Two weeks ago I ran a post about What Doctors Need to Know About the CARES Act. It was written within hours of it being signed into law. I had not read the entire law and neither had anyone else on the planet, so I knew there would likely be errors in the post, which were corrected as soon as they were discovered. More so than a few minor errors, what readers really noticed about that post was that it brought up more questions than it answered, most of which revolved around the small business stimulus portion of the CARES Act. Perhaps the most interesting part, and certainly the part that generated the most questions for my readers, of this stimulus was the tax-free forgivable loan for small business owners known as the Paycheck Protection Program. Today, I'm going to try to answer as many of those questions as I can.
What Stimulus Programs were Implemented for Small Businesses?
Small businesses are getting hammered in this recession. As an example, in my home state of Alaska, there have been fewer than 250 cases of coronavirus and only 7 deaths. But fully 1 in 7 restaurants in the state have closed and do not plan to reopen. Ever. As if the loss of these businesses for their owners was not bad enough, 48% of employees in this country work for small businesses. 18% work for businesses with fewer than 20 employees. So the loss of small businesses can have severe consequences for millions of American families. In an effort to assist them, Congress included a number of provisions for them in the CARES Act.
The main ones are the Economic Injury Disaster Loan and the Paycheck Protection Program.
What is the Economic Injury Disaster Loan?
The first of these is the Economic Injury Disaster Loan (EIDL) program run through the Small Business Administration (SBA). This program is a loan available to companies ranging from a significant company with as many as 499+ employees down to sole proprietor independent contractors. Non-profits are also eligible. There are a few odd exceptions–you can't be a farmer, a pornographer, a casino, a drug dealer, a lobbyist, or a member of Congress. The EIDL has been around for a long time. It isn't new for COVID-19, but has been expanded.
To qualify, you must be in an area declared a disaster area (occurred for the whole country March 13th) and have suffered some economic harm. You can borrow up to $2 Million (depending on how much economic harm you encounter), there are no upfront fees, there are no prepayment penalties, and the repayment term varies by your ability to repay it, but can be up to 30 years. The interest rate is 3.75% (2.75% for non-profits). There is no collateral required for loans of up to $25,000 and no personal guaranty is required for loans up to $200,000. You have until December 16th, 2020 to apply. The interesting part about this loan is that you can get a rapid advance within 3 days of applying of $10,000. As much of that $10,000 that you use for paid leave, maintaining payroll, mortgage payments, or lease payments can be forgiven, tax-free.
So the big question is whether this $10K can be “free money” to an independent contractor physician. The short answer is, probably not. The reason why is are the following ineligible uses of the money:
- Payment of any dividends or bonuses;
- Disbursements to owners, partners, officers, directors, or stockholders, except when directly related to performance of services for the benefit of the applicant;
- Repayment of stockholder/principal loans, except when the funds were injected on an interim basis as a result of the disaster and non-repayment would cause undue hardship to the stockholder/principal;
- Paying down (including regular installment payments) or paying off loans provided, or owned by another Federal agency (including SBA) or a Small Business Investment Company licensed under the Small Business Investment Act. Federal Deposit Insurance Corporation (FDIC) is not considered a Federal agency for this purpose;
- Payment of any part of a direct Federal debt, (including SBA loans) except IRS obligations.
If, like most independent contractor physicians, you don't have employees and don't really have an office, you're pretty much out of luck. But if you are a private practice physician or dentist with employees and an office, there's a free $10K here.
What is the Paycheck Protection Program?
The EIDL is really designed to help with up to 6 months of business operational expenses. The Paycheck Protection Program (PPP) is designed to help with up to 8 weeks of business operational expenses. The most important aspect of the PPP is that it can be forgiven tax-free. This provision, however, is basically a bribe not to fire all your employees to stay in business. Keep them on the payroll, the government says, and we'll cover your payroll for 8 weeks.
Can I Get Both the EIDL and the PPP?
Yes, yes you can. However, that $10K forgiven under the EIDL advance grant program will be subtracted from the amount you can get forgiven under PPP.
What Are the Terms of the Paycheck Protection Program?
The PPP is a loan where you can borrow 2.5X the average monthly payroll expenses of your business over the last year, with a maximum of $10 Million. It is a two-year loan with an interest rate of 1%. Payments are deferred for six months.
While that sounds good if you need a loan, there are two reasons the rush to apply for the PPP occurred:
- There is only a limited amount of money ($349 Billion). That sounds like a lot, but there are 30 million small businesses in the US. Divide $349B by $30M and you get $11,633 each. Even my tiny business is eligible for three times that amount, so there obviously isn't enough money to go around. I was unable to figure out how much money is left in the program from any reliable source, but a few days ago it appeared that at least $100 Billion of the $349 Billion had been distributed already and that's without most people understanding how it works. The government bureaucrats, bankers, accountants, or attorneys are still trying to sort all of this out, so do you think most small business owners know how it works?
