Articles

The Payroll Plan

There are two trillion dollars out there. How are you going to get your share?

By Rick McDonald

Well if you are in business or run a 501(c)(3), the first place to look is the Paycheck Protection Program whether you have been cutting paychecks or not.


Why A Lot Is Not Known


The Paycheck Protection Program is an extension of the Small Business Administration 7(a) program. SBA needs to make up the exact rules and then the rules have to be implemented by the 1,800 banks that are part of the program. For you to participate you need to contact a bank.


If you have an existing banking relationship, you should contact that bank first thing. Otherwise, contact us and we can get the ball rolling for you.


With that caveat, I will dive a little deeper into the legislation in this post.


Qualification


Besides promising that you are only going to take out one loan under the Payroll Protection Program, you have to certify two things. One is that you intend to use the money to retain workers, maintain payroll or make mortgage lease or utility payments.


So if you have the whole COVID-19 situation figured out so you are perfectly sure how you will get through the crisis without borrowing any money, you don’t qualify. And everybody else in the country wants to be you.


Generally, you can’t have more than 500 employees, but I figure if you have more than a couple of hundred, you have one or two of them studying the legislation for you. There are exceptions.


The Sweet Terms


No collateral or personal guarantee is required. Interest is no more than 4% and repayment, if required, can be over a period as long as ten years. You don’t have to show that you can’t borrow the money elsewhere.


Three Sets Of Rules To Consider


There are three important things that people want to know about this program. How much can you borrow? How are you supposed to spend the money? And how much of the loan will be forgiven?


It can be somewhat confusing because each set of rules uses some of the same elements, but they are different in how they are combined.


Payroll Costs - The Most Important Definition


“Payroll costs” is the most important concept and thankfully is defined the same way throughout.


“Payroll costs” is defined very broadly and includes salary, wage, commission, or similar compensation, payment of cash tip or equivalent, payment for vacation, parental, family, medical, or sick leave, allowance for dismissal or separation, payment required for the provisions of group health care benefits, including insurance premiums, payment of any retirement benefit, and payment of State or local tax assessed on the compensation of employees.


And there is one more thing included in payroll costs:

“the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period”


It seems you include the people you are paying as independent contractors and if you are a sole proprietor whatever your schedule C profit was (up to $100,000) and something similar for partnerships.


Including your Schedule C profit would put you in a similar position (slightly better maybe) as an S corporation owner who paid himself a reasonable salary. An S corporation owner that did not pay himself salary might be worse off.


Excluded from payroll costs are amounts attributable to payroll over $100,000 and amounts for which you are getting credit under the Families First Coronavirus Response Act.


How Much Can You Borrow?


This is a little confusing. There are things that you can use the loan for besides “payroll costs”, but the maximum loan computation is based solely on “payroll costs”. It is 2.5 times the average monthly amount from “ the 1-year period before the date on which the loan is made” you are seasonal. If you are seasonal it is the amount you paid in 2019 for the 12 week period beginning February 15, 2019 or at your election from March 1st to June 30th.


And there is a $10,000,000 limit.


What Can You Use The Loan For?


Besides payroll costs you can use the loan funds for:


“(II) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;


“(III) employee salaries, commissions, or similar compensations;


“(IV) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);


“(V) rent (including rent under a lease agreement);


“(VI) utilities; and


“(VII) interest on any other debt obligations that were incurred before the covered period.


We are recommending that you seriously consider opening an account where you deposit the loan proceeds and using that account to pay permitted expenses. That would give you a very easy audit trail.


How Much Can Be Forgiven?


This can be somewhat ambiguous, as the forgiveness section uses the term “covered period”, but defines it differently than the loan amount section. It is the eight-week period beginning with the origination of the loan.


Here is the actual language:


“Forgiveness.—An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:


(1) Payroll costs.


(2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).


(3) Any payment on any covered rent obligation.


(4) Any covered utility payment.”


This is one of the reasons we recommend a segregated account and payments drawn from there. The trail will be much easier, later.


But then there is a reduction in the forgiveness amount based on a headcount fraction.


“(A) IN GENERAL.—The amount of loan forgiveness under this section shall be reduced, but not increased, by multiplying the amount described in subsection


(b) by the quotient obtained by dividing—


(i) the average number of full-time equivalent employees per month employed by the eligible recipient during the covered period; by


(ii) (I) at the election of the borrower—


(aa) the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019; or


(bb) the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020; or


(II) in the case of an eligible recipient that is a seasonal employer, as determined by the Administrator, the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019.


(B) CALCULATION OF AVERAGE NUMBER OF EMPLOYEES.—For purposes of subparagraph (A), the average number of full-time equivalent employees shall be determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.”


There is also a carve-back in the forgiveness amount if there is a reduction in pay of more than 25% of any individual full-time employee.


These reductions, however, are not implemented if you are fully staffed up by June 30.


All Might Not Be Forgiven


Even if you spend all the money on permitted expenses, the difference in the definition of “covered period” might mean that you won’t have the full amount forgiven. And then there is that headcount problem.


One of the big unknowns is how quickly the banks will be able to dish out the money. Still the loan is a good deal even if you have to pay some of it back.


Here’s an Example:


Consider a sole proprietor consultant named Tom, who does not pay anybody else and has negligible expenses. Tom had Schedule C income of $96,000 last year. It looks like Tom can borrow $20,000, but how is the forgiveness amount determined? Is it Tom’s Schedule C profit for the year?


What if Tom has a loss?


Heads Up To S Corp Owners


Consider Tom’s competitor Mike who runs the practice through an S corporation. Can Mike amp up the loan by paying a salary now? Presumably, it is easy for Mike to qualify for forgiveness by issuing a paycheck to, you know, Mike. But if Mike has been stingy with the social security taxes and kept their salary very low, there seems likely a problem.


“There are two trillion dollars. How do you get yours?”

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