Late last week, the Small Business Administration published new guidance on the certification rules for the paycheck protection program. The PPP loans, in other words.
The new guidance amounts to a change in the rules. And that change flags two risks for small businesses who borrowed paycheck protection program money.
So, I want to talk about all this here a bit.
Quick Review of the PPP Certification Rules
The Section 1102 “paycheck protection program” statute sets forth a number of borrower requirements.
Most of the requirements work simply. For example, you needed to be “in business” on February 15, 2020.
Unfortunately, one of the other murkier requirements has suddenly become terribly problematic.
That requirement? The self-certification requirement—or more accurately, the fluid nature of the self-certification requirement.
Quoting the actual statute, the requirement says this:
An eligible recipient applying for a covered loan shall make a good faith certification that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.
Let me quickly point out something important and then tell you how many people read the above statement.
First the quick point. The self-certification allowed a small business to get a loan. A loan you would use principally for employee payroll. Self-certification did not mean free money.
In fact, a different law, Section 1106, determines whether a firm receives loan forgiveness. Forgiveness, as you maybe know, depends on a firm using at least 75% the PPP loan proceeds for payroll, on not reducing employee headcounts, and on not reducing worker pay rates.
Here’s the second thing I want to say. Many of us thought, applying some basic common sense, that the self-certification language meant something like this:
An eligible recipient qualifies for the loan if such a loan supports the firm maintaining ongoing operations, including payroll, rent, and utilities.
To say this another way, many folks saw requesting a PPP loan as akin to applying for a backup line of credit.
And again, this important point. The self-certification requirement? It connected to you applying for and getting a loan.
Loan forgiveness? Another issue. And another statute governed that possibility.
Rule Change for Self-Certification
A few days ago, however, the Treasury and the Small Business Administration changed the rule.
Specifically, the Treasury and SBA added this question and answer to their online “frequently asked questions document.”
Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 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. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.
A Quick Parsing of the Rule Change
In the quoted text above, I italicized and boldfaced the most relevant bits.
But in a nutshell, the new rule seems to say that you only qualify for the loan if you can’t “access other sources” of liquid funds without “significantly” damaging your “ongoing operations.”
I don’t even know what that means.
Does it mean if you can get a second mortgage on your principal residence, you don’t qualify?
Does it mean that someone on the doorstep of retirement who can tap an IRA without penalty doesn’t qualify?
Does it mean that if you can probably make it through the next two months you don’t qualify? But if you can’t make it through the next six months, you do qualify?
You might read the SBA’s “question and answer” as saying the new tighter rules apply to only to large firms like those reported by the news media. But look again at the first words I boldfaced and italicized above: “all borrowers.”
My honest assessment of the problem here? Congress did a sloppy job of writing the PPP statutes.
Now, even as they provide additional tranches of funding, they don’t agree on how the law should work, on how to fix the sloppiness. Rather, they’ve got the Treasury and the Small Business Administration creating vague new rules on the fly. Every few days.
But enough whining…
First Big Risk of Self-Certification Rule Change
I see two risks related to the rule changes.
The first risk concerns the self-certification you provided when applying for a loan.
You probably want to revisit your earlier self-certification in light of the new rules. Make sure your optics don’t look bad. Even if only in retrospect.
The change in rules contains an “out.” If you return the money before May 14, 2020, you’re off the hot seat. Which may be something you want to think about.
Just between us? If you got your loan based on self-certification that fully complied with a common sense reading of the statute? I think you’re morally fine to keep the loan. But that’s just me.
The question you need to ask? Do you want to get into an argument with bureaucrats? Or your bank?
Second Even Bigger Risk of Rule Change
And now let me mention a second risk, which is possibly even more significant.
That risk goes like this. The sloppy job that Congress (and really the Senate) did writing these statutes may mean other loan terms change as well.
At the very least, you need to stay alert to this risk. Further, the fluid rule changes may mean some firms need to recalculate the costs and benefits of the PPP loans they’ve already received.
Just to say this out loud: You may not want to use a PPP loan for payroll if the only reason you’re doing so is because you’ve got PPP loan funding. Instead, you may just want to return the money.
Terminating employees so they can receive generous unemployment benefits may be the wiser choice.
A related note—and something I’m going to talk about in my very next blog post. The way the PPP forgiveness formulas work, even a small decrease in payroll may cause you to lose all of your forgiveness.
Some Other Resources You Might Find Useful
We’ve blogged a lot about the Paycheck Protection Program and have tried to keep the articles up to date as additional guidance appears. A complete list appears here.
If you’re also rethinking your retirement plans, you might be interested in the series we did a while back on developing a “plan B” for retirement. That series starts here, Retirement Plan B: Why You Need One and then continues.
The full PPP frequently asked questions document, by the way, appears here.
Chuck N. says
My business can afford to keep all employees on full time, but it does not make business sense to do so. The purpose of the PPP, per the press, is to retain employees. But the new rules require that the business would fail without the loan. So, I should decline the PPP & cut workers’ hours, contrary to the purpose of the program.
That’s government bureaucracy at work!
Steve says
My opinion for what it’s worth. Retain employees using the PPP loan proceeds. And without guilt.
Guillermo A Birmingham says
For most small businesses, the self certification risk seems very low. In fact, based on comments today from Secretary Mnuchin, the guidance from the Treasury will be to scrutinize and focus on those loans at the $2M+ level. That level of funding equates to a monthly payroll of at least $800,000 per month or $9.6M per year. So I suspect that takes out more than 90% of small businesses.
