An Advisor’s Guide to the Paycheck Protection Program

The Paycheck Protection Program (PPP) provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act, is designed to help small businesses facing economic uncertainty in light of the COVID-19 crisis to help fund near-term expenses and to retain employees. The $349 billion initially funding the program is 100% backed by the SBA, and loans issued may be up to 100% forgivable. An additional $310 billion in funding was approved for the program on April 21, 2020.

For further discussion of strategically when an advisory firm should consider using the PPP instead of other available small business coronavirus relief programs under the CARES Act, see "Quickly Maximizing Paycheck Protection Program’s (PPP) Forgivable Loan Opportunity For Financial Advisors".

As of April 16, 2020, the funds initially allocated for the PPP have been depleted. While applications for PPP loans will no longer be processed, individuals in need of funding should continue to move forward and prepare to apply for assistance in case Congress approves additional funding.

As of April 27, 2020, the SBA has resumed accepting PPP loan applications.

Nerd Note: The information found here was last updated on May 14, 2020 and includes considerations per the SBA's Immediate Interim Rule and the updated Treasury Department Paycheck Protection Program FAQ Fact Sheet which includes information on the Safe Harbor for PPP loans less than $2 million.

Will Taking A PPP Loan Result In A U4 Disclosure Event For Financial Advisors?

Advisors contemplating PPP loans with the intention of seeking forgiveness should also consider the potential impact of such forgiveness on their U4, and whether such forgiveness may result in a disclosure event. Notably, Section 14k of Form U-4 asks whether such individuals have made a compromise with creditors during the past 10 years. It is possible that the answer to this question could be interpreted to be “yes” in the event that all or a portion of a PPP loan is forgiven. Further guidance from regulators is necessary to address this concern.

Advisors contemplating PPP loans with the intention of seeking forgiveness can rest easy knowing that having amounts forgiven by the SBA will not result in a disclosure event in Section 14K of their Form U4.

On April 13, 2020, FINRA released an FAQ regarding Paycheck Protection Program loans taken by a registered person or business they control, indicating that the forgiven loan would not need to be reported in Section 14K on Form U4 as a “compromise with a creditor”, as long as the “PPP loan or part of the loan is forgiven consistent with the original terms of the loan.”

Additionally, FINRA has clarified that “because a PPP loan contemplates forgiveness of some or all of the loan as part of the original terms of the loan, such forgiveness will not involve a new agreement by the creditor, but will be an event consistent with the loan’s original terms. In those circumstances, the forgiveness of a PPP loan will not be a “compromise with creditors” for purposes of Form U4 Question 14K. Any forgiveness beyond the original terms of the loan would be considered a “compromise with creditors.”

However, while FINRA has weighed in on how loan forgiveness under the PPP would be treated for U-4 purposes (not a disclosure event), how the same loan should be treated by a Registered Investment Advisor on Item 18 of the ADV Part 2A is less clear.

On the other hand, RIAs must disclose their PPP loans on Item 18 of the ADV Part 2A if the loan constitutes a “material fact” pertinent to the advisory relationship. In most cases, if PPP loans are used for the intended purposes of covering payroll expenses, the loan would be considered a material fact relating to the advisory relationship.

More specifically, the SEC provided a COVID-19 Response FAQ item on April 27, 2020, with the following response for small advisory firms:

As a fiduciary under federal law, you must make full and fair disclosure to your clients of all material facts relating to the advisory relationship. If the circumstances leading you to seek a PPP loan or other type of financial assistance constitute material facts relating to your advisory relationship with clients, it is the staff’s view that your firm should provide disclosure of, for example, the nature, amounts and effects of such assistance.

If, for instance, you require such assistance to pay the salaries of your employees who are primarily responsible for performing advisory functions for your clients, it is the staff’s view that you would need to disclose this fact. In addition, if your firm is experiencing conditions that are reasonably likely to impair its ability to meet contractual commitments to its clients, you may be required to disclose this financial condition in response to Item 18 (Financial Information) of Part 2A of Form ADV (brochure), or as part of Part 2A, Appendix 1 of Form ADV (wrap fee program brochure).