- The money can be forgiven under certain conditions. So even those businesses which don't actually need a loan (like mine) want to get their free stimulus money. Almost all companies have lost revenue, but some are in a much better position to weather the storm due to not losing as much revenue, having lower expenses (especially if they've been operating debt-free), and by having a cash reserve set aside for a rainy day. But when you wave a 5 or 6 figure amount of free money in front of them, it's worth their time and effort to apply, and to do so quickly before the money runs out.
Are There Ethical Concerns to Applying?
Some are threatening to publicly shame business owners who take out this loan but “don't need it,” but the only definition of need included in the law is that you need to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations.” Pretty vague.
Who really knows what the economy will be like or what will be needed to support operations a month or two from now? What does “support” really mean? How bad of shape do you really have to be in? And you better decide now before the money is gone!
Plus, if the idea is to keep businesses from firing employees, there are plenty of businesses that can make it through the crisis just fine (by firing or furloughing employees) who might not, given the prospect of the government covering their payroll for eight weeks. Is the goal to allow businesses to survive or to get businesses to maintain payroll? Is the goal really to preserve the most desperate businesses for 8 more weeks before they go out of business while stiffing those who ran their businesses better?
Lots of moral hazard and ethical questions here, similar to every credit and deduction in the tax code and all government welfare programs. I figure we've lost about 50X in revenue and additional expenses due to the pandemic what we will have forgiven under this program and I'm going to maintain employment and salaries over the next eight weeks so I'm okay with applying for WCI, LLC from an ethical perspective.
It also sounds like Congress is going to designate an additional $250 Billion to the cause in the next week or two.
What Are The Details of Forgiveness?
The loan can be fully forgiven if at least 75% of the funds are used for payroll costs and the other 25% is used for mortgages, rent, and utilities. You must maintain or quickly rehire employees and maintain their salary levels, otherwise, the entire loan will not be forgiven.
What About the Income Limitation?
2.5X payroll sounds like a ton of money to many doctors or owners of businesses that employ doctors. Unfortunately, there is a per-employee income limitation on both the loan and the amount of it that can be forgiven. Basically, you can only get enough to cover payroll up to $100K per year, so for 2.5 months, that's only $20,833 per employee. If you're the only employee of your business, that's the max you're going to be able to get no matter how much you made over the last year. I suppose you could reduce payroll to the equivalent of $100K/employee each year and still get the loan forgiven though.
Note that the $100K limit does not include benefits such as group health insurance and employER contributions to retirement accounts. See Question # 7 here.
Can Independent Contractors Get This?
Yes! Starting April 10th, sole proprietors, independent contractors, and the self-employed are specifically included, even if they are not incorporated and have no employees. Even if your business is a “side gig” and your main gig is as a W-2 employee of a hospital or physician group, you can still get this.
What Counts As Payroll?
Payroll includes salary and benefits such as health insurance premiums and retirement account contributions. It also includes “net earnings” for a sole proprietor.
Where Can You Apply?
Most people are seeking assistance from their accountants, attorneys, or bankers. But you can find a lender here. There are four banks within a mile of my house offering this program. Just don't be surprised if the lender puts you at the back of the line. Many banks are offering this first to their customers that already have a loan from them and then to their deposit customers before offering it to new prospective customers. We went to a local bank we were in the process of opening up new accounts with when the CARES Act was passed.
What Information is Needed to Apply?
Well, I'm not actually filling out the application (what are COOs for?), but our bank is asking for the following:
- A Deposit Account
- W-9
- Government ID
- Bank SBA Paycheck Protection Program Business Banking Application
- SBA Paycheck Protection Program Borrower Application Form 2483
- 2019 IRS Payroll tax reports (940, 941, 944, W3)
- Payroll reports for a twelve-month period
- Documentation showing the sum of all retirement plan funding that was paid by the company (exclude retirement plan funding of employee contributions that remitted by the company)
- 2019 IRS 1099 (applies only to independent contractors)
Notice that a 2019 tax return is not on the list. But if you're an independent contractor that doesn't file Form 941s, I'm not sure how you're going to show what your net self-employment earnings are for the last year to the satisfaction of a bank without a 2019 tax return.
What Does that Application Look Like?
It's two pages long and looks like this:
I thought one of the more interesting lines on the application is in the first section on page 2, where you certify you'll only use American-made equipment and products. I have no idea how that one is going to be enforced, nor whether my Macbook counts given it is sold by a US company but manufactured in China.
I Heard There Is Now a Max of $15K. Is that True?
People who qualified for the EIDL are now reporting that the SBA is telling them they will get an initial disbursement of just $15,000 and perhaps as little as $1,000 per employee. Whether they will get more in a second disbursement is not yet clear. It likely depends on whether additional funding is approved by Congress. As near as I can tell, neither of these caps apply to the PPP but things change rapidly and it is unlikely that there will still be funds available by the latest date to apply for the PPP (June 30th).