I think one of the under-appreciated risks is the 0.5 portion of the maximum loan amount. For those companies that did not analyze the potential loan forgiveness amount prior to submitting their application, they may find that some of the loan will NOT be forgiven. For example, we know that per SBA Guidance, no more than 25% of non payroll costs can be forgiven. If a business has low rent, utilities, or mortgage interest which is not enough to use up the full 25% (that’s the 0.5 part of the 2.5 times monthly payroll calculation), then the portion not used up for those expenses will not be forgiven. Remember, the payroll benefit is only for 8 weeks after loan disbursement.
I had a client that using the maximum loan computation qualified for $1.6M, but we opted for a lower amount of $1.2M because his rent payments were very low.
The other risk that has recently been getting buzz within the Government Contracting arena, is whether or not, the loan forgiveness for Gov Cons should be treated as a credit to the Government which in essence, would make the forgiveness useless. I’m sure in one of the many “Interim Final Guidance” documents forthcoming, we will get some information on how to treat that.
Steve says
Good points Guillermo. BTW I think there’s another way to look at the no more than 25% for non-payroll rule.
You describe one reading, which is that the forgiven amount can’t include more than 25% of non-payroll rule. I hope it works like that.
If you read some of the other documents like the Additional Eligibility Criteria’s phrase, “At least 75 percent of the PPP loan proceeds shall be used for payroll costs,” I worry you might lose forgiveness if you don’t spend at least 75% on payroll.
Monica says
I can’t tell you how helpful your blog posts are. I am a sole proprietor with no employees and received a PPP Loan for $20600 (my 2019 Schedule C net was $99140. I am really hung up on the 8/52 vs 2.5 month calculation that was used to determine the loan amount. If I go with 8/52 I end up using $15252 on payroll costs, however 75% of the loan is $15450 so if I use that calculation how could I ever met the required 75% threshold for forgiveness and why did the SBA make 2.5% monthly payroll the standard? I initially though I’d submit payroll records for 2/12 (based on a year) but that doesn’t seem to follow the advice you are offering. I’m in the weeds so any help you could offer would be incredibly appreciated. Thank you!
Steve says
Okay, so first, I have worried about the same mathematical “bug” you worry about above. Further, I have contributed to some folks worrying about this–including my comment to Guillermo above. And this comment, what you’re (and (I’ve been) worrying about may not be paranoia.
HOWEVER, these two comments:
1. In the Interim Final Rule (page 14), the SBA makes this statement, “Further, the Administrator and the Secretary believe that applying this threshold to loan forgiveness is consistent with the structure of the Act, which provides a loan amount 75 percent of which is equivalent to eight weeks of payroll (8 weeks / 2.5 months = 56 days / 76 days = 74 percent rounded up to 75 percent).” I read this to say that the rounding error that occurs because 8 weeks does NOT equal 75% of 2.5 months? Yeah, that doesn’t matter. I.e., to use your numbers above, $15,252 is close enough to $15,450.
2. I do think you want to stay alert to requirement that only 25% of the forgiveness can go toward non-payroll costs (and to be nitpicky, only certain non-payroll costs). So if you have $15,252 of “owner” payroll, you can only at most get forgiveness of $20,336. So slightly short of your $20,600.
Bottomline? I think you disburse $15,252 to Monica the owner. (I think you want to actually disburse this money.) Hopefully you’ll have “eligible for forgiveness” non-payroll costs that add up to another $5K or so. And then you plan on some (hopefully) small part of the loan NOT being forgiven.
Monica says
Thanks Steve, as you can probably surmise, my business isn’t financial :-). I expect to have to have a portion not forgiven as my expenses won’t meet the full loan and that’s fine, in my mind it’s a very generous offer so I’m just happy I was able to qualify and get the payroll portion forgiven. I will document, document, document. Thank you for responding, greatly appreciated.
Ivan says
So do you calculate owners draw into the amount for payroll on the application?
Steve says
Not the draw. The Schedule C profit. E.g., if your Schedule C business made the owner exactly $48,000 last year, so $4,000 a month, that’s the owner’s compensation.
If the sole proprietorship has no employees, only the owner, the PPP loan formula equals 2.5 times $4,000 or $10,000.
Confusingly, the forgiveness formula works differently. It looks at the draws (I think) made each week.
Brad M. says
Re loan forgiveness:
I understand the rule about comparing total FTE’s to prior periods, but also if a particular employee’s pay drops by more than 25% during the 8 weeks when compared to the previous quarter you can lose loan forgiveness. I don’t understand the meaning of this rule. Does it only come into play if an employee’s rate of pay has been cut by more than 25% – for example if his hourly wage dropped from $25 to $15? Or does it come into play if this employee’s rate of pay remained at $25 but his pay dropped by more than 25% due to less hours worked?
Steve says
Great question. I talked about this in the Paycheck Protection Program Loan: A Small Business Lifesaver blog post a couple-three weeks ago.
We’ll get more clarity on this as the SBA and Treasury release guidance specifically on forgiveness. But this would be my prediction…
If you reduce an employee’s hours from full-time to (say) half-time, I think that reduces forgiveness through the “reduction in employee headcount” adjustment. E.g., if you had 5 full-time employees but then cut one guy to half time so now you have 4.5 full-time equivalents? I think you lose 10% of your forgiveness right there.
And then if you (to keep this easy) reduce wage rates by 30% an across the board pay, I think that wage rate reduction–note it’s 5% in excess of the 25% threshold–means you lose another 5% of loan forgiveness.
BTW, please feel free to comment, challenge, poke holes in my reading of the statutes or the SBA guidance posted at treasury.gov. I think we’re all struggling to make sense of a, er, confusing situation.