Notably, Item 18B states:

If you have discretionary authority or custody of client funds or securities, or you require or solicit prepayment of more than $1,200 in fees per client, six months or more in advance, disclose any financial condition that is reasonably likely to impair your ability to meet contractual commitments to clients.

It is entirely possible and would be objectively reasonable for a Regulator to conclude that applying for a PPP loan, in which a business must certify that the loan is “necessary,” is a clear indication that there is a condition reasonably likely to impair the advisor’s ability to meet its obligations to clients. Accordingly, Regulators may take the view that merely accepting a PPP loan – whether forgiven or not – should result in a disclosure in Section 18 of the ADV Part 2A.

~~Guidance from Regulators is urgently needed to clarify this ambiguous but important issue.~~

PPP Eligibility – Are Financial Advisors Eligible To Receive a Paycheck Protection Loan? (Probably!)

Think of PPP Eligibility as being based on an honor system. If you answer yes to these questions, your business should be eligible for a loan:

Does your practice have 500 or fewer employees?
- If a portion of your business is owned by another business, affiliation rules may apply, and you may have to combine the total number of employees across both businesses.
Is your business experiencing economic uncertainty as a result of the COVID-19 crisis that makes a Paycheck Protection Program loan necessary to continue business operations?
- It is hard to imagine a financial practice that is not experiencing at least a reasonable amount of economic uncertainty right now. So, for most advisors, the key question will be, “Does the economic uncertainty make the loan necessary?” Admittedly, this requirement is likely to be interpreted fairly liberally, but advisors should ensure that they have a reasonable basis for making the argument as the penalty for lying to get free cash is severe: imprisonment and fines.

A few other considerations that may bar you from the PPP program even if you answered yes to the two previous questions:

You are engaged in any activity that is illegal under Federal, state, or local law (this includes marijuana dispensaries);
You are a household employer (e.g., you pay your nanny); this would not make you eligible as without a profit motive, the operation is not considered a business (even though you have an employee);
An owner of 20% or more of the applicant's equity is incarcerated; on probation; on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last 5 years;
You (or any business owned or controlled by you or any of your owners) have ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last 7 years and caused a loss to the government.

A little more on the new safe harbor created by Q&A #46 for PPP loans of $2 million or less, which corresponds to having certified that you are apply for a PPP because of "current economic uncertainty...to support the ongoing operations":

If you received a loan of $2 million or less (including loans made to affiliated companies), the certification will be deemed valid.
The logic behind this is to create certainty for smaller loans and free up auditor resources for the larger loan requests.

PPP Maximum Loan Amount – How Much Can I/My Advisory Firm Receive?

For the overwhelming majority of advisors, the maximum loan amount will be equal to your average monthly payroll costs multiplied by 250%. In the exceptionally rare circumstance that your average monthly payroll exceeds $4 million, your maximum loan is capped at $10 million.

For financial practices that have existed for less than one year, there is a modified calculation, as shown below:

PPP Qualified Payroll Costs – What Costs Are Included In “Payroll?”

The total amount of compensation that may be considered as part of “payroll costs”, per employee, is limited to $100,000 (annualized). This includes those that make more than $100,000; in those instances, the income in excess of the $100k is excluded but the employee is included. (Note that according to the Treasury Department, "the exclusion of compensation in excess of $100,000 annually applies only to cash compensation".)

Thus, the maximum loan amount that can be received, attributable to each employee, equals ($100,000 / 12) x 2.5 = $20,833.33.

Payroll costs include all of the following:

Salary, wages, commission, or similar compensation (up to annual cash compensation of $100,000);
Payment for vacation, parental, family, medical or sick leave;
Allowance for dismissal or separation;
Payment required for group health care benefits, including insurance premiums;
Payment of retirement benefits;
Payment of state or local tax assessed on the compensation of the employee; and
The sum of net earnings payment or compensation as any of the above individual forms of employment up to $100,000 in one year, or prorated for the covered period.

