SBA Issues Details for Paycheck Protection Program Loans
Late Thursday (April 2nd) the SBA issued interim guidance for the Paycheck Protection Program. The SBA and our banking system have been scrambling over the last week to iron out the details of how to administer funding and to determine required documentation for the loan applications. Read the SBA notice here.
We have been in constant contact with our bank (and other metro banks) to try and stay current on the loan requirements. There remains many unanswered questions, but we do have a better idea as to what documentation is going to be required. However, in our calls yesterday each bank had a different requirement of the documentation they were going to be asking for. In many cases, their documentation requirements were onerous and were going to slow the loan process down. I am hoping the SBA guidance provides clarity, but I think we will still see each bank having a different loan requirement process.
The intention of the loan program is noble, but the bureaucratic process of administration and interpretation will slow the process down and create confusion. There are additional concerns that we have based on what we have been told by the banks and information provided by the SBA guidance release to the lending community.
- The SBA specifically says this is going to be funded on a “first-come, first served” basis. This is inherently unfair, and I hope that Congress recognizes the potential mess, harm, and discrimination they built into the process with this statement.
- If a client does not have a participating bank, they are now scrambling. The feedback I have gotten from banks ranges from:
- We are not taking any new business, to
- We would be glad to work with them but will be serving existing customers first.
- If you need to find a bank, we will do everything we can to help you.
- You can only apply once for the PPP loan. Make sure you apply for the maximum and if not used, you can pay the loan back. If your computation of average monthly payroll costs is incorrect, you cannot go back and fix it.
In summary, based on the rules given, start your PPP loan process now!!!
The following highlights the major changes from the information we have previously posted on our website. See the section below that discusses the documentation requirements you will have to follow.
The initial communication on the loan term, for the amount not forgiven, was 10 years. However, that has changed to two years.
The original rate was .5% and this has been moved to 1% to provide the banking community additional cash flow to administrate the program.
Not more than 25% of the loan forgiveness may be attributable to non-operating costs. In addition, if your payroll costs during the 8-week period is less than 75% of the loan proceeds you will have a remaining loan to be repaid.
From the SBA guidance.
Can lenders rely on borrower documentation for loan forgiveness?
- Yes. The lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs.
- The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower.
Payroll Cost Calculation & Time Period to be Used:
In previous communication we had communicated that the time period to be used to determine your average monthly payroll costs was from February 15, 2019 to June 30, 2019. That statement is now incorrect. With the additional SBA guidance, it now reads:
How do I calculate the maximum amount I can borrow?
The following methodology, which is one of the methodologies contained in the Act, will be most useful for many applicants.
- Step 1: Aggregate payroll costs (defined in detail below) from the last twelve months for employees whose principal place of residence is the United States.
- Commentary: We are planning on using calendar 2019 payroll amounts and payroll tax returns to do this computation and not the previous twelve months. The reason is that financial statements may not have been updated and the first quarter payroll reports may not have been completed. However, review your situation to see if the reporting period from April 1, 2019 through March 31, 2020 produces a better result.
- Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
- Commentary: We believe this statement is misleading since payments to an independent contractor (i.e.1099’s) cannot be included as payroll costs.
- Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
- Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
What qualifies as “payroll costs?”
Payroll costs consist of:
- Compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation.
- Cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips).
- Payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal.
- Commentary: Generally, these payments will be included in your gross payroll.
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement.
- Payment of state and local taxes assessed on compensation of employees.
- For an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
The Most Important Item: Documentation Requirement
The following are excerpts from the SBA communication released last night.
- SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness.
- Lenders will need to do the following before a loan is approved:
- Confirm receipt of borrower certifications contained in Paycheck Protection Program Application form issued by the Administration.
- Confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020.
- Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application; and,
- Follow applicable BSA requirements. As a “lay person” I am not sure what this means but I am sure it relates to compliance requirements!
Here is the documentation that Axtell Haller & Slachta will be providing to our banker, Dave Peterson from Minnesota Bank & Trust. Feel free to use this as a guideline with this qualifier. I am sure there will be at least one additional item that we will have to provide.
- A completed application signed by all three partners.
- We will include an attachment that has all the owner information section completed.
- Each owner will complete and sign page 2 of the application.
- Provide copies of the quarterly IRS Form 941’s for the year
- Provide a copy of the IRS Form 940
- Provide a copy of the payroll register showing each pay period (probably overkill but we are providing this)
- Prepare and attach a reconciliation of our payroll and benefit cost to what will be entered as our “Average Monthly Payroll” cost.
- Attaching a copy of our 12.31.19 P&L to show the income that will be allocated to the partners that is subject to self-employment income taxes.
- If you are an S Corporation you will not have to provide this. The owner’s compensation is included in your payroll costs.
- Preparation of a cover letter.
- Pray for approval!!!!