Carolyn says
So, I have an employee that started 1/1/2020, so not part of my 2.5 calc. He doubled the average monthly payroll. I applied based in monthly data for 2019 x. 2.5, do I stand to lose forgiveness of funds if I do not meet his compensation from Q1 2020? He is paid based on a % of invoicing, plus a base and has benefits. Either way for all others if we obtain PPP funding, we will exceed their 2019 payroll due to growth. Just concerned this one employee will be paid less than pre-Covid gross wages and that will cause me to lose the ability to have that amount forgiven.
Steve says
I think to the extent that his salary decreases by more than 25% from Q1 to Q2, you will lose forgiveness to the extent of reduction.
E.g., if he made $20K in Q1 and $10K in Q2, a 25% drop would be $5K so a $10K drop would be $5K reduction in forgiveness.
You know what probably makes sense? To tweak his pay during Q2. To $15K.
Dottie Natal says
Unintended consequences of overlap in rules: here in California (perhaps in other states?) if the employee is cut back 10% or more, they can file for partial unemployment and then get the EXTRA CARES act benefit of another $600 per week. So if they were making $1000 per week, cut back to $900, they would collect $1500 per week (plus change.) And, the wage part would be paid out of our PPP loan. I doubt that was the intent of the rules, as this is really double-dipping, but… what about these employees? Some would PREFER to be laid off to collect extra unemployment amounts and not need to work. We already have put anyone back to work that can work from home, in a segregated warehouse (1 person per building) and paid people to stay home to take care of kids until the date of the PPP loan. A few options we considered is letting people go that do not want to work and hiring someone else in their position, but is that allowed? (And if not, they may continue to just not work, which is not really what I want!)
Steve says
I think you probably want to consider replacing someone who won’t come back. And I say that for this reason:
Your payroll costs limit the non-payroll costs you get forgiven. To make the math really easy, I’m reading the interim final rule and the PPP FAQ language on “not more than 25% can go for non payroll costs” to mean that $900 of payroll may allow for $300 of forgiveness of non-payroll costs. But $1000 of payroll may allow for $333 of forgiveness of non-payroll costs.
In an absolutely catastrophically bad worst case scenario, then, where nobody will come back to work, you would lose all the forgiveness.
Jennifer says
I have some staff that are not comfortable coming back to work yet, and I respect that. We are fine with running our business with the staff that do want to come back, since business is less due to all of this. We are non-profit religious organization and so our employees do not get state unemployment, but they do qualify, and are receiving the $600 from the federal government through the CARES act. We applied for this before we knew that our employees could qualify for any unemployment as we were trying to help them out and continue to pay them during this time. We have been closed, but are slated to open up in the next 2 weeks. Am I able to pay the employees partial pay to stay home and then increase the pay of the employees whop are coming back to work (hazard pay). How would this effect the $600? Would they still be able to claim that if they are getting paid from us, but it is partial pay? Any help you could give me would be so appreciated. All of this is so confusing to me. Thank You!
Steve says
I don’t think you want to, er, play any games with the payroll. Rather, I think you make a written offer of employment to people (as described in Gotcha #3 in this blog post, https://evergreensmallbusiness.com/losing-ppp-loan-forgiveness/ )
And then you need to plan for the reality that some of the money you received to pay these folks will need to be paid back. It won’t be forgiven. Also, you’ll lose some of the forgiveness you get for rent, utilities and interest.
Gregory Ricker says
There seems to be absolutely no way to find out where my loan application is in line to be paid. . When I call BB and T bank they say there’s no way for them to find out can you help
Steve says
Sorry, your experience is the one most applicants have. I don’t think one has any real recourse or solution.
Here are the practical steps you may want to consider: What to do if your PPP loan application failed or seems to be failing…
Twila Leedle says
I am a very small small business and I get no help with rent utilities. I have clients that I brovide hair and nail services to. This how I make money. Now I can’t pay my rent so there goes my business. I am not the only one there is a lot more like me think about us for once. We are not big but are important to our community. Where to get help!!!
Steve says
You probably want to apply for a PPP loan. (Though, quite honestly, that’s a long shot for most of us.)
What might be possible in your case would be to get unemployment benefits from the state. I would guess that’s your most accessible source of financial help.
BTW, I would think your landlord should show some grace here. What we all need (people with hair, landlords with space to rent, etc) is for you and other small business owners to get back to business.
Good luck.
P.S. I can hardly wait for my barber to open again.
Bradley Smith says
Steve, I think many borrowers under the PPP loan program viewed the loan as a hedge against an unknown worst case scenario. Consider the April 2, 2020. This was just a couple of weeks after most states issued partial closing orders, New York was falling apart, and many cities were seeing exponential daily increases in the number of confirmed cases. My clients called me about these programs, and virtually all of them had the same concern – “I am fine now, but where is this heading? I think I need to protect the business from future unknowns and apply.”
If you look at the certification “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” It does not say it is needed in the next eight weeks nor even tomorrow. It says to “support ongoing operations”. I think almost every small business (even essential businesses) could easily on April 3, 2020 make this assessment of the economic climate.
My clients average loans were in the 20k – 40k range, and now I am worried these small business owners will wake up in eight weeks and have to defend with the benefit of hindsight that they made their certifications in good faith.
My question “Do you think the rhetoric from Treasury is focused on large and publicly traded companies, or do you think this will cause a problem for true small businesses (5-20 employees)?
