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  • Writer's pictureNancy C. Prager

Paycheck Protection Program Goes Live TODAY

Time is of the essence. Earlier this week I shared an overview of the benefits in the three economic stimulus packages that the United States government has adopted thus far in response to Covid-19. I am hopeful you all have reviewed it, and will review this message to the end.

Some of you may have decided that unemployment is the best option if you are independent contractor. Many states are struggling to issue guidance on how unemployment insurance will accommodate freelancers. However, you should consult your state’s department of labor for the process to obtain benefits.

As I mentioned in the Overview, the Paycheck Protection Program (the “PPP”) is a vital option for businesses with payrolls. Contrary to what it may seem the program is available to any business with less than 500 employees, including sole proprietorships. Yes, one person.

I didn’t delve into the PPP in the overview because the regulations had not been issued. The PPP is based on the existing SBA 7(a) loan program. It allows a business to borrow 2.5 times the amount of “payroll.” The SBA has now issued the regulations

For clients and friends who pay employees (W-2) or independent contractors (and actually issue 1099s) it will be easier to establish how much your loan should be based on “payroll.”. Unfortunately for many sole proprietorships or independent contractors, there are not such clear records. However the newly released regulations for the program provides:

“You must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099 MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.”

The regulations further define payroll for an employer as:

  • compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);

  • payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including

  • insurance premiums, and retirement;

  • payment of state and local taxes assessed on compensation of employees;

For an independent contractor or sole proprietor, payroll consists of wage, commissions, income, or net earnings from self-employment or similar compensation.

It is my opinion (and only my opinion) that this means you may have tosubmit your most recent tax return as evidence of income and expenses where you do not have payroll data.

The Draft Guidance suggests that the easiest way to calculate how much you can borrow under the PPP is as follows:

Step 1: Aggregate payroll costs from the last twelve months for employees whose principal place of residence is the United States.

Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.

Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).

Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.

Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).

Note: Prager Law hopes that everybody who qualified applied for the EIDL as suggested in the Overview. Prager Law did but the funds haven’t arrived. Being the optimist, Nancy presumes it’s taking more than the reported 3 days to process. If you haven’t applied yet and you are not taking unemployment, please file.

Funds borrowed under the PPP are excusable to the degree that they are used for the following items:

- documented payroll costs,

-- covered mortgage interest payments,

-- covered rent payments, and

--covered utilities.

Recall, however, that the funds are excusable only if you retain employees at a comparable salary level prior to the crisis. You will have to submit an application to your lending institution that includes documentation verifying the number of employees on payroll and their compensation levels, , along with all relevant documents showing payments on mortgage interest and utility payments, in order to have the loan portion excused. Therefore, know that any funds you receive need to be used as expected to receive the forgiveness.

Significantly, the Regulations provide that receiving funds from the PPP will be on a first come first serve basis! Therefore DO NOT DAWDLE. For your convenience I have attached the proposed application from the SBA. Even if you decide not to take the funds, get an application in to a participating bank or lending institution. Prager Law can refer you to a bank if you do not already have a banking relationship in place. However, ideally you have one.

P.S. NOTE: The SBA has limited the ability to forgive the loan for non-payroll expenses to 25% of the total amount of the loan made that can be excused. This is contrary to the act, and the regulations acknowledge as much. If your mortgage interest payments exceed your payroll payments be advised and act accordingly with your bank.

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