Join our multipart livestream series to engage in the latest changes related to these uncertain times. You’ll hear strategies for navigating what these developments mean for you. Topics include issues related to legislation, liquidity, workforce, and other relevant topics.
In case you missed it:
- Jennifer Rohen, CLA Principal, WOTC Practice Leader
What we talked about:
Rohen: Good afternoon to our CLA family members, clients, community partners, and friends. Welcome back to our fifth livestream. We are grateful to have all of you and wish you, your families and, your friends health and safety during this time.
Today we are having a follow-up session to provide an update on the latest developments on the Paycheck Protection Program (PPP) under the CARES Act. The PPP is a focal point for small businesses under the CARES Act, which was signed into law by President Trump just 11 days ago. The CARES Act includes several provisions totaling over $2 trillion n stimulus intended to help organizations, individuals, states, and municipalities. The bill was 880 pages long and provides various small business lending, emergency funding for hospitals and health care providers, tax incentives, and unemployment provisions. Last Tuesday, you heard Todd Sprang and Jack Rybicki discuss what we expected to happen with respect to the PPP.
As you will hear, things are moving fast and furious in the world of the PPP, so please know that guidance is changing regularly and it is important to make sure what “you know” is still current before applying for a PPP Loan.
With that, I would like to welcome Todd Sprang from our Financial Institution Group and Jack Rybicki from our Real Estate Group. Jack is also leading our COVID Economic Relief Team. They will walk through the latest developments on the PPP. Welcome, gentlemen!
When we last spoke, the Department of Treasury was saying that small businesses and other qualifying organizations would be able to apply for PPP loans on April 3rd. We were skeptical if that timing was feasible. Todd, please let us know what has actually happened since then.
Sprang: Since that time, Treasury worked out guidance with the banks and issued guidance on April 2nd. The borrower’s application was issued and modified numerous times, the last being on April 2nd. Some banks started taking applications on April 3rd, while many worked over the weekend to make sure their forms and processes were as complete/accurate as possible. Some banks didn’t start accepting applications until April 6th. Treasury and the Small Business Administration (SBA) have issued guidance and numerous FAQ documents to clarify the provisions of the PPP. As a result, over $4.5 billion of PPP loans were funded on April 3rd.
Rohen: How has the process gone thus far?
Sprang: As expected, there is much confusion and diversity in the interpretation of the program by banks. The volume of activity has been tremendous. We have heard that Bank of America received nearly 100,000 PPP loan applications on Friday alone. Regional and community banks are also seeing heavy volume. Some banks are restricting PPP loan applications to existing clients, while others have set limits on the PPP loan volume they are willing to lend.
Rohen: Let’s turn to the hot topics of the PPP. Jack, what has been going on in your team’s world as they work with CLA clients on the PPP loan application process?
Rybicki: As Todd mentioned, the last seven days have seen a whirlwind of activity and changing guidance. What we thought we knew one day on many critical elements of the program was changing rapidly. In many instances, what we knew didn’t really matter, but rather the way the banks were interpreting the provisions was (and is) what was (and is) important. Just last night, Treasury issued an update to its FAQs that has provided clarity on some of the more pressing questions. Now we will need to see how quickly banks react to this guidance.
The most critical areas that we now feel we know are:
- Eligibility – Organizations with 500 employees or fewer, and possibly a higher threshold based on the SBA’s Size Standards for their NAICS code, are eligible for the program. In general, companies should not be precluded from participating in the PPP due to revenue limits.
- $100,000 limitation – This has been probably the most hotly debated topic. Is the limit on only salaries and wages or does it apply to the all-in compensation amount, which also includes group health care costs and retirement benefits? The difference in the interpretation on this topic results in significant fluctuations in the sizing of the loan. Treasury clarified last night that the $100,000 limitation should only be applied to cash payments, so salaries and wages predominantly, and not non-cash benefits of retirement plan contributions, group health care and, state and local taxes.
- Gross versus net – Another significant topic related to what should be included in salaries and wages due to the reference in the CARES Act that FICA and federal withholding needed to be excluded. Again, Treasury confirmed that gross wages should be used, and clarified that the only thing not includable is the employer portion of federal taxes (FICA predominantly).
Rohen: Those are some pretty important things to get clarity on as they fundamentally impact the ability of a company to participate and the amount of the loan they could receive. Any other important topics that we now know?
Rybicki: Additional items that we have clarification on are:
- Only employees whose principal place of residence is the US should be included when determining the number of eligible employees. These are the same employees that can be included in the average monthly payroll cost calculation used to size the loan.
- Employee count to determine eligibility is essentially a “headcount” number, not an FTE number. FTE’s play a role in the PPP, but only in the forgiveness calculation.
- Companies with non-US owners that have US-based employees are eligible to participate
- The affiliates rules do apply, unless you are a franchise or in the hospitality or restaurant business (NAICS 72).
- Payments to independent contracts or sole proprietors should not be considered by the company for average monthly payroll calculation.
- Employees leased from third-parties (think Professional Employer Organizations) can be included in payroll costs of the borrower.
Rohen: So, it sounds like we know quite a bit now. What topics are still out there that still need clarification?
Rybicki: The most significant topic relates to self-employment. Many organizations taxed as partnerships do not compensate owners that actively participate in the business through W-2 wages. Owners are generally compensated using guaranteed payments or though distributions of profits. The now infamous “(bb)” section of the payroll cost definition in the CARES Act provides that “compensation that is wage, commission, income, net earnings from self-employment or similar compensation,” so we know it is includable somewhere. Some banks are allowing these amounts on the application of the company, while others are advising the owners to file their own claims once the self-employment application period opens on April 10th.
Rohen: Jack, thanks for that summary of the hot topics and open items regarding the PPP. It sounds like we now have some clarity for borrowers on a number of critical topics, but that we are still looking for guidance on others. As we close, Todd, can you please bring us home with any additional thoughts on the PPP?
Sprang: We continue to hear that demand is expected to outstrip the $350 billion allocated for this program. However, the President and Secretary Mnuchin have both stated that they will go back to Congress for additional appropriation, if needed. There isn’t any assurance that will happen though, so time is of the essence for getting your application in. Additionally, given the number of critical interpretations that banks are having to make, have a conversation with your banker before you start the application process. Get clarification on how your bank is interpreting the topics that Jack previously spoke of, so you can complete the application as efficiently as possible and you don’t risk rejection of your application by your bank.
Rohen: Thank you, gentlemen. This has been very helpful. We recommend you contact your lender and your CLA professional for more information about the PPP. We can help you gather information to complete your applications and size your PPP loan request.
We hope today gave a nice overview of where things stand with the PPP. Todd and Jack will be back with us on Thursday to provide additional insights on the PPP and guidance that continues to unfold. We have just barely touched the surface on the all-important forgiveness provisions of the PPP, which will also be discussed on Thursday.
Have a wonderful afternoon, and stay safe and healthy.