Steve says
So, first, I totally agree with your assessment of the situation. BTW, we didn’t apply. (We actually are blessed to have plenty of work and loyal clients.) But two of the most experienced CPAs in our small firm–both whom see the firm P&L–said, “Gosh, shouldn’t we get one if we can? We face extreme uncertainty. What if a principal dies? Or what if we experience the same pressures that the large CPA firms seem to be facing? What if economy deflates to 50% for X months? Shouldn’t we back up our ability to keep employees with a loan?”
This sort of thinking and the thinking you share? Yeah, right on in my assessment.
Regarding the issue of whether we should worry about our clients who, e.g, got a $20K or $40K or $80K loan? I think theoretically they should worry if they had some other liquid source of funds they could tap. (A HELOC? A Roth account? Personal savings outside the business?)
I would not worry very much about these sorts of situations through. The IRS audits, what, 12,000 S corporations year? And they’re engineered to do that work. The SBA is not going to be able to audit 200,000 borrowers. No way.
Jerry Seo says
What is the penalty if you are found in violation of the certification? The certification doesn’t state “under penalty of perjury”. Is it in the Act? In any SBA or other promulgation? It seems to me that the worst that can happen is that they force you to return loan amount.
Steve says
I think there are fines and prison time (worst case) for SBA loan fraud. Five to Thirty years in prison. Fines from $250K to $1M.
Michael Keller says
We have a partnership. The partnership in turn owns an LLC. The LLC owns a storage facility. The LLC is a disregarded entity for tax purposes and reports rental income on Form 8825 of the partnership’s 1065 return. Is the LLC eligible to file for a PPP loan based on the net income of the property it owns?
Steve says
I don’t think so. That’s not a business. It’s a rental.
Maria D. says
Regarding the 25% of the loan that can be used to pay rent, mortgage interest, utilities, what exactly would be be covered by the term utilities? Would this cover internet services and phone? What about things like cloud storage for a company involved in IT?
Steve says
I think it probably does. I spent a few minutes scouring the various sources.
The statute (so the actual Sec 1102 law) includes this language:
The Additional Eligibility Criteria document referenced several times through these posts includes this language:
Note that the cost of cloud storage probably doesn’t count as utilities. But wouldn’t it count as rent?
Dale S. says
We were forced by employee illness to close our small retail store a few days before the order to do so was handed down by Governor Inslee. We have been shuttered since March 19th.
We applied for a PPP loan, and it was funded on April 24th. It seemed like a good idea at the time, but the eight week time frame of the loan forgiveness requirements is making less and less sense as we move forward. Also, the federal unemployment boost offers a much better deal for to our employees than our use of PPP funds.
If forced to follow the eight week time frame, since the store is very likely to be closed for the better part of that period, we are essentially paying, but not employing our workers.
Additionally, guidance for forgiveness seems to be so vague and ambiguous that it appears simple, innocent mistakes could result in lower or even no forgiveness.
After reading in your article that the final date for returning and cancelling the loan is May 7th (Ed note: As of 5/5 now May 14), that seemed to be our most logical option. However, we are also seeing recommendations in other articles from groups such as the AIPCA that are calling on Treasury to change covered periods to be aligned with pay periods as opposed to loan dates, that the eight week period be changed to commence once the store is allowed to reopen and to simplify payroll calculations.
Our question is, if by May 7th, guidance isn’t sufficient to determine if any of these logical changes will be forthcoming, what happens if we just hold the loan proceeds, wait to see if there are positive changes in guidance, and if not, seek no forgiveness and repay the loan at the end of the eight week period.
Your articles are an excellent source of information. Thank you very much for sharing your knowledge with us!
Steve says
I’m just going to say this. The way you’re thinking? You’ve got a handle on this. You’ll looking at good sources. You’ve identified the key issues. You’re watching the right developments.
BTW, keep in in mind that you can pay yourself… E.g., say you have ten employees who all make exactly $1K a week. This includes you, say. Or you and a spouse.
With a situation like this, you may have gotten a $100K-ish loan. And maybe you can’t get forgiveness for all of that.
But if you pay yourself and a spouse $1K a week, that’ll be $16K over the eight weeks. That will also let you get forgiveness for another chunk for rent and utilities: $6333. That would total nearly $22K of forgiveness.
One other thing to mention here. To avoid the reduction in headcount and reduction in pay rate “forgiveness” adjustments, you would need to rehire your full team and at least 75% of at pre-crisis pay rates by June 30. I base this on the following language from the PPP fact sheet at the Treasury’s web page of guidance:
Ok, sorry, one other thought: Given that you are basically shut down right now, and given that you would be using the PPP money for funding, are you sure your can’t partially reopen? Even if with very inefficient operations? I am out and about because we’re an essential business. So I see people in my town (Redmond) operating in jury-rigged fashion.
One of the coffee shops isn’t open in the usual… but they open their front doors onto the sidewalk and then serve coffee to people who stand there for
drive-bywalk-by service.The Ben Franklin Arts and Crafts store appears to let customers phone in orders… and then pick them up will call outside the store.
Just as a way to ramp up operations for when we’re through this initial phase, I really like the idea of a firm operating even if at a slow speed.
Dale S. says
Trust us, if we could find any way to open with even limited service, we would have. We carry products for children and it’s very much a try before you buy situation. Even when we are allowed to open, it’s going to be a challenge to maintain a truly sanitary shopping experience.
One thing in your reply caught my attention: You suggested taking a paycheck as the owner(s) while allowing employees to ride it out on unemployment until we are required to put them back on the payroll at the end of June. Am I reading this correctly? We are not required to include all employees in our PPP expenditures if we simply re-instate them before the end of June and begin paying them their normal, pre-crisis wages at that time? That would seem to sort of fly in the face of the intent of the program, and maybe give the lender looking at forgiveness the wrong impression.