Are There State Programs?
Yes, some states have totally separate loan programs. For example, Utah has a 60 month (no payments for first 12) 0% loan of up to 3 months of operating expenses. It does not have a forgiveness component however.
Do You Think This is Good Policy?
I think the 1% loan was a good idea, but I'm less convinced adding in the “free money” forgiveness aspect was as wise. Perhaps it should have been designed as a 6% loan if you didn't maintain payroll but a 1% loan if you did. Or perhaps just increase the stimulus payment to individuals while also providing a flat payment to businesses on a per-employee basis would have accomplished the same goals with less moral hazard. Too late now.
What do you think? Does your employer's business qualify for this loan/grant? Will it be applying for it? If you are self-employed, will you be applying for it? How much do you expect to have forgiven? Comment below!
Let me get this straight, you’re saying a 1099 “side gig” as a sole proprietor can qualify for the PPP and $10,000 of the loan can be forgiven if 75% of it is used for payroll (let’s say the employer retirement account contribution was ~ $10,000, last year, and net earnings were ~$50,000) due to the fact that “current economic uncertainty makes this loan necessary to support the ongoing operations”? What if the sole proprietor doesn’t have have $2,500 (25%) in mortgages, rent, and utilities? I would assume the sole proprietor would have to prove that they had enough 1099 shifts canceled in the 8.5 week period due to the pandemic to justify a loss = to 10,000, no?
No. 2.5 months of annualized payroll expenses can be forgiven if the loan is used for payroll. Don’t confuse EIDL with PPP.
I have an S corp for side income (reviewing sleep studies, pharmaceutical talks, etc.). I am making no money now given the pandemic. I don’t have any employees, but I guess I can add my husband or my daughter?
For my W2 job, I have been furloughed to 2 days a week, so my income has been drastically reduced. They may also stop paying for my health insurance.
Am I eligible to apply for any of the above programs?
Thanks.
Yes for the S Corp. You lost your salary, no? So you should be able to apply for a loan of 2.5 months of your salary, pay it to yourself and get it forgiven.
Well, I didn’t pay myself a salary in 2019, and my accountant put the tax return on extension.
So I can apply even though I don’t have employees?
Thanks
That’s a good question. A sole proprietor is eligible. And an employee/owner of an S Corp is eligible for their wages. But I don’t know about an S Corp owner who did not get wages.
I did apply for the PPP. I did not apply for the EIDL. I have an LLC that I file as an S-Corp and am a partner in a large ED group. I feel justified in this given the substantial and sustained volume decrease over the last month. One other question I have pertains to applying for the educational loan payment you referenced in your previous post. Can we apply for the PPP as well as the loan payment?
Good article.
However, I disagree with the ethical dilemma portion and businsess justifying applying while actually doing fine. Let me be clear, I am not admonishing them, but what it does create is backlog or screw other businesses that actually are completely shut paying employees. Lets take restaurant or barber shop business. Imagine I own a 3-4 businesses like that, my business absolutely would need this loan/grant and help government is providing. Yet, there are businesses in front of the line that are e-commerce business running just fine with 10% reduction in “profits” and taking away the limited money.
You could say – hey too bad, you needed to be fast/smart about applying etc etc. All true, but congress/govt could have ACTUALLY thought this through and categorized businesses HARDEST hit (Not online business but you know salons, restraunts, any business that depends on people gathering/foot traffic).
So I call all businesses trying to get this money but not really needing it disingenuous.
/endrant.
Oh and none of your pointers on “managing” business bad or supplying money so they can die 8 weeks later apply here. That is one sided argument painting a business bad before looking at the obvious: any normal business in that category shut has NO revenue and foot traffic businesses take time to ramp back up to pre-covid revenues. Thats effectively many months of cash flow gone. I do not know of ANY good to great managed business having “cash reserves” that last that many months. They are not “just fine” despite furloughing employees.
First come first should have been hardest hit categories come first.
Via email:
Hey Jim, my wife and I run my dental office. After several attempts we were finally able to complete the PPP loan (?) through our bank. We have been running and paying staff a minimum salary out of our cash reserves because we did not want to fire or furlough them. Holding out as long as possible until the we can secure some funds. I am one that has questioned the illogical handling of this entire situation. Now I pray our country can handle the financial ramifications. We will pay a great price for “free money”.
Thanks for all you do,
One thing our group struggled with was determining what we were eligible for. Yes, salary is capped at $100k/year per employee, but according to Department of Treasury, IRS regs and talking with our national organization (ASA) and our bank – we determined that overall payroll costs are NOT capped. That would included medical insurance premiums and retirement contributions.
Having read the CARES Act multiple times (at least the parts that are valuable to small businesses) – I believe this is a correct interpretation.
What have other groups been doing?
