Who knows how many small businesses applied for but failed to get a PPP loan.
Certainly millions. Maybe tens of millions.
Which begs an obvious question: What does someone who needed a PPP loan do now?
I have a handful of ideas for folks in this boat.
Prepare for Second Wave PPP Loan Funding
You may get a second chance to take a bite at the apple if Congress provides another tranche of funding. Stay alert to that.
For example, make sure you’re in line for a PPP loan someplace likely to restart lending.
Take time now to assemble the optimal documentation. (Maybe you want to get your accountant’s help this time around.)
And an awkward issue? If your first attempt failed because you lacked payroll cost to plug into the formula? Like say you’re an S corporation with no employees who just does shareholder draws? Or that you run a business that treats employees as 1099 contractors? Or say you just haven’t gotten around yet to filing your 2019 taxes?
See if you can take care of this stuff. See if you can be ready next time. (You might want to check out our blog posts about how the PPP loan formula works and about how you do PPP loan accounting if you get funding.)
Upgrade to a Better Small Business Bank
Let’s admit that some (maybe all?) of the big banks bungled this program for their smallest customers. This program worked terribly.
I’m thinking here of the two banks I use and their emailed promises to supply PPP loans to their customers. Promises later broken… But only after customers couldn’t apply for a PPP loan someplace else.
But hand-wringing about shabby treatment gets you no money. Accordingly, this idea: Look at the option of moving from that big bank you use now to some smaller community bank.
I have no name for you. Only this suggestion based on what we heard from clients. Talk to your small business owner friends and see if any of them got their PPP loan.
Consider the Employee Retention Credit Alternative
The PPP loans supply a business with free money. Usually. And you can’t beat free money. Usually.
But the federal government included other really significant assistance in the CARES act, too.
One of example of this assistance? The employee retention credit. We’ve got a longer blog post here, 50% employee retention credit, but the short description: You can probably get the IRS to fund 50% of the first $10,000 you pay an employee.
Many small businesses after looking carefully at both the PPP loan option and the employee retention credit, in fact, choose the retention credit.
The retention credit can in many situations pack a bigger punch.
Note: The retention credit seems to optimize in situations where a small business employs a number of modest wage seasonal employees and won’t be able to ramp up their workforce immediately.
Release Employees Who Can Rely on Unemployment Insurance
This awkward thought. If you haven’t already been forced to lay off or furlough employees—maybe you delayed because you hoped to get a PPP loan—maybe you reduce your workforce now. And then you let state and federal unemployment benefits support employees while you put your firm into hibernation mode.
To learn more about what you can expert, check out your state’s online resources. (Google is your friend here.)
You can get information on the Emergency Paid Sick Leave Act and Emergency Family and Medical Leave Expansion Act here.
But do know this. Substantial support exists for your employees. Furloughing workers so they can receive unemployment benefits and so you can conserve the capital you’ll need to restart in a few weeks or months may be best for everyone.
Cobble Together Bits and Bobs
Some small businesses can possibly cobble together a decent sized pot of state and local aid.
More than a few cities offer help. The City of Seattle, for example, runs a small business stabilization fund that provides $10,000 grants or loans to some small businesses. (More information here: Seattle small business stabilization fund.)
You don’t want the pursuit of free money to become your job. The odds seem long. Seattle literally runs a lottery for its grants.
But at the same time, the rules changed with the COVID-19 pandemic. And lots of federal and state aid exists—even if it quickly gets exhausted.
Dial Down Shareholder-employee Compensation
A quick esoteric point for S corporations. Look at the amounts you’re paying shareholder-employees. You need to pay shareholder-employees something reasonable. But as you know, any money you take as a wage triggers both income taxes and payroll taxes.
If you can avoid one or both of these taxes, that helps.
By the way, the worst thing you can do if you’re an S corporation shareholder who didn’t get a PPP loan? Invest additional money into the S corporation which you then return to yourself as wages.
Tip: We’ve got a blog post about when it’s possibly okay to pay zero wages to an S corporation shareholder-employee. You might want to look at that.
Copycat Big Service Firm Tactics
One final idea to leave you with? You might want to copy what some of the large professional service firms do.
For example, consider the approach used by the large CPA firms. The firms too large to qualify for a PPP loan or an employee retention credit.
In many cases, they are reducing their headcounts (say by 10%?), reducing their higher-wage employees by some percentage (like 10%) and then reducing business owner compensation by a significant amount (like 25%).
A combination of those tweaks surely adds up to way more than a PPP loan does.
Often the CPA firms seem to be combining cuts in spending that equal about 15% of their anticipated revenues. That’s a lot for firms that count as “essential services.”
Two Closing Cautions
I want to close with a couple of comments. Cautions, really.
First comment: What the economy really needs you to do? I mean, long term? Restart your business when you can. Began to make stuff and provide services again. Rehire people. That’ll be how you really contribute to the good of the community. You will probably be well-rewarded financially, too, if you can do this.
