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Tuesday, April 7, 2020

SBA Loan FAQs: EIDLs and PPP


Updated April 8, 2020, to include additional details.

The SBA has two loan programs to help businesses impacted by COVID-19: the Economic Injury Disaster Loan (EIDL) program and the Paycheck Protection Program (PPP). Here are some answers to questions about them, in plain English. (We also have a cheat sheet that compares the two.)


What’s the difference? Can I do both?

Yes, a borrower can do both, providing the funds are used for different purposes. The PPP can be forgiven if funds are used to pay specifically designated expenses. There are no personal guarantees and the basis is 2.5x the average payroll expense in the last year or $10 million, whichever is less. The EIDL loan is up to $2 million, so it’s perhaps less money than the PPP, but the application is much more rigorous and consistent with typical SBA emergency loan standards.

Note that the EIDL also comes with the opportunity to get a quick $10,000 advance feature. It will be forgiven if the loan application is denied. If the applicant applies for a PPP loan, this $10,000 EIDL advance will be added to the PPP loan basis and deducted from any loan forgiveness.


Who is eligible for the SBA PPP?

Companies with less than 500 employees. Note that companies with an NAICS code beginning with a 72xxx are eligible if they have more than 500 staff but less than 500 per location. This applies, for practical purposes, to most hotels and restaurants.

Nonprofits are eligible too if they are a 501c(3), a tribal organization or a veteran’s organization.

There are no limits based on revenue. This deviates from other SBA loans, which do have limits according to NAICS (industry) code.

Public companies can apply. Note that some do not want to, as they’ll have to disclose that they participated in a relief program on their financials.

Applicants with foreign owners are not excluded if they are at least 51% owned by a U.S. citizen or permanent resident. Of course, they should be organized in the U.S. and have employees there. Note that foreign workers are excluded from the application. Also note that affiliation rules are complex, and if there is any argument to make about this interpretation of the rules (which are always ambiguous), get legal counsel and submit their opinion with the application to the SBA.

Recently, it was determined that affiliation rules are relaxed for religious organizations. Practically applied, that means that an organization controlled by one diocese may qualify even if the employee populations add up to more than 500 if the locations can distinctly separate their staff into teams of less than 500. (For example: one diocese that has a school and also a church that operate somewhat independently and have different EINs would qualify.)


How do I calculate the wage basis for the SBA PPP loan?

We have a cool calculator. Here are the basics:

  • Wages — up to $100K per individual in the 12-month period
    • Take out excess for any individual over $100,000
    • Wages include all paid time, paid vacation, bonus, commission, tips
  • PLUS benefits
  • PLUS SALT (not including employer share of FICA)
  • PLUS retirement matching

Last: Divide the total by 12, and multiply by 2.5

After February 15, 2020, the formula changes and becomes more complicated. (We don’t think it’s best for the client, and it’ll complicate the understanding of the underwriting.)

  • Wages — up to $100K per individual in the 12-month period,
  • PLUS benefits
  • PLUS SALT (not including employer share of FICA)
  • PLUS retirement matching
  • MINUS employee share of FICA
  • MINUS employee FIT

Last: Divide the total by 12, and multiply by 2.5

In summary, there are two separate calculations if periods after February 15, 2020, are included in the look-back measurement period.


What is the 12-month look-back period for measurement?

There is a lot of ambiguity and conflict between the CARES Act and the SBA/bank here. We have chosen to use the period 2019 because most bank applications are asking for it. The CARES Act allows for a 12-month rolling period dating back from the date the loan is funded.

Regardless of the method chosen, transparency and clarity must provide for easily auditable figures. What we do in the application will be compared to the 8-week comparable post-loan-funding period and this must be an easy, apples-to-apples exercise to get the most loan forgiveness.


Headcount, number of jobs or full-time equivalent (FTE)?

Some bank applications ask for “number of positions.” Others ask for “headcount.” The 8-week period reviews we have seen are asking for “full-time equivalents.” The purpose of the PPP is to maintain both jobs and salary levels (of at least 75% per person to prohibit deeper salary cuts). We recommend calculating both number of jobs (not number of W2s!) and FTE. Technically, the application asks for number of jobs both part-time and full-time, and this is especially important in a business employing a lot of part-time workers. Don’t over-report the number of jobs on an application, because you’ll need to maintain the number, or restore those jobs and salaries by June 30, 2020, if you want to get 100% forgiveness.