Thanks again for all of this!
Steve says
I have another blog post that I may post today about how the forgiveness works when you start tweaking headcounts, pay rates, rehire, etc. I’m going to wait therefore since it provides a (sorry) lengthy discussion of the issue you raise.
P.S. Sorry you guys are getting slammed with this. And that you don’t have a way to at least trickle a little revenue onto the profit and loss statement.
Kim m Bush says
I secured a PPP loan for my salon,I havent signed yet.I cant seem to find out what happens in 8 weeks if my salon is still unable to open and Im out of loan money?
Steve says
First, I think you should sign the PPP loan docs. The money runs out quick.
Second, you should be at least able to pay yourself–even if you can’t reopen.
Third, what you may end up needing to do is pay people to stay at home (calling the pay “sick leave” or “vacation” or something like that.)
BTW, keep an eye out too for changes in this rule. The accountants (via the AICPA) are begging Mnuchin to let small business’s start their payroll when they can reopen. That would really make more sense. And if you look at page 3 of the PPP fact sheet available here, the language seems to indicate that you don’t need to rehire folks ASAP. Only by June 30,
Guillermo Birmingham says
The 0.5 was intended to provide funds for the “other expenses” (rent, utilities, mortgage interest). I believe this is why the 2.5 factor was used in the calculation. But one has to ask, if the intent was to “protect the paychecks” of American workers, why doesn’t it allow for ALL of it to be used for payroll equal to the period covered by the 2.5 factor or 10 weeks. I think the legislators were trying to be too cute on this and created a mess.
Lauren Weldon says
Can you please tell me the legalities of paying a bonus to employees to make sure enough of the funds are used towards payroll cost. Would this bonus also me allowed towards the owner? As far as utilities does that include rent or company cell phones?
Steve says
Rent and cell phones will count if you’re not a self-employed Schedule C business.
I don’t know if you can bump the wages. I just reread again all the guidance. And nothing there says you can’t do that. But such an approach would diverge from the approaches they’ve described.
BTW if you’re a sole proprietor, you can only get 8/52nd of your 2019 Schedule C amount.
Sheila D says
Question – we are a small LLC with 3 owners, we applied for PPP loan based only on payroll b/c that is what we were told at the time that we could get. Sent in 941 and explanation of how we came up with payroll # and received the $$. Now we have seen that as owners we could have included our K-1 profit as payroll up to 100K. Are you aware if supplmental applications are permitted? Have you heard of banks submitting them and if so do you think they would raise a red flag. Our loan was less than 60K so we are well under the $2M to flag but just curious. My other thought was not apply for extra $$ but use partner draws in calculating payroll expenses to maximize forgiveness. We used 2019 payroll #s and have since downsized from 7-5 employees so our costs were higher to begin with.
Last ?, one of our employees will be going on medical leave in a few weeks (assuming surgeries proceed) so she will go on short term disability and we will lose her paycheck but she remains employed with benefits. Any idea how that will be viewed?
Thanks!
Steve says
Only one PPP loan. Sorry. Basically you guys applied for the loan before the banks had explicit descriptions of how to handle sole proprietorship or partnership “owner” earnings. (How a partnership should work was clear to the accountants. But the banks don’t know how to do this stuff.)
This should be consolation: Had you waited you very possibly would not have gotten a loan.
Bev Hayes says
I am an independent contractor-Realtor. and was approved for PPP. My calculation of 8/52 accounts for 73.5 percent of the PPP Loan. This does not meet the 75% threshold. Will I have to pay back the entire loan? It does not look like many of my other expenses are eligible for forgiveness – MLS Fees, advertising, health insurance monthly payments. Are estimated State income tax payments or ROTH IRA contributions eligible expenses?
Steve says
I think you will lose forgiveness for the non-owners-compensation part of the PPP loan. so the other 25%…
I think you won’t get penalized because the guys we have writing and administering the law don’t know that a month doesn’t exactly equal four weeks. (They round the nearly 74% value to 75% in the guidance, for example. Explicitly.)
Sonya Merriman says
I am the physician owner of a medical practice. I have spent the last couple of years aggressively paying off all but mortgage debt in the business and then building up our retained earnings for equipment purchases and as a business emergency fund. I never envisioned this kind of emergency! Before all this happened I had approximately 2 months worth of expenses saved ($200,000). That does not included paying myself in that monthly expense calculation. I am a plastic surgeon so all business shut down on March 20. No income since then. I applied for and received a PPP loan of $151,000 as we had no income coming in and we had no idea how long our shut down would last. We are starting back up with a reduced schedule next week. My concern is that when determining loan forgiveness, they will look at the retained earnings account and determine that at least in the 2 months they are looking at, we could have scraped by without it. Am I at risk of not getting the loan forgiven? We kept all employees on at 100% of their pay based on that loan. Thanks for being so generous with your time and expertise!
Steve says
I think you sound like a pretty legitimate PPP borrower. Not to be negative, but what if you guys find revenues are down for the next few months because one in six Americans being unemployed begins to bite? What if Georgia’s approach to Covid 19 results in a flair-up and you guys have to go hardcore with social distancing in the fall. BTW, the fact that you’ve kept people on the payroll? I think that strengthens the merit of your certification too.
Here’s an alternative scenario where I would think someone should worry. They got a $151K loan… but they have $1.5M in bank account… or liquid personal assets…
Or another alternative scenario… maybe the business is lightly capitalized but it provides an essential services and revenues are only a little off.
