On April 6, the Small Business Administration (SBA), in conjunction with the Treasury, issued some additional guidance about the Paycheck Protection Program (PPP) loan process. The guidance is in the form of a Frequently Asked Questions document, which you can read in its entirety here.

We wanted to alert you to three of the FAQs in particular, as these represent areas of frequent confusion and speculation among many of the businesses applying for PPP loans.

Does the $100,000 compensation limit include all employee benefits?

The answer the SBA provided to this question is no. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits such as employer contributions to retirement plans and group health care benefits.

What time period should borrowers use to determine their average payroll costs when calculating their maximum loan amount?

The SBA’s response is that the borrower can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. Either time period is acceptable.

How should a borrower account for federal taxes when determining payroll costs?

The SBA states that under the CARES Act, payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld, such as the employee’s and employer’s shares of FICA and required income tax withholding. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax.

For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.

Other questions in the PPP FAQs provide additional clarity around the 500 employee limit, the lender’s responsibility in reviewing the borrower’s documentation, affiliation rules, seasonal businesses, independent contractors, and more.

We are committed to helping you as you continue to navigate the Paycheck Protection Program loan application process. If you need any assistance, please contact us. We also continue to update our COVID-19 Resource Center, which you can access here. If you have any questions about these or any other matters, please do not hesitate to contact your Kreischer Miller relationship professional or any member of our team.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.