My understanding is that the $100K does include benefits, but it sounds like you have spent more time reading the actual act than I have. I hope you’re right though! Because that could basically double the amount a doc might get.
https://www.sba.gov/sites/default/files/2020-04/Final%20PPP%20FAQs%204-7-20.pdf
WCI. I think you were incorrect on this one. Fingers crossed that you are. Lots of confusion going on. See question number seven from the April 7 update. Seems pretty clear, based on this guidance, to me that you are able to add on the retirement cost and healthcare cost on top of the hundred thousand limit. Curious what other groups and docs are doing?
Would love for you to really do some research and use your contacts on this question as I think it’s one of the most important questions for your readers in a long time.
Second question is has anyone gotten any guidance on what is included in “utilities“? Will paying a billing company to do billing for us count as a “utility”?
According to my COO, it’s not clear on our bank’s application whether health insurance and retirement contributions are included in “total compensation” or not, but on our application, total compensation is limited to $100K/year at the bottom of the spreadsheet. Most definitions of total compensation I can find on the internet includes benefits such as health insurance and retirement accounts. Our application does specifically exclude employee contributions, presumably including both the $19.5K and any Mega Backdoor Roth IRA contributions.
I can’t imagine a billing company would be considered a utility by anyone. Gas, electric, phone, internet maybe.
Did you and or your people look at question #7 from the sba 4/7/2020 guidance update ?
It’s also on the treasury website. Seems like this is the definition and question that matters ? Unless I’m missing something it seems they answer the specific question pretty clearly?
From what I could tell prior to 4/7 guidance update everyone was interpreting it as healthcare and retirement contributions were included in the 100k. Since this update seems people are saying retirement and health care benifit are in addition to it.
Thanks.
Do you have a link?
https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf
https://www.sba.gov/sites/default/files/2020-04/Final%20PPP%20FAQs%204-7-20.pdf
see question #7
Looks pretty definitive to me. Nice find. I’ll quote it for those interested and add it to the post.
Question: The CARES Act excludes from the definition of payroll costs any employee
compensation in excess of an annual salary of $100,000. Does that exclusion apply to all
employee benefits of monetary value?
Answer: No. The exclusion of compensation in excess of $100,000 annually applies
only to cash compensation, not to non-cash benefits, including:
employer contributions to defined-benefit or defined-contribution retirement
plans;
payment for the provision of employee benefits consisting of group health care
coverage, including insurance premiums; and
payment of state and local taxes assessed on compensation of employees.
Is anyone aware of any bank that is allowing loans to be taken out for retirement/benefits on top of the $100,000. Looking for such a bank.
Most should be, but I guess it’s up to every bank to decide how much to loan.
So if you work as a W2 employee and have a side gig as 1099 which made more than 100K, you can submit the PPP for a max of ~20K. The question though, is how do you prove that this money was for ‘payroll’ if you have no employees and are just an independent contractor? Can you just dump the 20K into a solo 401k and that is enough proof to have it forgiven?
Not sure what proof will be required for forgiveness, but it shouldn’t be that you contributed it to a 401(k).
Well, I’m not saying that it is required to be in a 401k, but as far as I can tell there is no clear way to prove that this for payroll, except the only thing that comes to mind is a contribution as an ’employer’ into the solo 401k which is clearly ‘payroll’. I guess the proof required for forgiveness for independent contractors is yet to be determined? Couldn’t find any info on that since this law was enacted and it’s been bugging me since then
If your solo 401k is with ETrade, they can recode your contributions for you (employee vs employer) for documentation purposes. I believe it defaults to employer for all contributions anyway.
I am also wondering about proof of forgiveness of payroll expenses for ICs. I think the govt has 30 days from 3/27/20 to provide forgiveness guidance. How is everyone “paying” themselves with PPP Funds? Write a check to yourself so there is a bank record?
Haven’t gotten the PPP Funds, but we’re doing payroll this week and it’s larger than the PPP funds will be so should be easy.
We were advised that if we applied for the initial $10k from the EIDL program and also applied for the PPP, that the initial distribution from the EIDL would be taken off of what was disbursed through the PPP and would not be eligible for the forgiveness that PPP funds are eligible for. Based on this, we deferred applying for the EIDL in lieu of the PPP that would be entirely forgiveable as long as we meet its terms. I suppose we could then discuss the EIDL if this pandemic continues to affect our business if it is eligible until December.
We did the same thing for the same reasoning.
I work part-time as a 1099 contractor, and that income has gone to $0 due to present circumstances. It looks like I made a mistake by applying for the EIDL program. I plan to apply for PPP. Should I try to rescind my EIDL application? Or pay it back immediately?
You can apply to both. Any grant you get from the EIDL is simply subtracted from the PPP. No big deal.
Question about 401k contributions using PPP money…
My dental practice has yet to pay our employee’s safe harbor match contributions for 2019 as well as profit sharing contributions. Could these payments be made with PPP loan funds and be forgiven as a payroll expense?
I would think so.
We initially applied for the EIDL before the new bill was passed. We are in CA. I had to re-apply. That was about 2-weeks ago and I haven’t heard a thing.
