The federal government has made available several financial resources to help businesses survive and employees to continue to receive paychecks. This is our nation’s effort to mitigate the impact of Corona Virus 19 ‘s impacts. These include the Paycheck Protection Program (PPP), Economic Injury Disaster Loan Assistance (EIDL), and Emergency Economic Injury Grant, Employee Retention Credit, and increases in the amount available under SBA Express Loans, among others. The funds available under these various resources are not unlimited, so it is critical to quick analyze your business needs to determine which, if any, of these resources is right for you.
Paycheck Protection Program
The Paycheck Protection Program was included as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Under this program, nearly $350-billion was made available to provide American small businesses with eight weeks of cash-flow assistance. These new loans are designed to qualify for loan forgiveness if the funds are spent on allowable costs as discussed below. If you can declare in good faith that the uncertainty of current economic conditions makes the loan necessary for your business, you should be eligible to apply. On April 2, 2020, the SBA issued an interim rule of thirty one pages answering many questions about the program. Key provisions of the PPP are as follows:
Who can apply?
- Businesses and entities that were in operation on February 15, 2020. This includes small businesses, 501(c)(3) nonprofit organizations, 501(c)(19) veterans organization, or Tribal businesses that have fewer than 500 employees, or the applicable size standard in number of employees for the North American Industry Classification System (NAICS) industry as provided by SBA, if higher.
- Individuals who operate a sole proprietorship or as an independent contractor and eligible self-employed individuals.
- Any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a NAICS code beginning with 72 (Hotels and Restaurants), for which the affiliation rules are waived
How soon can you apply?
- Starting April 3, 2020 for small businesses and sole proprietorships
- Starting April 10, 2020 for independent contractors and self-employed individuals
- The period for loan applications may end as early as June 30, 2020. So the window of opportunity is short and the PPP is “first come, first served”.
Where can you apply?
- Any Bank that is already an SBA lender or any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program.
How much can you borrow?
- The maximum loan amount is $10 million and can be calculated as follows:
- If you were in business February 15, 2019 – June 30, 2019, the maximum loan amount is equal to 2.5x the average monthly payroll costs of the 12 months prior to your application. If your business employs seasonal workers, you can opt to choose March 1, 2019 as your time period start date. Sole proprietors count wages, commissions, income or net earnings from self-employment (capped at $100,000).
- If you were not in business between February 15, 2019 – June 30, 2019, the maximum loan amount is equal to 2.5x the average monthly payroll costs between January 1, 2020 and February 29, 2020
- If you took out an EIDL between February 15, 2020 and June 30, 2020 and you want to refinance that loan into a PPP loan, you would add the outstanding loan amount to the payroll sum.
- Employee federal payroll taxes are to be considered part of payroll costs and included in the average monthly payroll cost calculation. Employer federal payroll taxes are not allowed to be included in this calculation.
What is the interest rate?
- Not to exceed 4%, however, the current interest rate is to be 1%.
What is the term of the loan?
- The term of the loan is 2 years, assuming it is not forgiven.
When do you have to start repaying the loan?
- Loan payments are generally deferred for six months.
What can you use the loan for?
- Employee salaries, commissions, or similar compensations qualify. Wages above $100,000 and compensation of employees residing out outside of the U.S. are excluded.
- Health insurance premiums and costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave
- Payments of interest on any mortgage obligation but excluding any prepayments or payments of principal
- Rent (including rent under a lease agreement)
- Interest on any other debt obligations that were incurred before the Covered Period
How can the loan be forgiven?
- The PPP loan and any interest can be forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscriptions, at least 75% of the forgiven amount must have been used for payroll).
- You must apply through your lender for forgiveness on your loan. In this application, you must include:
- Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings.
- Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities.
- Certification from an officer of your business or organization that is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used in accordance with the program’s guidelines for use.
What can reduce the amount of the loan forgiven?
- The loan forgiveness amount will be reduced in proportion to any reduction in the number of employees retained, and/or if any wages were reduced by more than 25%.
- If you rehire employees that were previously laid off at the beginning of the period, or restore any decreases in wage or salary that were made at the beginning of the period, you will not be penalized for having a reduction in employees or wages, as long as you do this by June 30, 2020.
Other notes related to the PPP
- There appears to be a double benefit in that the loans finance what are usually deductible business expenses, so there are federal tax savings to businesses as the loan is spent. This is true even though cancellation of the loan yields taxfree income. If you are an accountant, the entry is essentially: debit (increase) deductible expense, credit (increase) tax free income.
- See generally the SBA’s discussion at “Coronavirus (COVID-19): Small Business Guidance and Loan Resources.” Their site even provides a sample loan application form. SBA.gov, “Paycheck Protection Program (PPP) Sample Application Form, effective March 31, 2020.” https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp
- The SBA normally doesn’t have recourse against the owner, shareholder, partner, etc. Collateral and personal guarantees aren’t required.
- There are permissible payments from the loan that may not enhance the loan forgiveness feature, such as commissions, state and local payroll taxes, and retirement plan contributions.
- Certain fees that may otherwise apply with the SBA are waived.
Emergency Economic Injury Disaster Loans
The Small Business Administration (SBA) has also launched the Economic Injury Disaster Loan Assistance (EIDL)program for small business owners which are available now up to $2 million and are only available through the SBA. In addition to this loan the SBA is offering an immediate $10,000 advance (the Emergency Economic Injury Grant) within three days of applying for an EIDL. To access the advance, you must first apply for an EIDL and then request the advance. The advance does not need to be repaid. The interest rate is somewhat higher at 3.75% for businesses and 2.75% for non-profits, but the repayment period can extend up to 30 years and the first loan payment due date is not until one year after the loan origination date. The permissible purposes of the loan focus on paying sick leave due to the coronavirus, maintaining payroll, costs of the supply chain, rent, mortgage payments, and paying debts that can’t otherwise be paid due to lost revenues. This loan is not forgivable, but can be rolled into a PPP loan in which case it could be forgiven. The SBA will place a lien against the assets of the business, and a personal guarantee is required for loans greater than $200,000.
Employee Retention Tax Credit
The CARES Act introduced an employee retention tax credit. In general, the employee retention credit is a fully refundable credit equal to 50% of qualified wages plus health care plan expenses. The employer can’t claim the same wages under the employee retention credit and the Paycheck Protection Program, so there needs to be some analysis performed as to which program will be most beneficial to your organization.
There are new provisions allowing employers to defer payment of payroll taxes, and those benefits go away as one achieves loan forgiveness under these new rules.
These are challenging times. The US Federal Government makes these options available to help businesses survive and perhaps even thrive through our current challenges. Time is of the essence as resources are not unlimited and demand will be significant.