Many of our small-medium sized employers are applying for SBA loans, pursuant to the CARES Act enacted into law on March 27, 2020. As AccuPay is on the “front lines” for providing payroll reports and general education to employers as they apply for the CARES Act loans, we have obviously seen plenty of lists of documents required by many different lenders as they open up their online portals to accept small employer loan applications. The common denominator of all the various lenders’ loan document requests is that they all want employers to complete SBA Form 2483—which is the actual loan application itself, requesting an employer’s “average monthly payroll costs”, which when multiplied by 250% generates the eligible SBA loan amount.
What is “not uniform” at all in the thousands of SBA lenders (our clients bank with perhaps 100 different lenders, and some SBA lenders are not banks, but SBA loan brokers/consultants) is the lists of documents each separate SBA lender is asking for in their loan application packages. Many banks did not get their loan portals open at all on “kickoff Friday”, to include most of the large US banks—-Bank of America apparently processed a large number of loans Friday, and I saw the CEO of a NY/NJ bank called Connect One interviewed late Friday on a financial news network, since they apparently were the first bank to submit applications to the SBA—–our understanding is $ 2 Billion worth of SBA loans submitted by a 350 employee bank—hats off!!—-I looked at their website/SBA loan portal last Friday late and found that I could literally “sign on” to their portal and complete the process with figures and copies of 941 IRS tax returns for 2019 (I did not apply, just “signed in” to their SBA loan portal!) I can see how they processed that volume of SBA loans in a day—and likely earned about $75 Million dollars in loan processing fees while helping those small employers getting their data submitted—–kudos for being “nimble”!!
NOTE—-SO WE CAN PAY INFORMATION FORWARD TO OUR CLIENTS, ANYBODY WHO HAS HAD A GREAT EXPERIENCE WITH A SBA BANK/LENDER, CAN YOU EMAIL ME AT larry@accupay.com AND GIVE ME THE NAME OF THE SBA LENDER AND YOUR CONTACT THERE?——we would like to have a list of excellent, easy to deal with, SBA lenders who we can provide as referrals to others who may still be struggling——although generally your business banker is preferred since many/most banks are giving priority to their existing customers for SBA loan submissions.
LINKS TO IMPORTANT SBA DOCUMENTS ABOUT THE SBA PAYROLL PROTECTION PROGRAM LOANS
SBA Form 2483, with accompanying instructions, shows the information needed to complete your loan application—-each lender will have you complete this document, which asks for your “monthly average payroll costs” and “number of employees”—the instructions to Form 2483 are not difficult to read.
A 31 page SBA document which provides lenders and borrowers with guidance as to how to complete the loan application, defines “payroll costs”, and advises lenders about the “underwriting/loan process” requirements which lenders need to submit the loans to the SBA for funding.
We are also linking back to AccuPay’s PayDay from just last Wednesday, which we titled SBA Loans–ABC’s. Our intent in this previous PayDay was to explain, in plain English, the SBA Paycheck Protection Program loans’ provisions.
HOW DOES THE SBA DEFINE YOUR PAYROLL COSTS? WHAT IS INCLUDED?
The PPP loans revolve 100% around a small-medium sized employer’s “average monthly payroll costs”—–Once you have calculated your average monthly payroll costs, you simply multiply that figure by 2 1/2 X and you have the permitted loan amount. The intention of this SBA loan program is for employers to spend at least 75% of the loan proceeds on “payroll costs” with no more than 25% spent on rent, interest, utilities.
Essentially, the concept is to loan 10 weeks worth of pre-crisis average payroll costs to pay for 8 weeks of payroll with 2 weeks of payroll costs being used for rent, interest, utilities expenses. Employers who spend most of the SBA loan proceeds on retaining, rehiring and hiring employees back to their 2019 level of employees and wages, both as to the number of employees and their pay rates, will receive much or all of their SBA loan forgiven (as non-taxable income, per the law). The intention is to help employers ramp their businesses back up to similar employee count and wage levels during the 8 weeks after receiving the loan to the same 8 week period of 2019.
Employers can use SBA money to ramp back up during the post loan 8 week period and “be ready” to go full-steam ahead after the end of the 8 week period—and none of us know what conditions will be like 2 months from now, but this is mostly government money to find out. I suspect that much of this money will be used for employees and rehires to get better, improve procedures, and develop a plan for post crisis conditions—–should be a lot of clean buildings after the 8 week period!!
Payroll costs include all of the following components of employer costs:
Gross wages, to include cash tips, commissions, salaries, all types of paid time off, bonuses, CAPPED at $100K per year for each employee. Payroll costs include the first 100K paid annually to each employee, and does not include the excess wages paid over $100K per employee.