Summing up, I think you’re fine.
Sonya Merriman says
Thank you do much! And no doubt, we will not bounce back up to pre COVID levels anytime soon.
Sonya Merriman
krawford says
We are run by shysters
Diane says
If a PPP loan is approved, but business is barely getting by with extremely low cash flow, can the owner of the S-Corp elect to accept the Loan on August 1, 2020, Then August 1st would begin the 8 week period to spend the PPP loan. or must the PPP loan be used as soon as it is received.
On another note: If the loan can be delayed would it be lost?
Steve says
I think if you delay you’ll lose opportunity to get loan. The PPP is all about getting money into business owners’ hands ASAP… and then having them quickly pay that money out as payroll. If your situation doesn’t let you do that, SBA and bank will want to fund some other applicant’s loan who can do this.
Sorry. 🙁
Scott Conklin says
I have applied with 3 online vendors as a self employed contractor ( I could not with BofA as I don’t have a Small Business Account).. on April 11th when I was allowed yo….. but still have not heard from any of them other than the original email that confirms my online request. I still have not been given access to a portal or been asked to upload any documents.
Does it look like my chances to get the loan even remotely possible?
Steve says
I would guess you are out of luck. Sorry.
David Anderson says
Thanks for the head’s up! I received a PPP loan for $11K (2.5x) my monthly Self-Employment wage ($54K). I just received this from my bank today:
“The amount eligible for forgiveness will equal the amount spent by your business during the eight weeks following the loan on payroll costs, interest payments on any mortgage obligation incurred prior to 2/15/2020, payment of rent on any lease in force prior to 2/15/2020, and payments on any utility for which service began before 2/15/2020.”
So if I write myself a weekly payroll check for 1/52 of the $54K self-employment wage, that’s $1040/week, times 8, for a total of $8,320. Does this seem to say that I will have to pay the difference ($2,880) back? Or maybe I should be writing the 8 checks for $1,400 to use up the loan amount for payroll? But then that would be greater than my self-employment figure. Does that make sense?
I have no problem giving a portion back, but wanted to make sure what the expectations might be as of 12:02pm EST on 5/1/2020! haha.
David Anderson says
Also, another thought is to make business payments to Gas and Electric during this time. However, those are normally made from a personal account because of the home office deductions.
Dave says
I have the exact same situation (and coincidentally almost identical numbers). I’m really trying to figure out what to do with that remaining sum. I don’t believe you can use it as payroll as that would essentially be using it to give yourself a raise. I have seen mixed answers on the use of the remaining funds on home office expenses (gas, electric, internet, phone etc). Any clarification on this would be extremely helpful, I hate to leave any of this on the table.
Healthy Regards!
David Anderson says
That’s pretty funny! I do hope that Steve is able to circle back around before this blog is closed! 🙂
Steve says
OK, for the Daves… 🙂
Self-employed folks will only get forgiveness equal to 8/52nds of their 2019 Schedule C profits. They won’t, for example, be able to use home office expenses to bump the forgiveness amount.
See Gotcha #8 in the Losing PPP Loan Forgiveness post:
https://evergreensmallbusiness.com/losing-ppp-loan-forgiveness/
David Anderson says
Thanks Steve. My PPP loan was predicated on my 2018 return. So I’m hoping that my 2019 return showed a larger profit. I guess I better get that done quickly in the event that it did! Otherwise, yes, I will set aside the differential until it is requested.
SK says
What happens if you applied during the first round of funding, (when the nation’s funds ran out), but the bank processed your application anyway while waiting for a new round to be released? Our application was “approved” by the bank and is w/the SBA for the approval now.
This certification stipulation didn’t exist when I applied. I don’t think we’re at any risk now that it is in effect, but it’s so confusing. We’re a 2 employee consulting firm, we HAVE lost contracts because of clients freezing their new business. The PPP we requested was rather small (less than $35k), and fits all the criteria very safely; we’re can’t apply for unemployment because we’re still working on old business.
Steve says
In a situation like you describe, I don’t think you need to worry about the certification. Sounds to me like you pretty cleanly match the requirement.
Stephanie says
I just got the loan. I believe I can make payroll myself the next 8 weeks. How do I give the money back?
I don’t want to have any problems. I don’t know how building will be in the next 6 months.
But I’m afraid to use the loan money.
Steve says
I don’t think you should be afraid to use the money. The certification “standard” wasn’t that you could survive for a few weeks without the loan. Rather, the standard was all the “Covid 19” economic uncertainty meant a loan request made sense because otherwise you might not be able to continue operations.
The other thing is, you’d want to look at your other liquid sources of funds. E.g., if you had $1M in your bank account and got a $100K loan, yeah, that suggests you didn’t need the funds.
But if you had (say) $100K in corp account and, sure, you could that money to get through next 8 weeks, but then you’d be out of funds? And then you get more breathing room if you can get a (say) $125K PPP loan? That sort of situation to me matches what the Treasury and SBA seem to now be saying…
John says
Small business here with a mom and pop grocery store. So we are essential and still running. We applied and were approved in the first round. April 3rd we had no idea what was to come. We just came out of a down 15% comp year due to new competition the virus hit and we jumped at the chance to protect what we had and reward our people with hazard pay.
We got to stay open and made a small increase in profitability but with many increased cost for cleaning staff supplies higher wages etc.
We keep a out 60-100k in the bank to run our business.
We own nothing. We have a 200k loan on our business. Our liquid is the business account and the 50k in our personal checking/saving.