I did apply for the PPP and it looks like our application is working its way through our local bank. They calculated a lower amount than I did, but I don’t think it is worth delaying the application to argue it. I wasn’t able to prove my healthcare expenses. They said a simple P&L would suffice, but I guess as an S-corp, my health expenses don’t show up there. So I suppose by the time it comes to the forgiveness portion, I will have to have a way to prove that. The weird thing is they said simple invoices from the Health Insurer wouldn’t suffice. I found that odd.
I did struggle with applying or not. Ultimately, like many, I don’t know what is coming down the line and this will help us ride out a storm if it comes our way.
I’m a little confused by this statement >> “Documentation showing the sum of all retirement plan funding that was paid by the company (exclude retirement plan funding of employee contributions that remitted by the company)”
I’m an independent contractor with a S-corp and Solo 401k. Is the employee contribution portion or the employer profit-sharing contribution excluded in the calculation of payroll costs?
My understanding is employee contributions are excluded.
Jim,
I don’t know for sure, but what I can tell you is that our bank created a spreadsheet for their clients that did not exclude employee contributions. Also, this source says the same thing:
https://www.napa-net.org/news-info/daily-news/retirement-contributions-and-paycheck-protection-program
I looked at the actual law, and searched for elective deferrals, employee contributions, and the like. I got no hits. I think it might be in the gray zone, but as far as I understand it they are not excluding employee contributions. However, we are being super conservative and assuming that this part of the “loan” will not be forgiven and we will have to pay it back. I guess it is bank dependent. Is your ER group applying for the PPP? Also, can you do a post on the Cares Act Provider Relief Fund? Strong work on this post, and stay safe!
Did you read # 7 here? Sounds pretty definitive to me.
https://www.sba.gov/sites/default/files/2020-04/Final%20PPP%20FAQs%204-7-20.pdf
I’m told the partnership is applying. Those with S Corps are also applying on their own.
I can look into the provider relief fund but I think it’s pretty automatic that those who qualify already had money dumped into their accounts late last week.
Are you seeing that ER groups are getting grants from the Provider Relief Fund? 6 figures are just showing up in medical practice accounts. The terms and conditions are fairly comprehensive but moderately easy to follow. Compliance will be essential as audits will occur.
I am referring to the elective deferrals for the 100k limit. The way our bank calculated it was effectively allowing $119,000 in compensation because the $19,000 elective deferral is not counted as compensation, but a retirement expense. Initially and intuitively I would not expect this or do it this way. The way I read #7 is that it is not referring to employee elective 401k deferrals for a multiple member member medical practice receiving W2 compensation where the physicians maximize the elective employee deferral of $19,000.
Sounds like different banks are following different processes to me. This thing is a cluster…
I recently started 1099 work in early 2020 and therefore do not have any income listed on my 2018 or 2019 tax return. Would I be eligible for the PPP and if so what income would be forgivable? I assume it would be difficult to determine a loss wage but I was thinking I could use the PPP for the employer portion of contribution to solo 401k? Does this sound reasonable?
Hmmmm….you might be out of luck but maybe you can provide your income using your 1099 income from earlier this year. Certainly it’ll be harder for you. What does your banker say? Start there.
Any idea how an “affiliate business” might affect eligibility for PPP loan? The application asked if I have any affiliate businesses. I listed my LLC and my partner’s LLC… which are the entities that actually own our dental practice. Is my LLC then ineligible for its own PPP or EIDL loan? My W-2 income actually comes from my LLC (taxed as S-corp).
I would assume only one loan between all the affiliated businesses.
Our private practice group has applied for and been granted approval for a PPP loan. While it’s clear that we can use the loan for our office staff payroll expenses and have that forgiven, we are still confused on what, if anything we can pay our physicians and still be forgiven.
Does the $100k cap mean that we can still pay physicians $8,333 per month ($100k divided by 12)? Most of our physicians have already made over $100k this year and it’s not clear if that means they now disqualify from receiving any PPP money and have it forgiven. Similarly, we are unclear if we can use PPP money to cover their healthcare or retirement benefits, considering again that they have already made over $100k this year.
Any thoughts on these issues?
From the National Law Review summary:
https://www.natlawreview.com/article/summary-cares-act
Amount of Loan
Generally, the amount of the loan is capped at the lesser of $10 million and 2.5 times the average monthly payroll costs incurred in the one-year period before the date of the loan. Payroll costs include salary/wages/tips, sick/family leave/PTO, severance payments, group health benefits (including insurance premiums), retirement benefits, and state or local taxes assessed on employee compensation. However, for any employee who is paid more than $100,000 salary, only the amount up to $100,000 (prorated for the covered period) is calculated into the number.
