The Smarter Startup

Update 4-9-2020: Treasury Department Clarification for CARES Act

The latest (4/9) Treasury Department clarification regarding shareholder affiliation, salary caps plus the lastest listing of banks participating in the CARES act.

Here is the latest Treasury Department clarification regarding shareholder affiliation, salary caps plus the lastest listing of banks participating in the CARES act.

The sheer size and complexity of the CARES Act is on full display as more banks began participating, largely to the frustration of their customers, and new clarifications from the Treasury Dept. cleared up some of the most common questions around the Payroll Protection Program.

Shareholder Affiliation & Payroll Cost Calculation for PPP Loans

1) The FAQ released by the Treasury Department provides definitive guidance on a number of questions. Highlights:

  • Affiliation: If a minority shareholder irrevocably gives up rights that would have otherwise presented control issues for the purposes of affiliation, that shareholder will no longer be considered an affiliate of the business. This is important for any company out there looking at amending their corporate docs.
  • The $100,000 annual salary cap in the Payroll Costs calculation for PPP loans only applies to cash compensation, NOT to non-cash benefits paid by the corporation for things like health care, retirement plans, etc. Such costs are not pro-rated or otherwise reduced per-employee – this has been a major question for many CFOs trying to understand whether these amounts should be in addition to, or inside of, the $100K limitation.
  • The time period to use when calculating average monthly payroll costs has bedeviled many of us as well. Here’s the bottom line – companies can use:
    • The previous 12 months, i.e. March 2019 to March 2020
    • Calendar year 2019
    • If seasonal – take the average monthly payroll for the period between February 15 or March 1, 2019, and June 30, 2019
    • Not in business during those periods? Use average monthly payroll costs for the period January 1 – February 29, 2020
  • Reiterating: Independent contractors ARE NOT included in Payroll Costs for the purposes of PPP loans. We continue to see bank, lawyer and payroll companies including IC’s in their online calculators and guidance – this is most definitely not correct.
  • Employee salaries are included on a GROSS basis, i.e. without regard to taxes imposed or withheld. Federal payroll taxes are taken out of the loan total as a lump sum later in the PPP calculation, not as an adjustment per employee. If the company pays an employee $5K/mo. in salary, then you should count the full $5K for the purposes of Payroll Costs.

Congress Requests Additional Funds

2) The Treasury Dept. has formally requested an additional $250B from Congress for the PPP program. It is possible the Senate may vote on it as early as Thursday, a faster replenishment of the appropriation than even optimists expected. In tandem with the Fed term loan facility announced yesterday, this is what “whatever it takes” looks like.

Paycheck Protection Program Participating Banks

3) Fortune has published an updated list of banks participating in the PPP. This info is changing by the day, but most banks are coming online (for better or for worse) this week.

Emerging Best Practice: Separate PPP Loan Sub-Account

4) An emerging best practice as companies start to apply for PPP is to form a separate sub-account at their bank that holds just the loan funds. Once set up, shift payroll, rent and utilities payments (all qualified under the forgiveness rules) to process just from that account, effectively ring-fencing them from the rest of the business. This way, documenting the use of proceeds is simple when the time comes for the company to defend to the lender exactly which expenses should be forgiven under the Act.