Second comment: I think you avoid actions that permanently damage your personal finances if you can possibly avoid it. For example, I would not think you tap your retirement account to fund your business. Just my opinion? You want the worst-case scenario you face as a small business owner to be this: You unfortunately liquidate the business… and then once the pandemic passes, you figure out what the next chapter looks like.
Relooking at the employee retention credit. Eligibility states you can’t get a small business interruption loan. Does this apply to only the PPP or does it apply to EIDL too?
Just trying to figure out if that EIDL advance that never came will randomly show up in our account in the future and disqualify us from the 50% ERTC.
I think you’re okay.
Can a Company take the Tax Credits from the CARES ACT until they get a PPP Loan?
I think so. And then if you get the loan, I think you’ll need to pay back the credits.
Steve,
I have a question on the PPP loan from your previous post. VERY helpful post. I couldn’t comment on that post so I hope I can ask my question here. Does the business getting the PPP have to actually make the employees RETURN to work or can they just PAY them full time hours for sitting at home all but one day a week? I can’t find anything that says they have to actually WORK it just mentions costs. It is not something I am pleased with when I found out but I didn’t know if it actually met the requirements. Thanks!!!
I think you can pay people to sit at home. E.g., you can pay them sick leave or vacation pay.
As long as the business has fewer than 100 employees.
Thanks for these amazing posts. I’ve looked through all the LLC related posts. My questions: Our only payroll consists of the two principal partners declaring the LLC profit as ordinary income. We have a two person LLC. We haven’t filed our 2019 taxes. A major bank is still working on our loan and says we only are missing one thing.:a 941 form. We only had 2 employees reported on a 941 for the 1st quarter of 2019….for a modest total sum. We then decided, after a dozen years with employees, to run the LLC by ourselves. So our only significant 2019 payroll is taking our profit as ordinary income. And the 941 employees won’t be rehired, since they haven’t been with us for over year, and have moved on.
Several questions:. 1. Can we ask them to disregard the modest 1Q 941 because they won’t be here in 2020? 2. Since we haven’t filed taxes, can we upload a 2019 Quickbooks Statement to document our net income that the partners took as ordinary in come for 2019? 2. Has no one been able to successfully document partner LLC income who hasn’t filed taxes this way? It would seem if they are allowing us to extend the filing of taxes, they would allow LLC’s a way to document their income another way.
3.. We plan to upload the 941, indicate the current “payroll” only pertains to the partners….upload the QB. Will they disregard the 1Q 2019 941 because it is no longer relevant to current payroll?
The two issues in your case seems to be these: (1) You haven’t filed your 2019 1065 tax return, which supplies the self-employment earnings you need for the loan formula calculations and (2) The bank hasn’t updated their process for the “additional eligibility criteria” document that the SBA and Treasury published. That document, linked to a bunch of times in these blog posts, indicates that a partnership loan formula uses the self-employment numbers.
HI,
We have an S-Corp with 2 employees that take a monthly payroll as regular wages. Single shareholder + Spouse. We tried for the PPP, and of course shut out from our local bank. So looking at the Employee Retention Credit and have a few questions.
Would it be best to keep our same salaries as long as possible ($100k & $50k), or dial down our salaries to just maximize the $10,000 per employee for the sake of the retention credit. I was initially trying to keep our salaries high in case we can do the PPP, but also now trying to balance the cash flow in case we still can not receive the PPP. I remember that we needed to keep our salaries for the PPP of at least 75% of previous month or some qualifier like that to make the PPP loan a grant.
Our cash flow is slowing very quickly, So trying to adjust to taking the Employee retention seems to actually move us further down the road if we reduce payroll. In an emergency, I guess we can always take a distribution of profit, rather than payroll.
I’d probably dial down my payroll to a lower rate or even zero.
BTW neither the statute nor the post-statute IRS guidance exclude your wages and your wife’s from the employee retention credit. But some practitioners think you can’t include those wages. (I can’t find the source for that and actually spent some time looking for this over the weekend. But I bet the practitioners who say this are correct. And when I find out where it says that, I’ll post.)
FYI I think it’s reasonable to give up on the PPP loan. The process maybe predictably turned into a goat rodeo.
So could we reduce our payroll to just include our full 401k contributions and still be considered as retaining for the sake of the retention credit? Thinking that the credit would actually be kinda like free money back into our retirement accounts?
Steve- great posts hanknyou!
Our LLC is being told by our SBA agent we won’t be eligible to apply since we ran at a loss last year.
I have not seen this issue addressed.
Is that correct?
That is correct. And actually the issue has been addressed though in indirect ways. The PPP loan formula looks at the owner’s self-employment earnings for 2019 (in most cases) and considers this the owners payroll costs.