My interpretation is that highly compensated employs are covered up to $8,333 / month since that’s included in the 2.5x calculation. The lending bank should be able to provide a definitive answer. BTW, keep in mind the loan proceeds aren’t restricted to payroll to qualify for forgiveness. You can spend up to 25% on mortgage interest, rent and utilities incurred within the eight week period after the loan origination.
Personally, I’d be more concerned about the requirement to keep EVERYONE on staff from 2/15 through 6/30. That’s a long time in the future to remain fully staffed considering it’s 4 1/2 months vs. PPP loan covering only 2.5x months of payroll. “If you lay off employees or reduce wages between February 15, 2020 and June 30, 2020, the amount of the loan forgiven is reduced proportionally”.
So in your interpretation, would a productivity-based private practice group like ours be able to pay physicians $8,333 per month in addition to paying for their health care costs and pension costs? We were approved for an amount that would allow us to do this, but are a little concerned about paying out money to our physicians that we would later be responsible for paying back if those disbursements were not considered forgiven. Our main concern is the wording of the $100k cap and how it applies to high income earners. We definitively plan on continuing to pay all of our office staff, as well as our rent and utilities out of the loan. We are trying to decide if we should also pay our physicians. Thanks for your reply!
The language of the act is actually fairly clear. Salary ABOVE $100k/employee per year is capped. That doesn’t mean if you’ve earned that already in 2020 you are disqualified.
In addition you are eligible to apply for 8 weeks worth of medical insurance premiums and retirement contributions. If you already applied for the loan and did not include these costs you lost out on asking for additional funding.
See the comments above on this issue.
We actually did include these costs when we applied for the loan. We just wanted to get the application in right away to secure the loan since we didn’t know how long they would be available. So while we will have access to the loan money, we still are not crystal clear on what specific disbursement amounts will be forgiven. Thanks for your reply!
Yes.
But if nothing else, you get part of it forgiven.
My understanding is that a business simply needs to hire back staff to pre-COVID numbers, in terms of both headcount and total pay, by June 30th to avoid being penalized with a reduction in the forgivable amount. You do not need to maintain full staffing levels from now until June 30th. Just hire them back no later than June 30th. Is this incorrect?
Well, Forbes disagrees with that interpretation. Along with four other financial sites that I follow.
The entire point of PPP is *keeping* employees on payroll, right?
From Forbes:
https://www.forbes.com/sites/kellyphillipserb/2020/04/08/overwhelmed-plain-talk-on-the-paycheck-protection-program-for-small-businesses-affected-by-covid-19/
Wait, what’s that part about it being forgiven? Does this mean I don’t have to pay it back? The loan can be forgiven if all employees are kept on the payroll for eight weeks, AND the loan proceeds are used as intended – that means payroll, rent, mortgage interest, or utilities.
I’d suggest your find better quality financial sites to follow. This is from the Treasury Dept’s website. See the last bullet point. Similar language is also stated on all our bank’s websites.
https://home.treasury.gov/system/files/136/PPP–Fact-Sheet.pdf
How much of my loan will be forgiven? You will owe money when your loan is due if you use
the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities
payments over the 8 weeks after getting the loan. Due to likely high subscription, it is anticipated
that not more than 25% of the forgiven amount may be for non-payroll costs.
You will also owe money if you do not maintain your staff and payroll.
Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time
employee headcount.
Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and
wages by more than 25% for any employee that made less than $100,000 annualized in
2019.
Re-Hiring: You have until June 30, 2020 to restore your full-time employment and
salary levels for any changes made between February 15, 2020 and April 26, 2020.
For businesses that were forced to close due to being “non-essential”, what benefit is it to a) employees – who will be pulled off their higher-paying unemployment to now continue sitting at home being paid from PPP funds, or b) the employer who’s not even open for business, but now must pay payroll taxes, TDI, WC, etc (these are not covered by PPP) for employee salaries in addition to taking the big risk that the feds will once again modify the loan terms (as they have multiple times already with both the PPP and EIDL). For non-operating businesses struggling to survive, adding these additional costs simply is a bad business decision. The PPP is not really a small business stimulus unless you are an ongoing business. I’m not arguing that is either good or bad, just stating a fact. Non-essential/non-operating businesses realize the PPP is simply a way to assist the state governments by pulling people off unemployment and onto PPP, thereby shifting the responsibility and the risk back to the employer. Personally I think its better to attempt to time your 8 weeks, such that your business can at least be operating and earning revenue for a portion of the 8 week period (even if you are running at diminished capacity). Just make sure all your employees are hired back to pre-Covid status no later than June 30th. Oh, and pray they add enough additional funds to the program.
I think so. They’re certainly not disqualified based on their earnings, just earnings above 8333/month are disqualified.
There’s been several administrative problems with both programs (PPP & EDIL). Many business owners have been reporting the SBA is limiting EDIL loan applicants to $15K which is a long way from the CARES Act $2M loan cap. The PPP program effectively ran out of money within 24-36 hours of kicking off on Friday 4/3/20. Banks were allocated different chunks of CARES Act money based on their prior SBA lending volume. Unfortunately, most lenders (including our bank) had already exhausted their tranche of funds before the weekend was over. I knew it would go quickly, but was still surprised to hear the pot was empty only one business day later when we applied on Monday 4/6/20.
