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Payroll Protection Program (PPP) Loan Documentation

With all the questions surrounding the PPP loan, I recently had an opportunity to email a client and go in-depth on the documentation required for the application. I think this information can be useful to any business owner trying to gain a better understanding:

I hope all is well and you are staying safe during this COVID-19 pandemic. Thank you for allowing us the opportunity to discuss some matters regarding loan documentation for small business owners applying for Paycheck Protection Program (PPP) loans.

I think the loan program was a great example of creative approaches to help small business have access to affordable funding as a form of economic stimulus by keeping their employees on the payroll. I have assisted and consulted several clients that are small business owners along with some not-for-profits in and around the Buffalo Niagara Region all of which have obtained PPP loans.

The application process is pretty straight forward provided all required loan documentation was available. I would start by collecting all 4 quarterly Federal Forms 941 for calendar year 2019 along with the 1st quarter Form 941 for calendar year 2020. These forms report wages paid by quarter. I would also consider including Federal Form W-3 for 2019, which details and should agree with the total wages reported on the previous quarterly Federal Forms 941. The purpose for this is to substantiate wages paid to employees and are a factor in the legible amount of the loan.

If a business or not-for-profit has independent contractors in place rather than employees and documents payments through a Federal Form 1099 MISC, they should collect all such federal 1099 forms paid in 2019 along with their Federal Form 1096 filing for 2019 to include as the basis to calculate the aggregate payroll costs for the past 12 months for employees whose principal place of business is within the United States. If a sole proprietor were to apply for a PPP loan, the best source of income data would be their Federal Schedule C filing pertaining to the Federal Form 1040 filing.

Once that financial ‘payroll’ data has been collected you must aggregate any compensation paid to an employee or independent contractor/sole proprietor in excess of $100,000 paid over the last 12 months as these are a subtraction from the payroll calculation for eligibility amounts. After compiling the total eligible payroll factor, you would need to divide this amount by 12 for a monthly average and multiple this average by 2.5 to determine the eligible PPP loan amount that could be requested.

Also, it is especially important to substantiate the business applying for the PPP loan. This would include a proper taxpayer identification number, address of the business, type of business industry, employee headcount and ownership of the business. Ownership could be a single owner or multiple partners and a drivers’ license is needed to confirm and validate identity. As a side note, multiple partners (those with greater than 20% ownership) are of particular consideration.

Lastly, make sure a bank account is included on the application so money can be directly deposited into an account. We hope this helps in answering some PPP calculations and loan documentation topics. Please advise any questions that you may have and thanks again for the opportunity to share our views and thoughts on this subject matter.

In a subsequent email, I explained my interpretation of the $100,000 cap components:

My interpretation of the definition of the $100,000 cap or excluded from the payroll costs aggregator is strictly compensation, health care and retirement benefits. I would define compensation to be these components: salary, wages, overtime wages, commissions, tips, paid time off and bonus pay. Stock options could also be an ingredient in the definition of compensation but I would not think this would be applicable as the PPP was initiated for small businesses.

The payment and not the accrual of health care benefits including insurance premiums along with the payment/funding of retirement benefits would also be applicable within this calculation of the $100,000 cap excluded. I have applied my interpretation for compensation for the eligible total amount and the cap excluded to a combination of my clients, as well as some not-for-profits that reached out to me. Fourteen of these organizations have received PPP funding prior to the fund being exhausted.

I believe and have heard that some banks might be taking an alternate approach and defining payroll costs to include not only the above items listed but also FICA taxes, however this is a tax and not what I would define as compensation paid to an employee. The best bet is to check with your bank to make sure what their interpretation of payroll costs is under their lending calculations.

Furthermore, I cannot stress enough the importance of small businesses having up to date bookkeeping and accounting records. It is critical for not only timely financial reporting, income tax matters and banking processes but when opportunities for assistance arise a small business owner should not have to stress and scramble to complete such vital financial processes.

If you have any questions regarding the points mentioned above, or assistance preparing the PPP loan documentation, please don’t hesitate to reach out!

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