**Please note that things are changing rapidly and you should ALWAYS consult your Pugh tax advisor before taking any action**

The new Paycheck Protection Program (PPP) loans provide small businesses with an opportunity to apply for a loan with the Small Business Administration (SBA) to provide liquidity during this difficult time. And significantly if the loan is used for qualifying purposes during the 8-weeks following the origination of the loan, part or all of the loan may be forgiven.

Friday was the first day applications could be submitted. I think we can safely say the opening day did not go as planned. As of now, Monday morning, there are still many unanswered questions. The legislation authorizing PPP was drafted quickly and has left many open questions regarding implementation, i.e., the devil is in the details. While Treasury has issued some guidance, several important questions are still unanswered. Based on what we have seen, the banks are interpreting the details differently. We want to help those applying for PPP loans as much as possible but where there are issues that have not been addressed adequately, you will have to make some decisions.  Please note that if the SBA ultimately determines that your Certifications and/or Application is wrong you could:

  • Cause a delay in the loan process and since funds are limited you could miss out on the program entirely,
  • Request less than the maximum amount that otherwise you could borrow (as of now you only have one chance),
  • Request more than the correct maximum or use PPP funds for unauthorized purposes, and in either case the SBA may direct you to repay those funds and may subject you to additional liability, including charges such as fraud.

Therefore, we encourage you to read the Certifications on the Application carefully and make sure your answers are correct.

As mentioned, there are several issues for which the law is unclear and there is no guidance; therefore, there are some questions we simply cannot answer conclusively. As of now we believe those questions/issues are:


  • What period do I use to calculate Average Payroll Cost? Except for seasonal businesses and businesses started after June 30, 2019, CARES uses the “… 1-year period before the date on which the loan is made …”; the instructions to the Application say “… most Applicants will use the average monthly payroll for 2019 …”. You need to decide whether to use calendar year 2019 payroll costs or the immediately preceding 12-month period. Many banks seem to indicate in their applications that the calendar year 2019 payroll should be used


  • Can Individual Partners in Partnerships and Individual Members in LLC’s treated as Partnerships for tax purposes, include either Guaranteed Pay or Self-employment income (up to $100,000) in Payroll Costs? CARES, the Application and Treasury Interim Final Rules all make it clear that Sole Proprietors, Independent Contractors and “eligible self-employed individuals” are eligible to be covered under PPP. We, and probably most other professional advisers, are completely frustrated that none of these reference partners and how to handle their “compensation” for PPP. It seems likely to us that Congress intended PPP to apply to partners in some manner. We just simply do not know the answer at this point. If you have partners, you will have to decide whether and what amount to include for them.


  • How do federal payroll taxes, including amounts withheld from employees for Social Security, Medicare and federal income tax fit into the calculation of Payroll Cost? CARES starts the definition of Payroll Cost with “… compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation …” and goes on to add additional payroll related items. It does not add the employer share of federal payroll taxes, so that is clearly not included. The meaning of ”compensation” to any accountant or payroll professional includes taxes withheld from employees. However, CARES muddies the water by specifically excluding  “Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees” (Interim Final Rule). We know some banks have interpreted this as requiring you to subtract amounts withheld from employees and the employer share of FICA from compensation in determining the Average Monthly Payroll. While we do not believe this is correct, you will need to decide whether to adjust compensation by withholdings and federal payroll taxes in calculating Payroll Costs for the applicable period.

Important Note: When it comes to calculating the amount that can be forgiven later, the text of the law seems to indicate you cannot include the employer or employee share of federal payroll taxes or any federal taxes withheld from employees in the 8-week period in calculating  payroll cost. This could result in part of the loan not being forgiven even if used for what is normally considered payroll cost.


  • How can I use the proceeds of the loan? CARES indicates the loan proceeds can be used for payroll costs, mortgage interest, rent and utilities in the 8-weeks following the loan origination (or to refinance an SBA EIDL which is beyond scope of this email). Treasury, in the Interim Final Rule takes the position that at least 75% of the proceeds should be used for payroll costs. If you do not plan to have payroll costs for the period immediately following the loan origination, you should consider not applying (or applying later when you will have such costs). Funds may not be available later but if you apply now and do not have payroll costs, best case is you will have to repay the loan, but Treasury may consider that a misuse of funds and apply additional sanctions.


  • Does the exclusion for costs over $100,000 on an annualized basis per employee (or self-employed person) apply to just compensation or does it apply to total costs for that individual? We are including this one because CARES language was ambiguous and was being interpreted differently. We believe it is fairly well settled that the limitation is for the total payroll costs for that individual so that Average Monthly Payroll (term used on Application) could not exceed $8,333.33 ($100,000/12) for any individual employee. If you read the law and guidance differently you can certainly apply the 100,000 to just compensation but remember the potential penalties.


As always, Pugh CPAs will work diligently and remain focused on serving your needs while we adapt to the ongoing changes in the current environment. Thank you for your confidence in us and for the opportunity to serve as your trusted advisors. Please contact us with any questions you have. And please check our website www.pughcpas.com  for additional developments.

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