We are being told that because we are essential and could run during this pandemic and generate income that we should give the PPP back or face criminal charges. With all the rule changes for application we are scared. We have already obligated these funds to wages hazard bonuses and increased expense that match the approved list. We are told that specifically because we are a grocery store it will automatically trigger us to be auditted and face criminal Liability.
I just need an impartial point of view.
Steve says
You sound to me like the perfect sort of business that SHOULD get a loan.
I think you keep the money, stop worrying, and assume you’re doing this right.
BTW, the problem (and maybe I shouldn’t say this here because it’s sort of political and I want to keep this apolitical) but the problem is the statutes were very poorly written. Ruth’s Chris Steak House and Shake Shack followed the statutes I’m pretty confident. But what’s shown up once we see how the PPP works is Congress did a sloptastic job writing the law.
So, the problem isn’t you. Or me. Or the bank. It’s them.
Laura says
We just got approved for a $115k ppp loan for a medical practice. Our business was totally closed for 7 weeks, no patients or surgery. However we did have about $50k given to us as a grant from Medicare after we applied, so we had about $200k in the business account. Plus we have a substantial amount of personal savings. And we got our business mortgage deferred. Are we ok to keep the funds? Or does it seem like we had other ways to get funds?
Steve says
Per the statute, I think you were correct and appropriate in applying and you should be able to keep the money and then get forgiveness if you use the money for payroll. Even with your grant and your checking account balance.
However, legislators are now saying the law they wrote, deliberated on (supposedly) and then passed says something different or means something different. And your situation doesn’t mesh well with the new, “oh we didn’t mean what we said earlier” definition.
You’ll need to make your own decision here. But it maybe helps to understand the “rules” changed mid-game…
P.S. I think it’s really significant that your business closed for 7 weeks. That closure for example per another Section of the law serving up another tax goodie would make you qualify for financial support. (See this blog post for more info on that: Section 2301 employee retention credit.)
Robert S. says
We have three operating companies with cumulatively well under 500 employees. In round 1 were approved for around $150K in each of two of those companies and around $800K in the third. Because of the nature of the business, and contrary to our expectations when signing the forms, the first two companies are booming and we plan to return the money prior to May 7 (Ed note: As of 5/5, deadline is May 14).
My dilemma is regarding the 3rd, larger (by sales not net value) company, whose operations are split between a location that is similarly booming (25% of sales in entity) and one location whose sales are down 18% in April due to the beginnings of what will be a significant slow down in the residential construction industry due to Coronavirus (comprising 75% of sales in the entity). Overall the company’s sales for April were down 12% compared to last year. So during the 8 weeks of the program we would NOT need this money to stay in business, but can use it to keep employees from missing paid hours at the location that is hurting. Also at the time we signed up, dire macroeconomic predictions were at the forefront of our thinking. I think it is entirely possible that once the projects we have in the pipeline at the location with falling sales dry up later in the summer and fall, we could face a severe and possibly mortal slowdown in our business, way beyond what we are seeing now. Am I risking fraud by retaining the funds in the company in question, and does my returning funds in the other two affiliates help me show that I considered all this in good faith if I need to justify keeping the funds in company #3? What would you do?
Steve says
>Am I risking fraud by retaining the funds in the company in question?
I don’t think so…
>Does my returning funds in the other two affiliates help me show that I considered all this in good faith if I need to justify keeping the funds in company #3?
To me? Yes. You guys seem like really good people. I mean that.
>What would you do?
Exactly what you’re asking about.
And thank you for thinking this way. You and people like you are the reason we’ll get through this.
Robert S says
Thank you for being so generous during this time of uncertainty.
Thomas Bryant says
Thanks for helping out with this information. I have a question. At the time of my application, my bank advised me that I could not use and self-employment income in my PPP calculations and could only use employee payroll. The banker was not aware of the rule change implemented by the U.S Treasury on April 14th that allows an LLC to use income declared on my 1040, schedule C. In my case it would amount to an additional $20,833 in the PPP loan amount.
I received word from my bank that my loan has been approved by the SBA. I have not received my closing documents and have not received any funds. I am requesting that my bank amend my application to include this amount. Is my request possible? Will the bank need approval from the SBA and if so do you know if this can be done?
Steve says
Your bank bungled the original application. They should have known better. But the banks don’t really get how the accounting works. As any CPA will tell you.
You should see therefore if you can get them to recalculate the “right” amount. But if they won’t, I think you take the bird in your hand and don’t reach for the two birds in the bush. The big risk, it seems to me, is missing out on the PPP loan.
Em says
Hey! First up, thank you SO much for taking the time to answer everyone’s questions. I tried reading through a few of your blogs and all the message boards but still have some questions!
I’m a super small S-corp — around $300K in revenue. My husband and I are part owners 50/50 and take a smallish but reasonable salary. Then we have 3 employees who are categorized as part-time on our payroll but do rely on their salaries for nearly 100% of their income. (They were freelance but because of CA law they were switched to employees in January.)
We are an internet based company working in marketing and I applied for the loan because I was worried about the economic uncertainty and if companies would be paying for marketing at this time. So far we haven’t seen much of a dip BUT I’m not sure what the next few months would bring and it would break my heart to not support my employees.
We were JUST approved for the loan last night and it’s sitting in my inbox waiting to be signed but I don’t want to get in a heep of trouble taking the money.
Couple questions:
— My employees are hourly so their income fluxuates. Am I okay as long as they don’t dip below the numbers I submitted for loan approval?