If I furloughed or laid off people, do I have to rehire them?

The intent of the law is to help you rehire if and when your business revs up again. There’s a complex strategy here. Depending on your employee base, it might not make sense to bring them back to work if there is still no work for them to do. Get help with the planning from a financial professional.

The date currently stated as the deadline for rehiring is June 30, 2020.


What is the wage basis for an LLC owner where the LLC has multiple members?

Their guarantee is a wage equivalent. This should be booked as an operating expense and can ultimately be found on a K1.


What is the wage limit for a sole proprietor or a single member LLC?

It’s the sum of the Schedule C net profit, which carries to the Schedule 1, which in turn supports the Form 1040, plus the sum of their staff compensation calculated as above.


What’s the “forgivable amount” of a PPP loan?

If a company gets a PPP loan and uses it for the purposes it was designed for, the amount can be 100% forgiven — and tax free. The loan is intended to be used to sustain a business for an 8-week period. The proceeds should be used at least 75% for payroll. The other 25% should be used for rent and utilities. It can also be used for mortgage and lease payments, but only the interest portion will be forgivable.

Specifically, the loan should not be used to refinance other debt!

If you use the PPP loan for expenses in other than the 75/25% ratio, the amount that is not forgiven will be rolled into an SBA 2-year loan at 1%. We urge clients to focus on that, rather than make rash spending decisions in order to get rid of the PPP loan capital. If you use the loan for refinancing or some other disallowed purpose, they’ll make you repay it. (Don’t buy a Harley or refinance your residence, and you’ll be fine…)


My payroll provider gave me a PPP calculation of the loan basis compensation. Can I use that?

NO. Do the math. We have seen payroll companies provide calculations that are incorrect, and the largest processors disagree on how to calculate. Be safe and use payroll figures that tie to your gross payroll as reported on your payroll returns, so it’s easy to prove out figures.


How will the 8-week “forgiveness” work?

After the PPP funds land in the account, the clock starts ticking. Track these expenses. Some banks are requiring a separate account be used for clarity. At the end of that 8-week period, the borrower has to provide a reconciliation showing use of funds. Guidance is expected on exact documentation requirements. Expect it to include payroll journals and payroll tax returns.


I have a property management company and other real estate entities. Do I qualify for the PPP?

Generally, yes. Real estate management and other service companies in this industry (cleaning, security, brokerages, etc.) with payroll qualify as borrowers. Real estate entities with passive income are not eligible. But entities with active income, and payroll expenses, are eligible. Most property management companies have non-passive income and staff, so they’ll qualify.

Other real estate industry entities are specifically excluded and are not eligible, including:

  • Businesses engaged in subdividing real estate
  • Businesses that are engaged in owning or purchasing real estate and leasing it for any purpose
  • Businesses that lease land for cell phone towers
  • Businesses that enter into a management agreement with a third party that gives the management company sole discretion to manage the operations
  • Apartment buildings

Are 1099s included in my payroll calculations?

NO! A 1099 recipient is a business owner, not an employee. They can apply for their own PPP.


Can I apply for a PPP even if I have adequate cash reserves and don’t really need it?

Technically, you may qualify. However, you must attest that the COVID-19 pandemic negatively impacted your business and that this loan is necessary to support ongoing business operations due to economic uncertainty. Making a false statement here is a punishable legal offense!


I asked my payroll provider to defer my portion of the Social Security tax (Section 2302 of the CARES Act). They told me I couldn’t apply for the PPP if I did that. Is that true?

It is our opinion that AFTER you have had a PPP loan forgiven, you absolutely cannot also defer your Social Security taxes. At this time, no one has a PPP loan, never mind has had one (past tense) forgiven.


What does affiliation mean in terms of prohibiting eligibility in the PPP?

This is the SBA way of limiting the PPP to small employers with fewer than 500 staff. This targets companies who might be a part of a bigger overall group, where that group may be seen as taking advantage of more than one PPP loan. Borrowers must attest that they are not applying for more than one PPP. If a borrower has other entities, they may need to be included in one application as a bundle (and satisfy the employee count).

For regulatory updates and other information on running your business through disruption, visit our COVID-19 Resource Center.

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