Lack of funds is compounded by lack of access to the funds. Only about 60% of banks are registered for disbursing SBA loans. Almost all of those banks imposed additional conditions (i.e. active business account, active credit, active loan) as a condition of applying for PPP. After our bank ran out of funds and stopped taking applications, my wife contacted seven other banks ranging from regional credit unions to national banks. All of them had instituted pre-existing conditions for CARES Act applicants and none were taking application – even from existing bank customers that would otherwise qualify. In effect, 40% of small business owners who happened to pick the “wrong” bank several years ago never had a chance at funds in the first place.
In short, questions about eligibility don’t matter much at the moment since the funds are gone. Congress is attempting to pass a bill authorizing additional PPP funds at the moment. It’s likely to go through, but highly doubtful that any of the earlier problems will be addressed. Applications for self-employed and independent contractors were opened one week after the initial launch date for the program. I’m really hoping there was a separate tranche of money allocated for that group since those are the people who could most benefit from forgivable government loans.
It is not my understanding that the PPP ran out of money within 36 hours. 5 days after it began it was reported that 1/3 of the money had been used. Within the last 24 hours numerous publications are stating it isn’t yet out of money. Beats me where the real data is available though. Here’s an example of what I’m talking about: https://www.bizjournals.com/triangle/news/2020/04/14/federal-ppp-loan-money-could-be-gone-within-days.html
Here’s an even better one: The SBA this morning disclosed that over 1 million applications have been approved, totaling over $247 billion from more than 4,600 lenders.
We’ll see if we get any. But even if we don’t, if there is more money allocated to the program you would think we would be near the front of the line by having already applied.
That last SBA stat is both interesting and disappointing. That would mean that 2/3 of the PPP money has gone to less than 5% of small businesses. Even allowing for a huge number of hobby businesses, I can’t imagine that was any anyone’s expectation after the politician’s were done patting each other’s backs.
I would think that “Payroll” for a Sole Proprietor paid on a 1099 = Line 31 of prior years’ Schedule C (net profit, assumed to be “Payroll”)–? This also flows to Schedule 1 Line 3 as “Business Income.”
Just found some more info from the treasury here:
https://home.treasury.gov/system/files/136/Interim-Final-Rule-Additional-Eligibility-Criteria-and-Requirements-for-Certain-Pledges-of-Loans.pdf
It has more info on loans for individuals with income from self employment. Also, it indicates that the maximum of $100,000 is annualized over 52 weeks, so the maximum amount that can be paid to a single individual over the 8 week span is $15,385 per individual. In addition to this amount, healthcare and retirement contributions over the same 8 week period are also allowed. Hope this additional info adds some clarity.
Ah! Thanks – Page 6 of that document confirms what I was thinking.
VERY good find. I also noticed in that document the following:
“For individuals with self-employment income who file a Schedule C, the Administrator, in consultation with the Secretary, has determined that it is appropriate to limit loan forgiveness to a proportionate eight-week share of 2019 net profit, as reflected in the individual’s 2019 Form 1040 Schedule C. This is because many self-employed individuals have few of the overhead expenses that qualify for forgiveness under the Act. For example, many such individuals operate out of either their homes, vehicles, or sheds and thus do not incur qualifying mortgage interest, rent, or utility payments. As a result, most of their receipts will constitute net income.”
Does this mean that 1099 Self Employed Independent Contractors can actually be forgiven the amount equivalent to proportionate 8 week share of net income based on 2019’s 1040 Schedule C? Is there a cap to this? If not, this would be significantly more than the annualized 100K limit referred to previously, which is capped at $15,384 for 8 weeks.
Sounds like it doesn’t it. Odd since for a business with employees it’s about what you pay them over the next 8 weeks, not about what you paid them last year. Kind of defeats the purpose and ends up just being a mega benefit for those who are self-employed instead of just getting the regular joe schmoe $1200 if you make less than $100K. But hey…..you and I don’t write the laws/regulations.
I have S Corp from which I get W2 for myself. Last year my W2 was about 50% of total income (1099). The rest of the income was used for overheads and net profit( pass through income).
So by that, even if I had 100k total income through 1099, I guess I can only use 50k for as payroll cost calculation. Is that correct?
If I had taken more W2, would that have been better?
Thanks,
Dr. A
That’s my understanding and what we’re doing. But I’m not sure we’re going to get anything. It just hit the news that the money is gone and none of it is in our bank account. Maybe round two.
Yes, if you had paid yourself more you could possibly have received a bigger stimulus.
