In the flurry of releasing millions of dollars of loan requests from small businesses under the CARES Act’s Paycheck Protection Program (PPP), the Small Business Administration (SBA), in consultation with Department of the Treasury, issued additional guidance on April 6, 2020.
These Frequently Asked Questions (FAQs) go a long way in clarifying the intent of Congress in drafting the Program and the SBA in overseeing the Program. Six pages in length, the 18 FAQs shine a great deal of light in interpreting the prior rules. Among the issues addressed are:
- Qualification as a small business for purposes of the Paycheck Protection Program, even if the company applying for the loan has more than 500 employees
- The requirement to apply the SBA Affiliation Interim Final Rule on Affiliation
- The $100,000 limitation rule in determining the amount of “payroll costs” per employee
- Consideration of sick pay in the determination of payroll costs
- Signature requirements for the SBA PPP Loan Application
- Alternative time period requirements for reporting aggregate payroll costs
- The exclusion from payroll costs for amounts paid to independent contractors or sole proprietors
- How potential borrowers should be calculating payroll costs with respect to payroll taxes associated with amounts paid to employees
In particular, the two items most often discussed from the above listing were the $100,000 cap calculation and the treatment of payroll taxes in determining aggregate payroll costs. As noted, both matters appear to be resolved in the FAQs – see additional details below:
Prior to this additional guidance, the question persisted regarding whether the cap was applied against all payroll for a particular employee (which would be inclusive of other qualifying payroll costs), or whether the cap was to be applied to the latter.
By way of example, assume an employee with $120,000 salary. In addition to the salary, also assume costs of $10,000 for healthcare provided for the employee, and $7,200 for the employer’s profit-sharing contribution. Thus, the total compensation is $137,200.
Capping the entire compensation package at $100,000 would result in $37,200 being excluded from the annual “payroll costs” required in computing the maximum borrowing amount under the Paycheck Protection Program. Dividing this amount by 12 (months), equates to an average decrease in monthly payroll of $3,100. Multiplying this amount by 2.5, per the Paycheck Protection Program formula, equals $7,750. This is the amount by which the maximum loan amount would have decreased had total compensation been capped at $100,000.
Capping just the cash compensation at $100,000 reduces the excluded compensation in the example to just $20,000 on an annualized basis or $1,667 monthly. Using this approach, as set forth in the new FAQ guidance, results in the maximum loan amount being reduced by $4,167, leaving nearly $3,600 of additional borrowing capacity for the applying company or business.
Treatment of Payroll Taxes
Due to the explicit wording in the law, early analysis of the guidelines inferred that the loan calculation formula was intended to include employee compensation, reduced by the withholdings from employee salaries.
The new FAQs refute this interpretation and note and that all employee compensation is included at gross pay levels and not alternative “net” values after withholding taxes are taken from the employee’s gross income. This is a practical interpretation that was confirmed by Senator Marco Rubio, who participated in drafting the Paycheck Protection Program language.
The approach to the 18 questions set forth in the FAQs demonstrates the intent of the CARES Act in preserving jobs and aiding businesses under extreme economic duress at the current time. We strongly suggest that those contemplating application for a PPP Loan read through the FAQs prior to applying to ensure that the information submitted presents the most beneficial information possible in light of these developments.