Important New Information – you may need to revise your application if it has not been processed.
The Department of Treasury released an additional set of Q&A’s last night that clarified some of the issues related to the PPP loans:
- 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 and some banks had interpreted the law to apply the $100,000 limit to total costs including benefits. The instructions to the Loan Application seemingly agreed with that interpretation. However FAQ number 7 says –
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.
Therefore, if you computed your loan amount by applying the $100,000 limit to total payroll costs you should check with your lender to see if you revise your application. Another Q&A made it clear the application could be revised before it is processed.
- 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?
We know that some banks were requiring borrowers to reduce Payroll Costs for amounts withheld from employees and the employer share of FICA from compensation in determining the Average Monthly Payroll. FAQ number 16 makes it clear that payroll costs are not reduced and importantly clarify that also is true in determining the amount of a loan that can be forgiven. FAQ 16 follows:
Question: How should a borrower account for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan, and the amount of a loan that may be forgiven?
Answer: Under the Act, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.
Again, if your lender required you to reduce payroll cost by taxes withheld from employees you should contact them to revise the application if possible.
The Q&A’s still do not address unanswered questions related to Partner’s compensation.
- What should borrowers do now?
Review your applications carefully and if you have submitted an application to your bank using different methodology on either issue –contact them immediately and ask if you can update your loan application as banks may not do this for you. We know that a number of banks were incorrectly interpreting payroll costs to be reduced by any employee taxes withheld.
All of the FAQs are available here on the Treasury website.
Your Pugh CPAs advisor is available by phone or email. Please reach out if you have questions.