Will Your Bank Reduce Your PPP Loan by 30%?
We are starting to see some of the documentation that banks require to apply for the Paycheck Protection Program (PPP) loans. As expected some of the documentation may lead you to qualify for a much lower number than is allowed by the law and can be substantial.
As an example, we have reviewed a worksheet provided by a Top 10 bank based in the Eastern/Southeastern part of the US. The bank requires a borrower to fill out a spreadsheet listing various payroll costs such as payroll, group insurance, retirement pay and state and local taxes.
The spreadsheet then requires the borrower to subtract the following Mandatory Exclusions:
- Compensation in excess of $100,000 (we agree),
- Taxes imposed or withheld under chapters 21, 22 and 24 of the Internal Revenue Code during the covered period (we will discuss this further below),
- Any compensation of an employee whose principal residence is outside the US (we agree and this applies to H2A wages),
- Qualified Sick Leave and Family Leave wages (correct, but likely applies to no one who is using 2019 payroll data since these wages only started in 2020).
Now why is the second item an issue. First, the worksheet does not explain what these taxes are. Essentially, they are FICA and Medicare taxes (Chapter 21), Railroad equivalent FICA and Medicare taxes (Chapter 22) and federal income tax withholding (Chapter 24).
In their worksheet, they are requiring everyone to add up all of these taxes and the subtract it from their payroll costs during the “covered period”. The key is the term “covered period”. This period starts on February 15, 2020 and ends on June 30, 2020. This calculation will not apply for any borrower who is using 2019 wage data in applying for a loan (which may be 90% of the borrowers).
The issue is that most borrowers will not know the covered period dates and will add up all of their FICA and Medicare taxes (both employer and employee portions) and federal income tax withholding and place that on the worksheet and thus reduce their loan proceeds by 30% or more.
How do we arrive at that number. Well, the FICA and Medicare percentages for most employees is a combined 15.3% and we would guess the average federal income tax withholding rate is around 15%. This equals 30.3%.
If you see a worksheet that is similar to this, make sure to understand that you do not reduce your payroll costs by any of these taxes if you are using 2019 payroll data. Even if you are using 2020 data in your calculations, there is no reduction for any federal taxes before February 15, 2020 (and we believe even none after that date).
We believe that this is only used in calculating the amount of loan forgiveness during the 8 week period after you receive the loan and is designed to not allow you to use any of those costs in arriving at the total payroll costs that you incurred during that 8 week period.
SBA really needs to provide additional clarity on what this means. For example, it states to exclude all of these taxes from February 15 to June 30, 2020 which is a 15 week period, yet you only add up costs for 8 weeks. In some cases, these taxes during the 15 week period will exceed your total payroll costs during you 8 week period. That makes no sense.
Plus, if you receive a loan on June 30, 2020, then you have none of these taxes to exclude or subtract.
The word exclude does not normally mean subtract. It means you do not use these costs in arriving at eligible amounts. However, the wording in the law is a little fuzzy the way it was written and we really need some clarity now on what it means.
The bottom line – Do not reduce your loan amount by these taxes when applying for the loan.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Thanks Paul for clarification – much appreciated! Guess who will be resubmitting a new app today?
Including FICA, Medicare and federal taxes makes a big difference! Thank you.