Let’s hope “gone” means the website portal used by the banks to send loans to SBA is just backlogged with applications that have a claim on the funds, but haven’t yet closed. One of the consolidation type lenders wrote about pushing applications in as quickly as they possible could. 75% had one or more errors that were fixed after the fact to get the loan closed and funded. They just wanted to get as many placeholders into the SBA pipeline as possible.
Now you can dream about additional funding AND waiting for the loan queue to empty. 😉
As a Part-Time Employee (W-2 associate commission paid), if your Employer furloughs you due to Covid-19, are you required to go back to work?
Can I not go back to work after they mailed me a letter stating a “company-initiated short-term temporary unpaid leave of absence”?
My contract basically states that Employer and Employee “may terminate this agreement for reasons other than Cause, upon 90 days’ written notice.”
I have not been paid since the early March, do not use any of their benefits such as 401K or Health Insurance, nor filed for unemployment with them.
Can I now start a new different job without going back to work for them (without giving notice)?
Thank you!
It depends on the contract, but if you still haven’t given notice, I think you’re still 90 days away from leaving. But who knows if they would prosecute after furloughing you. Best to discuss with a health care contract attorney in your state.
Does the updated FAQ from the SBA change your plans to apply for the PPP loan? I am a sole proprietor with a locums moonlighting side gig along with a regular W2 job. I haven’t been able to do locums since this started and so the business itself is not bringing in money that I was counting on, however I’m obviously still able to pay the bills from my regular job. I was planning to use the loan only for my own personal payroll. I’m specifically referencing FAQ #31 which contains this statement:
“Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business”
Not for me. Treasury is making noise about auditing loan recipients who took $2M or more – particularly public companies with access to financial markets. That’s not a small business. There’s zero chance of the other two million businesses being charged with fraud based on that statement. That’s assuming you were violating it in the first place. The CARES Act was all about shoveling money out quickly with no restrictions. Those were added after the fact by Treasury and the SBA to reduce expected demand for the loans.
There’s never been a requirement that your salaried job needs to cover losses from another business. Since there aren’t any tangible assets, the only way for your particular business to generate cashflow is borrowing or taking on investors. In my view, borrowing money @ 10 – 15% interest vs. 100% forgivable loan would certainly be a major detriment to the business. Selling a piece to investors valued on little to no ongoing revenues would be far worse.
You’ll have a hard time finding any small business owner, advisory board or tax pro who thinks otherwise.
I’m an independent contractor and just received ppp loan with amount of $20,833. What should I do to make sure I can get the forgiveness? I do not have employees other than myself. Is the maximal amount for payroll 8/52 of 100k which is $15385? Can I just move $3846 to my personal checking every 2 weeks? I heard the retirement distribution employer part is also forgivable. Can I make a lump sum contribution to my solo 401k and include it in the forgiveness? I do not have business mortgage, rent, utilities etc. Is there any record keeping I need to do other than the bank statements? Anything else I’m missing? Thanks a lot!
Nobody is really sure what records will be required to get the forgiveness, but I’d make sure you at least distribute yourself $20,833 in payroll expenses over the next 8 weeks.
Remember the $15,385 is just salary. 401(k) contributions and other benefits are in addition, so make sure you make a 401(k) contribution during the next 8 weeks too.
The way I understand it, you are limited to $15,385 as the forgivable amount based on the loan forgiveness application instructions released by the SBA last Friday (page 4 of 11 pages):
The last statement on this paragraph says that, to quote:
“The authorized representative of the Borrower certifies to all of the below by initialing next to each one.
_____ The dollar amount for which forgiveness is requested:
•was used to pay costs that are eligible for forgiveness (payroll costs to retain employees; business mortgage interest payments; business rent or lease payments; or business utility payments);
•includes all applicable reductions due to decreases in the number of full-time equivalent employees and salary/hourly wage reductions;
•does not include nonpayroll costs in excess of 25% of the amount requested; and
•does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.”
$15,385 in salary. Plus benefits. Plus other legit business costs like mortgage interest.
I am an independent contractor doing shift work. I am receiving EIDL loan (not grant) and I’m just curious as the best way to document spending. I see in some places it’s not for refinancing however I have unsecured high interest debt that I would like to use it for. As well as credit card debt at this point. I just want to be prepared for the audit as it appears I do not need to document spending up front.
Thanks,
Scott
Not sure on the EIDL loan. Didn’t realize there was a big documentation issue there since it isn’t forgivable anyway. That’s where the PPP documentation will come in–to get the forgiveness.
Thanks. Yeah I’m just wondering in the event of an audit what I might have to show I spent the money on and trying to document appropriately in the event that were to occur.
The PPP Loan Forgiveness Application is rather confusing. There is some stipulation for those with under 2M loan and some sort of documentation required for how the money was spent. Would love to see a FAQ geared toward the IC. Thanks.
My CPA says with ~15K in various 1099 side gigs for 2020, I can receive ~3K in PPP. Any issues with this? I have a W2 from my main job.
Thanks
Wouldn’t surprise me if you qualified. The “self-employed” stimulus is great.