The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program (PPP), the initiative provides 100% federally guaranteed loans to small businesses. Importantly, these loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward. There are no personal guarantees, and no fees are charged to the applicant.

Before you apply for a PPP loan, consider the following three items and discuss with your tax advisor.

Calculate Average Monthly Payroll with Gross Payroll Data

The current guidance does not instruct applicants to exclude federal withholding, so it is recommended that when calculating the Average Monthly Payroll cost for a PPP loan, you use the Gross Payroll data from 2019. This number would be in lieu of Net Payroll which is defined as Gross Payroll less federal withholding and employee and employer FICA.

The law requires the calculation to be made on the 12 months prior to the loan, which is 4/1/19 – 3/31/20. However, most banks are using calendar year with end date of 12/31/19. Make sure to check with your bank and their specific requirements, because it varies by bank.

How Can the PPP Loan Amount be Used?

The PPP loan amount is meant to fund the next eight weeks of payroll, including benefits through June 30, 2020. A maximum of 25% can be used for other costs, such as interest on mortgage obligations or existing debt obligations, rent, and utilities. The loan amounts will be forgiven if the employee compensation levels are generally maintained and the total number of employees generally doesn’t decrease. The payroll costs are capped at $100,000 on an annualized basis for each employee.

Payroll costs include: salary, wages, commissions, or tips; employee benefits including vacation time, sick leave and family medical leave; allowance for separation or dismissal; required payments for group health care benefits including insurance premiums;  retirement benefit payments; state and local taxes; and for a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee. If you are using 2019 data, we suggest that you look at each employee’s Medicare wages as a reference for the “payroll” portion and then add the healthcare and retirement plan benefits.

Note, the forgiven portion of the loans does not cover payroll taxes withheld, including the employer match on Social Security and Medicare and Federal Income Tax withheld. Some banks are allowing the loans on gross payroll (i.e. not reducing it by the payroll taxes), while other banks are requiring the payroll to be reduced by the payroll taxes since they do not want any greater loan than the forgiven amount.

Weighing Financial Options

Borrowers may apply for PPP Loans and other SBA Financial assistance including Economic Injury Disaster Loans (EDILs), 7 (a) loans and 504 loans and receive investment capital from Small Business Investment Corporations (SBIC) with the intent that these other loans are not being used to cover payroll costs during the eight week period following the PPP Loan funding. Finding the right financial option for you and your business is a process of accumulating your predicted operating costs and comparing relative financial costs and benefits across these programs.

While the PPP loan allows for great opportunity for small businesses, borrowers must also be mindful on the front end of how much money they receive to avoid any penalties on the back end. Many of these factors will depend on your bank’s repayment structure and what they allow. Applicants are eligible to apply for this loan until June 30, 2020. However, it is a first come, first serve basis, so you will want to act promptly if this is the right fit for you.

Small businesses and sole proprietorships can now apply for and receive these loans to cover their payroll and certain other expenses through existing SBA lenders. However, the process is complex. Consult your bank and tax advisor to navigate these issues and make the most of these opportunities.