Okay, walk me through the calculation steps:

Step 1. Aggregate payroll costs (reviewed above) from the last 12 months for employees whose principal place of residence is in the United States.
Step 2. Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
Step 3. Calculate average monthly payroll cost (divide the amount from Step 2 by 12).
Step 4. Multiply the average monthly payroll costs from Step 3 by 2.5.
Step 5. Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between Jan. 31, 2020 and April 3, 2020 less the amount of any "advance" under an EIDL COVID-19 loan (because it does not have to be repaid). Note that only the amounts of the EIDL used for payroll must be included in the PPP calculation. EIDL proceeds that are not used for payroll may be (but do not need to be) rolled into the PPP loan amount.

Great! Let me see some examples (Note: these are provided directly from the PPP ruling itself):

No employee(s) make more than $100,000:

Annual Payroll: $120,000
Average monthly payroll: $120,000/12 = $10,000
Multiply by 2.5 = $10,000 x 2.5 = $25,000
Maximum loan amount is $25,000

Some employees make more than $100,000:

Annual Payroll: $1,500,000
Subtract compensation amounts in excess of an annual salary of $100,000: $1,500,000 - $300,000 (which may represent $100k across 3 owner or $50k across 6 well-paid employees) = $1,200,000
Average monthly qualifying payroll: $120,000/12 = $100,000
Multiply by 2.5 = $100,000 x 2.5 = $250,000
Maximum loan amount is $250,000

No employee(s) make more than $100,000, but there is an outstanding EIDL loan of $10,000:

Annual Payroll: $120,000
Average monthly payroll: $120,000/12 = $10,000
Multiply by 2.5 = $10,000 x 2.5 = $25,000
Add EIDL loan of $10,000 = $25,000 + $10,000 = $35,000
Maximum loan amount is $35,000

Some employees make more than $100,000 AND there is an outstanding EIDL loan of $10,000:

Annual Payroll: $1,500,000
Subtract compensation amounts in excess of an annual salary of $100,000: $1,500,000 - $300,000 (which may represent $100k across 3 owner or $50k across 6 well-paid employees) = $1,200,000
Average monthly qualifying payroll: $120,000/12 = $100,000
Multiply by 2.5 = $100,000 x 2.5 = $250,000
Add EIDL loan of $10,000 = $250,000 + $10,000 = $260,000
Maximum loan amount is $260,000

Finally, it should be noted that, with respect to payroll costs, there continues to be certain grey areas, such as:

Do guaranteed payments to partners count as “payroll”? (We believe that they do); and
Do S corporation profits count as “payroll”?

PPP Fund Usage – What Can I Use The Money For?

The main goal of PPP is to keep businesses open and for them to continue employing their employees. As such, the following is a list of how the funds may be used:

Payroll costs (as outlined above);
Mortgage interest: Principal and pre-payments excluded;
Rent;
Utilities; and
Interest on other loans incurred prior to February 15, 2020.

However, almost counterintuitively, the Treasury has also confirmed that a maximum of 25% of loan proceeds can be used for non-payroll expenses.

PPP Forgiveness – What Amount Of ‘Free’ Money Am I Eligible For?

The maximum amount of your Paycheck Protection Program Loan that is eligible for forgiveness is equal to the amount spent on certain qualifying expenses during the eight-week period beginning on the date on which the loan is originated. Qualifying expenses include:

Payroll costs (up to a maximum annualized amount of $100,000 per employee);
Mortgage Interest (for mortgages in place prior to February 15, 2020);
Rent (for lease agreements in place prior to February 15, 2020); and
Utilities (for services in place prior to February 15, 2020).

Bear in mind that loan forgiveness cannot exceed the principal of the loan. In addition, due to the overwhelming demand for such loans, the Treasury Department anticipates forgiving only 25% of costs, other than those related to payroll.

