IRS, Tips

Coronavirus Relief Loans and Resources for Small Businesses

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Gusto is my favorite company to work with for so many reasons… but it just got better as I have been watching how much effort they’ve put into researching cash flow options for their small business clientele.

I’ll be circling back to this list soon to explore these in an order that I think makes most sense for my client base; I’ve also emailed them about some City of Chicago and Cook County resources that should be added to the list.

But in the meantime, please check out their downloadable list of Federal, State, and Private resources for relief, loans and grants available to small businesses.

As they mention in the post:

This spreadsheet will regularly be updated with financial resources for small businesses. Check back for the most up-to-date information, and share it with a business owner who may benefit from the support.

We’ll also be creating similar resources for unemployment benefits and sick leave. Visit the Talk Shop homepage for our latest publications, and see our COVID-19 employer guide for more helpful info.

Source: Coronavirus Relief Loans and Resources for Small Businesses | Gusto

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.