Employer shares/expenses of fringe benefits, specifically to include the employer costs for group health/medical benefits/insurance and the employer portion of retirement plan funding. The employee portions/contributions are not included since they are already included in “gross wages”—AccuPay generally only has the employee portions of medical insurance and retirement contributions since those are deducted from payrolls. We may have some information about the employer shares, but not enough to ensure you have all of your employer shares.
Most employers can find their employer expenses for medical benefits/group insurance and retirement plans in their 2019 financial statements for those expense categories—-or could total all employer monthly costs from their paid bill files for group insurance and retirement plans—–do not include employee contributions/shares of these costs!
State and local taxes assessed on employee compensation—-I have not seen any definition of this term anywhere. Many states, not Indiana, do require employers to pay taxes at the state or local city/school district level, which are paid by employers as added expense (Ohio is a good example with it’s over 600 city taxing jurisdictions). We have seen many employers respond to this request from their lenders (who do not know how to define it either, but list it just like we are!) by asking for the amount of Indiana state and county taxes paid for year 2019—-which is easy to do by providing you with a copy of your 2019 WH-3 reconciliation form for Indiana W-2 purposes—it lists totals for state and local taxes.
I personally do not think that is what is intended for “state and local taxes” since those taxes are already included in “gross wages” for “payroll costs”, and do not “cost” the employer any extra money over/above gross wages. It is possible, but unclear, that state unemployment taxes can be included as “payroll costs”, since they are extra employer costs based on employee compensation. AccuPay’s reports will include SUTA taxes in them, which we provide to employers.
Not included in “payroll costs” are the employer share of Fica/Medicare taxes—we suspect this is the case since some of those costs are eligible for special tax credit pursuant to other provisions of the CARES Act (just an educated guess, not clear!!)
ONCE YOU HAVE THE ABOVE PAYROLL COSTS FOR A 12 MONTH PERIOD, YOU ADD THEM UP AND DIVIDE BY 12 TO GET AVERAGE MONTHLY PAYROLL COSTS
WHAT 12 MONTH PERIOD IS USED FOR CALCULATNG AVERAGE PAYROLL COSTS?
The CARES Act law indicates that average payroll costs will be calculated for the 12 month period immediately preceding the date of the loan—which would suggest April 1, 2019-March 31, 2020. This 12 month period would not be totally representative of “typical payroll costs” since payrolls were reduced or eliminated during March of 2020.
OUR ADVICE is to use the SBA Loan form instructions, since they are administering the program. The SBA loan instructions indicate that “generally, most employers will use the 12 calendar months in 2019” to determine their “average loan costs”. Exceptions to those using calendar year 2019 are “new businesses”, which can use Jan-Feb of 2020, and “seasonal employers”, which can choose to use Feb 15-June 30, 2019 instead of calendar year 2019. We have seen all different date ranges being used, such as March 19-Feb 20, April 19-March 20 (which is consistent with the law itself), and some asking for 14 months Jan of 19 through Feb of 2020, have seen some Feb 15, 2020 dates being used (which is the date in which an employer must be in operation with employees to be eligible for the SBA loans).
AccuPay’s standard reports will list employee gross wages, by employee, for the 12 months of 2019. We believe this calendar year 2019 period is what the SBA wants, and AccuPay needs some uniformity to our payroll reporting as we provide our clients with needed information as required by the law and the SBA Administration, not different date ranges and different types of data for all the thousands of different SBA lenders in this program.
WHAT INFORMATION CAN I GET FROM ACCUPAY TO SUPPORT OUR SBA LOAN?
- We will provide you with a “payroll gross wages report”, by employee, for the year of 2019. This will be totaled and will make it easy for you to subtract out any gross wages exceeding $100K, by employee, in your calcualtions.
- We will provide you with your annual SUTA tax paid for 2019, should you choose to include that as “state/local tax assessed on employees.”
- We will provide you with copies of your 4 quarterly 941 IRS forms for 2019, as well as your 2019 IRS Form 940 total compensation tax return.
- A payroll report which will show that you were “in operation with employees on the payroll” as of February 15, 2020.
- Our package of SBA loan information will include a “cover letter”, signed by Larry Shaub, as to what is included in the payroll reports—hopefully this will appease lenders.