The PPP loan forgiveness is designed to incentivize employers to keep employees working. As such, loan forgiveness will be reduced if either of the following occurs:

Employees who made less than $100,000 of compensation in 2019 have their compensation reduced by 25% or more; or
The number of full-time employee equivalents is less than the same number of employees during either (you can choose the more favorable period):
- February 15, 2019 through June 30, 2019; or
- January 1, 2020 through February 29, 2020.

Already let someone go? Don’t worry – if you did, the Treasury Department has stated that you can hire employees back by June 30, 2020 and still qualify for forgiveness!

PPP Terms – What Are The Terms Of A Paycheck Protection Program Loan?

Interest rate: 1%
Payments deferred: 6 months
Loan maturity: 2 years

Nerd Note: The Federal Government has changed their minds a few times regarding the interest rate. As such, please know that the 1% is as of April 3, 2020.

PPP & Other Loans – Can You Apply For PPP And Elsewhere?

It appears that the answer is yes, provided that the loans are used for expenses other than those covered by the PPP. Use PPP to pay for only what it has been designed to be used for, above, and use the other loans for other purposes.

It may be a good idea to open a special account for PPP funds so that it is very clear and easy to account for exactly how PPP funds are being used for later accounting purposes.

PPP & Other CARES Act Provisions – Does Taking A Paycheck Protection Program Loan Impact Other Relief I May Qualify For?

Yes. Other relief provisions may be impacted as follows:

Employee Retention Credit. The credit is NOT allowed if you take a Payroll Protection Program loan;
- However, as mentioned above, if you take out a different loan (other than a PPP loan), you would still be able to use the credit, which, in some instances, may be a better deal, especially if the large majority of your employees are lower-income earners.
  - In general, higher average payroll tends to favor using the PPP
  - In general, lower salaries may make using the Employee Retention Credit a better move
Deferral of Payroll Taxes. If you have all or a portion of your PPP loan forgiven, you cannot use this provision.
Unemployment Compensation for Self-Employed Individuals. If you receive a PPP loan and use it to pay your own compensation, you likely will not qualify to receive unemployment assistance until the loan has ‘run out’.

PPP Process – How Do I Actually Get One Of These Paycheck Protection Loans?

Contact an approved lender ASAP - It is FIRST COME FIRST SERVE!:
- Eligible lenders include SBA-approved lenders, Federally insured banks and credit unions, and other lenders specially authorized by the SBA to provide PPP loans.
- If you have a good relationship with an eligible local lender, that is often a good place to start.
- If you don’t have a relationship with an existing lender, you may wish to contact a lender that specializes in working with advisors, such as Sky View or Live Oak Bank.

Planning Point: You only get one crack at getting PPP money, so you should probably think about asking for the maximum amount you need, as you cannot apply for more than one PPP loan.

Organize the following paperwork today:
- Business paperwork such as headcount of employees;
- Payroll costs (income statements);
- IRS Payroll filings (i.e., Forms 940, 941, and W-2);
- Receipts/proof of other eligible expenses; and
- Information required for the PPP loan application (you may also wish to review a sample application that the Treasury Department provided. Notably, while the application was initially released as the official application, it has since been revised as a draft, and it has become clear that each bank will be able to use their own application. Nevertheless, the sample document should give advisors a good idea of what to expect on their own lenders’ application.)
Apply as early as possible - Did we mention, it is FIRST COME FIRST SERVE!:
- Small businesses & sole proprietors: beginning Friday, April 3rd, 2020;
- Independent contractors and self-employed individuals: beginning Friday, April 10th, 2020.
Remember that rehiring any laid-off employees can increase the amount of the loan that will be forgiven.

Planning Point: If you are a financial planner, CPA, attorney, or any other person assisting borrowers with the PPP process, note that you cannot charge the borrower directly. Your fee will be paid by the lender and cannot exceed: