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Many small business owners complete their Paycheck Protection Program (PPP) loan applications and run into common questions and hurdles. The immediate question currently revolves around two issues: First, how do I work with my bank or find a bank to submit it to? And secondly, how to correctly calculate the loan amount on the application? If you are unfamiliar with the PPP loan and how it can be used and canceled, please refer to my previous article here.
What if my bank still hasn’t launched its PPP application?
Most of the big banks have not yet started their PPP loan application, and it seems that almost all the big banks are planning to do this process entirely online and initially they will only work with their existing banking customers. . As of April 4, Bank of America is the only major bank that has accepted and processed PPP applications and said it took 85,000 applications on Friday alone, including loans totaling $22 billion. They only take applications from current clients.
Smaller banks, often called community banks, have been the most active in submitting applications, according to Treasury Secretary Steve Mnuchin. Most banks, large and small, work with their existing business banking customers first. This puts many businesses that only use one bank at the mercy of that one bank. For example, if you’re dealing with Wells Fargo, which hasn’t accepted applications yet, it’s not like you can just switch to Bank of America now and start applying for their loan.
We have seen many of our corporate clients of our law firm go to community banks or credit unions instead where they currently do not bank and some have found success through relationships and network contracts, but most have heard the same bad news that even those small institutions are currently only working with their existing clients. It’s complicated there, and many business owners work through every contact to find an investment banker who can submit their PPP application.
Related: 8 Ways Business Owners Can Take Advantage of the Federal Stimulus Program
If you have researched all of your bank contacts and your bank has not yet initiated their PPP application, you may have no choice but to wait for your bank to receive their application and process it. It’s frustrating, because many small business owners are already in financial survival mode and fear that the $350 billion Congress-funded PPP loans will run out.
Are PPP loans first come, first served?
In their final interim rule, the The SBA answered many questions about the PPP loan with detailed answers and examples. One question that the April 4 final rule and guidance answered was surprisingly short: “Is PPP first come, first served?” Yes.” The reality of limited funds is what drives many small business owners to scramble and beg their banks to get their apps up and running. There is a possible scenario that Bank of America and community banks could claim the full $350 billion available as other big banks continue to delay getting their apps up and running Some of the biggest banks and their small business customers could be left out if they are the last to put their applications in use.
Secretary Mnuchin was questioned by reporters on whether the $350 billion was enough and replied that if the funds ran out, they would go back to Congress to ask for more. President Trump echoed that message and said if funds were to run out, they would “immediately” ask Congress for more. The initiative has bipartisan support, but it’s troubling for many small business owners who are already stressed about having to rely on a second bill and a measure of finance to allow them to take advantage of this program. Who knows what changes or new restrictions may be included and what delays may occur?
I’m waiting for my bank to start. What do I do now?
If you are still waiting for your bank to implement their application, I recommend that you review and complete the SBA PPP Loan Application, even if your bank uses an online process and application. Going through the application now will require you to gather your records and information to correctly answer and calculate the questions on the application. Although many of these questions are straightforward, such as your business name and Federal Employer Identification Number, many businesses have stumbled upon calculating the loan amount. And if you haven’t already, you’ll also want to gather your company’s payroll records, such as your payroll reports and IRS 941 payroll filings.
How to calculate the loan amount?
The loan amount seems simple, but finding the correct monthly average payroll is confusing. The loan amount is determined by taking your company’s average monthly payroll over the previous 12-month period and multiplying it by 2.5. In the end, the amount you will get will be 2.5 times your average monthly payroll. As we help our law firm clients and answer questions through webinars for entrepreneurs, we’ve identified a few common issues that seem to be tripping up candidates. Let’s review some of these common questions.
- My bank told me to calculate my average payroll based on my 2019 payroll (from January 1, 2019 to December 31, 2019) and not the previous 12 months (from April 1, 2019 to March 31, 2020). Is it correct ? The CARES Act specifically states that the previous 12-month period should be used, but we find that most banks are using 2019 annual figures for payroll costs because first quarter 2020 payroll deposits (Form 941) are not available. not currently owed to the IRS, and there is no government form to verify payroll. Typically you’re going to stick to your bank’s parameters to answer this question, so if they’re asking for 2019, I’d provide and use 2019. If your payroll from April 1, 2019 to March 31, 2020 is significantly higher, you could try to base your loan on these amounts, but you may need to file your first quarter 941 payroll report with the IRS now so that you have a record of this amount in your loan application. At this time, we are in limbo between who made Q1 2020 payroll, and therefore banks will have some inconsistency here. We expect the time frame banks will use will change in May once the Q1 2020 941 deadline passes. It will be a more precise number.
- What is “payroll” and does it include withheld wages for 401(k) or health benefits? Salary costs include salary, wages, commissions and tips, as well as vacation, medical, parental and sickness expenses. It also includes payment for group health care benefits, including paid insurance premiums. These amounts are simple. Retirement benefits seem to trip up many small businesses that offer a 401(k) or similar company retirement plan.
- Do personnel costs include employer contributions? Yes, they should include employer contributions, as these amounts are considered “remuneration in respect of employees”.
- But what about employee contributions? Yes, those amounts should be included as well, and depending on what records and numbers you rely on, you could mess this one up. For example, many small business owners have relied on their 941 payroll reports over the previous 12 months, as these are typically submitted with the PPP loan application to document payroll costs. However, if you take Box 2 of Form 941, which is wages paid, that amount does not include traditional retirement plan contributions made to a 401(k) plan or other profit-sharing plans. Therefore, when relying on your 941 forms, you will need to add in traditional retirement plan contributions that employees made under 401(k) or other plans. This is good news though, as it increases your payroll costs and will increase the total loan amount. There is just one caveat here: Roth contributions or other after-tax contributions made by an employee, for example to a Roth 401(k), are not tax deductible and are already included in Form 941 box 2. wages paid. Therefore, you will not add employee Roth contributions to payroll, as these amounts are already listed in the salary number in Box 2 of Form 941.
- What is included in social charges? The other common error in the calculation of average salary costs relates to payroll taxes. The CARES Act and SBA guidelines make it clear that payroll costs include state and local payroll taxes paid (for example, state unemployment taxes), but do not include the employer-paid portion of federal payroll taxes known as FICA (e.g. Social Security and Medicare payroll taxes).
Related: How to get a PPP loan and get it forgiven
Submitting your PPP loan application is stressful, and I hope the big banks, who are expecting millions of small business customers, will have their applications in days. If you are currently waiting for your bank, your best option is to reach out to your network and contacts for an investment banker whose bank is accepting applications. There’s really nothing you can do but be ready for when your bank starts accepting applications. I also highly recommend that you go through the PPP SBA loan application by doing your payroll calculations and gathering supporting payroll records so that you are prepared and not rushed when the PPP loan application of your bank will be put online. And good luck.