If the 2019 self-employment earnings equal zero or some negative value, you don’t get any PPP loan.
i was thinking of raising my salary to be commensurate with the 100k yearly threshold but i just got guidance from the state (VT):
“You must also match total payroll costs for these 8 weeks to the same amount as you reported on your loan application (average monthly payroll from the calculation on the loan).”
Seems like they are saying as far as salary, you will only qualify for what you initially requested on your application.
Any other opinion on this?
I don’t think that’s true. Also, the state has no say in this. It’ll be the Treasury and the SBA. However, that said, I would not be surprised if the Treasury or SBA says this is rule at some point in future. (And maybe they’ve already said it and I just haven’t seen that yet.)
My thought: Anything you do to complicate or confuse or optimize the PPP loan forgiveness is potentially dangerous.
Sidebar thought: Have you ever seen the Seinfeld episode “Soup Nazi?” If so, this comment will make sense. Assume the SBA will act like the Soup Nazi.
Hi Steve, in light of the most recent guidance indicating a partnership can apply for a PPP loan and include guaranteed payments as payroll costs, but individual partners also cannot apply as self-employed individuals, do you think that also precludes an S corporation that is a partner in that partnership from applying for a separate loan if it pays a salary to its shareholder? Thanks.
I think just the partnership applies and that you deal with the partner’s owners compensation there, at that level.
Hello Steve,
I have a S corp with a Schedule E, take a draw when there are funds available, I issue 1099 for the Spa workers, can I apply for PPP?
If your S corporation shows zero wages, you won’t be able to get a PPP loan. You don’t have any payroll.
Steve, Thank you for these wonderful posts.
I recently transitioned from over a decade of being a sole proprietor to a single member LLC taxed as an S Corp late 2019. To date I have not paid myself a salary yet, but I intend to do so for 2020.
My S Corp applied for the PPP Loan with a simple online application from Bank of America on April 4. Per their instructions following a week later, I supplied a Schedule C. I also included a “Read Me” file explaining the change to S Corp.
I have been getting daily emails saying my documents are incomplete, but with no explanation why. The people in BofA’s CARES Team I have spoken with on the phone say what I did sounds right, but refuse to look at my documents.
Recently I received a request for Form 941. I don’t have one, so my bookkepper advised I create a file called “Form 941 2020 Q1” and put text in it stating the form does not exist because no payroll was run, only owners draws.
Yesterday, I was notified my application is ready to be turned into the SBA. This morning, I got another request to supply Form 941. I think I qualify for PPP Loan under SBA rules, but BofA’s system won’t accommodate me. This process is maddening. In hindsight, applying as a sole proprietor would have been simpler for BofA’s process.
Does anything jump out at you as a mistake on my part? Should I do something to supply a Form 941? Wondering when I should just give up…
I think you should be able to get a PPP loan based solely on your Schedule C from 2019. That’ll create the “PPP” payroll cost you need. You don’t therefore need actual employees on your payroll or a 941 for 2019.
E.g., if your 2019 Schedule C shows exactly $52,000, even if you employ no actual employees, your average monthly payroll costs equal $52,000/12 or $4333.
In this situation, you qualify for a PPP loan equal to $10,833 because 2.5 times $4333 equals $10,833.
Regarding forgiveness, in the eight week covered period, you would need to pay employees payroll equal to at least 75% of the $10,833. This amount equals $8125.
Your situation is a bit murky because in 2020 you don’t have a proprietor for whom you’ll have owner compensation replacement (which could have been up to $8,000 because the SBA says you can pay out 8/52nds of your 2019 Schedule C’s $52,000). Rather, you’ll need actual W-2 wages paid to Ian (now a shareholder-employee) and some other employee.
You’ll also get forgiveness for rent, utilities, etc.
Thank you for your thoughtful response. It’s reassuring that I am eligible. The trouble lies with Bank of America.
I applied on April 4. After the first round of SBA funds ran out, their system began sending me daily messages that I haven’t uploaded all my documents and to supply a 941. Now that the SBA is taking applications for the 2nd round of PPP funds, the messages have stopped.
Meanwhile I have been trying to call almost every day, but BofA has built a PPP support system that’s structured to prevent small business owners from speaking with anyone at the bank who can comment on individual applications.
Sorry. This is been a pretty poorly managed program. I’m not sure that this is any consolation, but it seems relevant to note that in the end most small businesses won’t be able to actually get a loan.
Thank you for your thoughtful response. It’s reassuring that I am eligible. The trouble lies with Bank of America.
My S Corp applied on April 4. After the first round of SBA funds ran out, their system began sending me daily messages that I haven’t uploaded all my documents, and recently, to supply a 941. Now that the SBA is taking applications for the 2nd round of PPP funds, the messages have stopped.
Meanwhile I have been trying to call almost every day, but BofA has built a PPP system that’s structured to keep anyone at the bank from speaking with individual business owners about their applications.