— So far my company hasn’t NEEDED the load. We’re no Shake Shack and don’t have millions or even hundreds of thousands in the bank but my husband and I do take profit distributions and there is no proof of economic need yet. Could we get in trouble if we take it? Or are we at risk of losing the forgiveness?
— We’re super small potatoes and the loan amount is under $40k but I also can’t weather a bunch of legal trouble… weighing if it’s worth taking the preventative measure OR even if it’s legal to?
— I guess I could not take the loan and if there is a dip and take the employment tax break thing?
Thank you so much!
Em
Steve says
I don’t know what to tell you. Your situation absolutely doesn’t seem like Shake Shack. (Gosh, will that be how we think of them now? The people who didn’t need a PPP loan?)
If you don’t need the money to cover people’s payroll (including the owners’ payroll), yeah, you should really leave it for someone who does. But then again, it’s hard because of all the “what ifs”…
P.S. We didn’t take a PPP loan. Oh sure, I could conjure up really negative scenarios where everything goes bad… But we’re a tax firm. People still need to pay their taxes. And this thing will solve itself in not too many months (even if at great cost)…
Andy says
I applied for a loan in the first round and just received funding yesterday (5/4). My business is a specialized construction subcontractor. All work has been shut down since March 15th so my two employees went on unemployment at that time.
I still have machine and equipment lease payments to make on a monthly basis with less than $10k in the company savings and our receivables are at essentially zero.
My loan amount was $26k. I pay myself through owner draws typically. Using the 8/52 rule I could pay myself about $12k. Does that count toward the payroll piece? What about using this loan to pay for two months worth of my equipment leases?
The kicker for me is that both of my guys just accepted jobs with another company prior to my getting funding. My business is essentially dead in the water with no upcoming work and no employees to do anything that eventually does come in. Your thoughts?
Steve says
If you’re a sole proprietor, you can pay yourself each week as owner lesser of 8/52nds of 2019 Schedule C or $1923… and this counts as $15,384 of payroll.
This level of payroll also lets you get up to $5128 of forgiveness for rent, utilities and interest as long as you’re not now considered self-employed. I’m not sure I know what “self-employed” means. But it seems like it means a Schedule C business without employees.
This leads me to last comment: Maybe you need to hire a new employee. You’ll probably get money for this from the PPP loan. You’ll possibly also qualify for some rent, utilities and interest spending forgiveness.
BTW, one other thing to be sure you understand. You need to make a written offer to rehire your guys at same wage rate so their departure doesn’t cause a headcount reduction.
P.S. You might want to carefully read through the Gotchas again… especially about reductions in employee headcounts, impacts of rehiring people, the 25% rule, and then the self-employed business owner rule. (Sorry.)
Martin says
The whole thing points out the pitfalls of taking money from what will no doubt become a highly controversial program that will invariably come under heightened scrutiny after the fact, particularly if the Democrats take over in November.
I serve on the governing board of a faith organization that has received bank approval for a decent-sized PPP loan in the second batch of SBA funding. The rationale for applying was to treat the loan as backup liquidity in case monthly tithes fall precipitously during the pandemic. The initial reading by most of my board colleagues was that this was “free money” and that we’d be “stupid not to take it.” I was never impressed by the case being made that we “might” need the money, and fearful of the lax standard we were using in making the need certification.
The revisions to the guidance make it pretty clear that we need to have a strong case that layoffs had better be a fait accompli if we don’t take down the funds.
The morals of the story:
1. Just because you think you “can” take free money does not mean you should.
2. There are undoubtedly businesses in greater need than ours, and a faith organization has a moral imperative to act sacrificially when such is true.
3. There is no telling what kind of small print will be in the loan documents that subject us to the risk of a government audit which may occur in a politically charged environment.
4. Faith organizations may be very out-of-favor in the next Administration, which may populate the next Justice Department with leadership seeking to punish us.
5. Better to pass the plate and let others have this money, particularly if we cannot build an ironclad case that this loan WILL, in retrospect, in 20/20 hindsight, have been absolutely necessary.
Steve says
Good points. And not trying to be argumentative, but both parties have their fingerprints all over this one and IMHO share responsibility for the sloptastic job they did.
P.S. I’d actually be okay with Congress saying, “Well, yeah, it wasn’t perfect. Sure. We wasted a lot of money. But the point was, we wanted to shower small businesses with money. Do whatever it takes to help that part of the economy.”
Websst says
Thanks a lot for the perfect ideas.
Regards Dan
Alex says
Steve,
I really want to thank you for your great posts and follow-up with everyone.
I run a small investment advisory firm in NYC with two employees. I applied for and received the PPP based on the original guidelines and now I’m wondering if I should return the money.
My practice generates a mid-six figure Schedule C net income, but since I’m fairly young, I haven’t accumulated massive liquid savings. Although most of my revenue is recurring and fee based, it is highly sensitive to the stock market. So far since markets have recovered somewhat, I’m doing ok. But that could change, if markets resume their decline, which is far from impossible given current uncertainty. A protracted depressionary bear market, while not a base case scenario, would wipe out my liquid assets, since my fixed costs are high, unless I reduce headcount/office space.
Before PPP I was seriously considering reducing staff/cutting salaries, in order to defensively preserve cash. PPP seemed like a real lifeline that gave me a chance to pause and with those thoughts. By now I don’t know if I should keep the money. The new rules are so vague that it is not clear to me. What are your thoughts?
Steve says
If you’re using PPP money to maintain payroll, it seems like that fits the certification requirement pretty darn well.
Alex says
Thanks, Steve. Much appreciated!