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{Updated 4/10/2020 for information on seasonal workers, banker reliance on borrower documents, self-employed borrowers (filing 1040 C or F) and payroll caps per employee.}

{NOTE: I will not continue to update this as the PPP loan guidance changes. The framework I proposed makes sense, and the SBA and federal government has clarified things as we go along. For the most recent information, please go to https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.}

The Paycheck Protection Program was designed to roll out quickly, not to be clear and easy to implement. Understandable. The coronavirus pandemic requires quick action as we shut down our economy for the overriding health emergency.

That said, lenders throughout the country are struggling to meet the time-compression of approving loans. And lending and credit management are creating the guidelines in the absence of clear guidance from the SBA.

That is the case at the time of this writing, and as you know, by the time you read this circumstances may have changed in this fast-moving challenge.

How to determine the loan amount

Lenders are looking for a clear approach, and it happens that unless your bank or credit union simply chooses a guideline, at the time I write this, there is not consistency across the board. Again, understandable.

To explain why, I have taken a business’ information from their 2018 1120S, their 2019 1120S (not yet required to be filed so perhaps not available yet). I also through in info from the Q4 2019 941 and their Q1 2020 941.

The four answers I got for the payroll costs, and the resultant loan amount for two of them are:

Form Period  Costs Monthly Loan Amount
2018 1120S Annual 124,451         10,371            25,927
2019 1120S Annual      62,918           5,243            13,108
2019 Q4 941 Quarterly      12,106           4,035  
2020 Q1 941 Quarterly      19,916           6,639  

I did not calculate the loan amount for the 941’s because they are quarterly only. But you can see from them how this business’ payroll costs are changing.

While the business is required to use 12 months payroll, that could be calendar year 2019 or, potentially, April 1, 2019 through March 30, 2020. And there are exceptions for seasonal businesses and those who were in business February 15, 2020 but had not been in business for the full year.

What documentation does the SBA require?

The Interim Final Rule published to the Treasury’s website on April 2, 2020 (the “Interim Final Rule”) indicates that the SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness.9 Lenders must comply with the applicable lender obligations set forth in the Interim Final Rule but lenders will be held harmless for borrowers’ failure to comply with program criteria.

I am not suggesting that you be careless, but the speed of the rollout of the program has led the SBA to give you some latitude about verifying that the borrower is being honest. Does that make you nervous or does that give you comfort?

What about the 8 weeks?

Whether or not the loan will be forgiven is based on how they spend the funds in the 8 weeks after some date. As I write I am assuming it is when the loan closes.

So, if the loan is made on May 1, 8 weeks later is June 26th. Assuming the eligible items that will result in loan forgiveness (including payroll, rent and mortgage payments) all are paid on the first of the month, this borrower will get two months of all those payments done in 8 weeks.

What if your loan is May 2nd? Then you pick up the June 1st payments but not the July 1st payments.

Or what if they pay on the last day of the month? They would have the May 30th payments, but not the end of June.

So the choice of 8 weeks will require our borrowers to pay attention and be sure to get two months of eligible payments in that window. Perhaps you can do them a service and make sure they understand the implication of timing.

What about owner comp?

What if you base the loan on a time when my payroll is up because of seasonality or other issues? And what if payroll to other than the officers is now not as high during the 8 weeks as it was in your look back period? And what if I would like to maximize the forgiveness of the loan?

What is to stop me from paying a bonus to the officers to make sure I maximize the loan forgiveness? I cannot exceed $100,000 compensation to any individual, but I am not aware of anything in the PPP loan that allows you to consider who got the wages, as long as none exceed $100,000.

Don’t forget the 1040 owner

The 1040 owner will not be included in wages, in the 1040 C or F or on a Form 940 or 941. You are allowed to use their self-employed income, which is the profit at the bottom of Schedule C or F. I have no idea how you then prove that you paid those amounts in the 8 week time frame, since it is likely the owner who needs the PPP loan may be facing a loss in the next 8 weeks.

What if the company really does not need the loan?

Well, this is a tough one. We really do not know how long and how deep the pandemic recession will be. We cannot know the impact of easing social distancing on a resurgence of the coronavirus causing covid-19. It is understandable that every business is considering how to conserve cash and reduce expenses.

Remember, though, the first C of Credit? Character. Given that these loans seem to be in short supply, is it right of me to maximize my loan forgiveness or even take out the loan if another business might need it more?

These are questions that your business borrowers are asking.

  • How do I plan in such an uncertain time?
  • What should I do to preserve cash and minimize expenses?
  • Can I hold out for a recovery steep enough that I can keep paying my employees?
  • Should I apply for the PPP loan?
  • Should I maximize the amount of the loan?
  • Should I maximize the amount that will be forgiven?

I have decided that my business will not apply for the loan, even though it could get one. And it could have much of it forgiven. It is taxpayer dollars that will forgive the loan, and we already have a major challenge recovering from recession. And I do not want the limit on the total available loans to cause another business that truly needs it to miss out. But if I am wrong about the impact of the recession on my business and family finances, I may regret that decision later.

Looking for answers?

I do not have them. But I can explain why there is such confusion about what numbers to use, some of the ways you can document your choices, and some of the challenges your borrowers are facing.

Resources for you

I have brought together on one page some of the resources that will help you up your game as we deal with the credit disruption caused by this pandemic. https://www.lendersonlinetraining.com/covid-19-pandemic-resources-for-credit-professionals/

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Linda Keith, CPA

Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis.
She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans.
Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.