As businesses across the country continue to determine whether to apply for an SBA loan under the “Paycheck Protection Program” (the “PPP”) provided by the Coronavirus Aid, Relief, and Economic Security Act (the “Act”), the US Small Business Administration (the “SBA”) has released additional guidance to interpret the previously issued interim regulations. While full guidance from the SBA on PPP related issues can be found here, this article highlights two issues many have sought clarification over. Specifically, this article discusses newly provided guidance on size requirements for employer eligibility purposes, and on how to account for federal taxes when calculating “payroll costs.”
Size of Employer Guidance
First, the SBA has clarified that a “small business concern” (as defined in Section 3 of the Small Business Act) is not required to have 500 employees or less to be eligible for a covered loan under the PPP if the business (together with its affiliates) (i) meets the SBA employee-based or revenue-based size standards for its applicable industry (which can be found here); or (ii) meets the SBA’s current “alternative size standard.” As of March 27, 2020, the “alternative size standard” provides that a business qualifies as a “small business concern” if the business (together with its affiliates): (i) has a maximum tangible net worth of not more than $15 million; and (ii) has an average net income after federal income taxes (excluding carry-over losses) for the two fiscal years before the date of the application of not more than $5 million.
Thus, this additional guidance may provide an alternative outlet to receive a covered loan under the PPP for those who may not originally have been thought to be eligible. While further clarification may be provided to define “tangible net worth,” the SBA does generally define “tangible net worth” as net worth minus goodwill. While no interpretations have been issued regarding how to define “net income after Federal income taxes” for s-corporations or other pass-through entities, other SBA regulations calculate “net income after Federal income taxes” for such pass-through entities as:
- Net income; minus an amount equal to the sum below:
- if the business (and its affiliates) is not required by law to pay state or local income taxes at the entity level, an amount equal to the product of (a) the business’ (and such affiliates’) net income, multiplied by (b) the marginal state income tax rate (or by the combined state and local income tax rates, if applicable) that would have applied if the business (and its affiliates) were taxable corporations; plus
- an amount equal to the product of (a) the business’s (and its affiliates’) net income, less any deduction for state and local income taxes calculated under subsection (ii) above with respect to the business (and its affiliates), multiplied by (b) the marginal federal income tax rate that would have applied if the business’ (and its affiliates) were taxable corporations
While it is not clear whether this methodology will apply at this time, at a minimum it can provide an initial framework for determining if your business is eligible under the “alternative size standard.”
Interplay Between Federal Taxes and Payroll Costs
Another issue clarified by the guidance linked above is that amount of “payroll costs” (which are used to calculate both the maximum loan amount and the amount of the loan subject to forgiveness under the PPP) is not reduced by taxes imposed on an employee and required to be withheld by the employer, but also does not include the employer’s share of the payroll tax. This is because under the Act, the definition of “payroll costs” specifically excludes “taxes imposed or withheld under Chapters 21, 22 or 24 of the Internal Revenue Code of 1986 during the covered period.” As such, the guidance clarifies that “payroll costs” are calculated on a gross basis without regard to federal taxes imposed or withheld. The SBA indicated that this interpretation would further advance the legislative purpose of the PPP.
By way of example, the SBA guidance provides that: “an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500 and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.”
If you would like further advice on loan calculations and forgiveness amounts, please review our CARES Act article which includes an overview of the PPP and the Act generally. As the SBA continues to issue additional guidance in all areas surrounding the PPP and the Act, we will continue to update you with all the information you need so that your business is equipped to make the best decision it can. As always, please do not hesitate to reach out to any professional in the McNees Corporate & Tax Group with any questions you may have.