- WE WILL PROVIDE ANY ADDITIONAL INFORMATION WHICH YOUR LENDER NEEDS OVER AND ABOVE THE ABOVE—WE WISH TO SUPPORT YOU, AND WILL SUPPORT YOU, WE ARE SIMPLY DEVELOPING OUR OWN LIST OF INFORMATION WHICH WE KNOW IS NEEDED—–THE MORE EACH REQUEST IS CUSTOMIZED, THE MORE TIME IT TAKES
WHAT HAVE WE SEEN IN LENDER SBA LOAN REQUEST PACKAGES?
WHICH SEEMS INCONSISTENT WITH SBA LOAN INSTRUCTIONS, AS THEY INTERPRET THE CARES ACT
Off the top of my head, we have seen the following document requests from SBA lenders, which we believe defeats the “expediency/rapid response” intentions of these PPP loans:
- Articles of incorporation, articles of membership for LLC’s
- State “in good standing” reports
- Annual business income tax returns—-corporation tax returns, Schedule C sole proprietor schedules, partnership/LLC tax returns
- Month to month payroll reports, with monthly totals—-the SBA wants a calculation of “average per month” payroll costs, based on a one year period, not month to month
- State and local tax withholdings paid to Indiana——we believe this is incorrect, but have seen it with some frequency
- Monthly bank statement copies from the bank which payroll was paid—-this is an “overkill”, in my opinion
- Monthly, annual financial statements—they have no bearing on average monthly payroll costs UNLESS you use them for calendar year 2019 to highlight medical insurance and retirement plan expense in them—–a quick “G/L printout” of medical insurance expense and retirement plan expense is what is actually needed
- The CARES Act included examples of 3 or 4 types of “paid time off”, and some banks are “cutting and pasting” those paid time off categories on loan document lists—-all wages for “paid time off” is already included in “gross wages” and does not need to be calculated as to type—-both worked and paid time off wages “count the same” as to “payroll costs”
Those were off the top of my head, without looking at more than a 1/2 dozen of actual lender checklists—-our payroll specialists could certainly add more to this list
RAPID RESPONSE/EXPEDIENCY/PURPOSE OF THE SBA PAYMENT PROTECTION LOAN PROGRAM
If you read the SBA’s 31 pages of instructions to lenders and borrowers, the words “expediency” and “immediately” are used a lot. Pages 1-5 of the SBA instructions indicate that SBA lenders should rely on certifications of the borrowers as to many aspects of the loans. As to the list of documents to validate the average monthly payroll cost”, it indicates “payroll processor records, payroll tax filings”. The SBA specifically tells lenders/borrowers that they should use “streamlined requirements” for these SBA loans, not underwriting these emergency, rapid response loans as banks have underwritten SBA loans in the past. Page 15 of the SBA loan instructions to lenders under “what forms are needed”, indicate they need the SBA Form 2483 completed based on “payroll documentation” as described above—-annual payroll reports (most generally for calendar year 2019) plus copies of payroll tax filings (941 and 940 tax returns for 2019). Page 16 of the SBA loan instructions indicate that for employers who do not have “payroll processor reports or payroll tax returns, the lender can then use “bank records” to “validate payroll costs”. Page 24 of the SBA loan indicates that the lender can rely on the borrower documentation and certifications for loan forgiveness, and that the lender does not need to verify the validity of the borrower loan documents for the forgiveness (Note, the loan forgiveness calculations occur after the end of 8 weeks after the receipt of the loan proceeds—-so prepare for that in June!!)
TIME IS OF THE ESSENCE
Small-medium sized employers must be able to obtain their portion of this $349 Billion CARES Act loan program ASAP—-This law and SBA guidance was put together within a week, law and guidance—The SBA is very clear that these are “emergency loans” which must be handled very quickly—-SBA lenders must process these loans within the “spirit” of their purpose, expedited loans to provide funds to struggling/closing/closed small employers so they can make every effort to return their operations to some semblance of normalcy. The SBA got guidance out on March 31st, or 4 days after the Friday of the law’s enactment. They make it clear that these loans are to be processed expeditiously, no time to waste. And as all of you know these loans are funded based on a “first come, first serve” basis, so the clock is ticking.
LET US KNOW HOW WE CAN HELP YOU IN THIS PROCESS
Feel free to provide this PayDay to your lender, it is simply our understanding of the CARES Act law and SBA loan requirements, as to what the definition of “payroll costs” is, what is included/excluded, and the SBA instructions to the SBA loan form and their guidance to lenders and borrowers—–these are our interpretations, as a non-lawyer, non-banker, small business owner just like you.
Feel free to email me with your specific questions about these SBA loans—- larry@accupay.com . We are rooting for you since AccuPay’s business is comprised 100% of small-medium sized employers—and we believe in the extraordinary excellence which is delivered by “small business America.”