On Friday, March 28th President Trump signed the historic $2 trillion emergency aid bill known as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The bill will provide $2 trillion in stimulus for employers and employees to help cushion the impact of the COVID-19 pandemic. This brief focuses on the aspects of the bill intended to help businesses.
Relief for small businesses in the form of two types of loans
The nation’s small businesses are set to receive relief in the form of simplified, no-fee, low-interest, and partially forgivable loans as part of the CARES Act. The U.S. Small Business Administration (“SBA”) will make the loans available to businesses that employ fewer than 500 people, with some exceptions, through two programs: a new Paycheck Protection Program (“PPP”) and the existing Economic Injury Disaster Loan (“EIDL”) program.
PPP loans are intended to encourage small businesses to keep their workers employed through the business interruptions caused by the COVID-19 pandemic.
EIDL loans are meant to help small businesses recover from economic losses sustained as a result of the pandemic.
We have received many questions on these programs from our clients, particularly regarding the PPP. While we await the SBA’s release of their guidelines and notification to banks of PPP operational procedures, we are providing a high-level summary of the provisions, as we currently understand them.
Please note, there is considerable misinformation circulating about this program. No banks at this time are currently able to accept and process applications for the PPP until the SBA issues final guidelines and procedures.
Frequently asked questions about the Paycheck Protection Program
What is it?
The CARES Act amended the Small Business Act to create the Paycheck Protection Program as an extension of the current SBA 7(a) program. Among the program highlights:
- Simplifies and streamlines the application and approval process and removes fees normally associated with SBA lending programs
- Increases the government guarantees of loans made under the PPP to 100% through the end of the year
- Provides forgiveness for portions of the covered loans used for qualifying expenditures during the eight-week period following origination (“covered period”)
- Removes requirements for collateral or personal guarantees
When is it effective?
The SBA is required to issue regulations within 15 days of enactment of the CARES Act without notice or comment period requirements. Lenders could begin accepting applications within two weeks. The deadline to apply is June 30, 2020.
Who is eligible?
Any business concern, nonprofit organization, veteran’s organization, religious organization, or tribal business that has fewer than 500 employees, or meets the definition of “small business concern” under existing SBA rules and regulations, is eligible if they were in operation on February 15, 2020.
Sole-proprietors, independent contractors, and other self-employed individuals are considered business concerns for the PPP if they:
- Were also in operation on February 15, 2020
- Have employees to whom it has paid wages and payroll taxes or have paid independent contractors
- Certify that the loan is necessary to support ongoing operations
- Will use the funds to retain workers and maintain payroll and other debt obligations
How much can one borrow?
The maximum loan amount is the lesser of 2.5 times the average total monthly payroll costs over the twelve months preceding the date the loan is made, or $10 million. If you were not in business from February 15, 2019 to June 30, 2019, the measured period for average monthly payroll costs is January 1, 2020 to February 29, 2020.
Payroll costs include:
- Salary, wage, commission, or other similar compensation
- Payments of cash tips
- Payments for vacation, parental family, medical, or sick leave
- Allowance for dismissal /separation
- Healthcare benefits (including insurance premiums)
- Retirement benefits
- State and local payroll taxes
Payroll costs do not include:
- Compensation of an individual employee to the extent in excess of $100,000 per year
- Compensation paid to employees with primary residence outside the U.S.
How can I use the loan?
The CARES Act limits the use of Paycheck Protection Program loans to:
- Payroll costs, excluding the prorated portion of any compensation above $100,000 per year for any person
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
- Employee salaries, commissions, or similar compensations
- Payments of interest on any mortgage obligation that existed on February 15, 2020
- Rent payments (including rent under a lease agreement)
- Interest on any other debt obligations
- Utility payments, including electricity, gas, water, transportation, and phone and Internet access for service incurred in the ordinary course of business prior to February 15, 2020. In each case, paid during the eight-week period commencing on the date of origination of the loan.
Borrowers can use the loan proceeds for other purposes, but will not qualify for loan forgiveness.
What portion will be forgiven?
The loan will be eligible for forgiveness to the extent that loan proceeds are used for payment of the following items during the eight-week period after the loan is originated:
- Payroll costs, excluding the prorated portion of any compensation above $100,000 per year for any person
- Group healthcare benefits and insurance premiums
- Mortgage interest, but not principal
- Rent payments and leases in existence prior to February 15, 2020
- Utility payments, including electricity, gas, water, transportation, and phone and Internet access for service incurred in the ordinary course of business prior to February 15, 2020, paid during the covered period commencing on the date of origination of the loan.
Do I have to pay taxes on the forgiven amount?
The loan forgiveness amount is excluded from taxable income.
What amounts are not forgiven?
The PPP is meant to assist businesses in retaining employees, at their current rate of pay. If employees are laid off, the forgiveness will be reduced by the percent decrease in the number of employees. If any employees were laid off between February 15 and April 26, the loan can still be forgiven for the full amount of payroll costs if those employees are rehired by June 30, 2020.
Also, if the borrower’s total payroll expenses for workers compensation (up to an annual rate of $100,000 per employee) decrease by more than 25%, then loan forgiveness will be reduced by the same amount.
How do I apply for the Paycheck Protection Program?
You should start with your bank, if it is currently a SBA lender. It will be the most prepared. There are indications that the program will be expanded to allow all FDIC banks to participate as a lender. The timeline for this is currently unclear.
This will be an incredibly popular program and having and existing relationship with a bank is an advantage, as lending institutions will be overrun with requests. If you need an introduction to a bank, please reach out to us immediately and we will work to connect you with an appropriate resource.
What are the terms on the loan?
Payments of principal and interest are automatically deferred, but not waived, for six months and may be extended to 12 months. If the full principal amount of the PPP loan is forgiven, the borrower will not have to pay interest accrued during 8-week covered period. Any amounts not forgiven will be amortized over a period not longer than 10 years and bear interest at a rate not to exceed 4%. All SBA fees are waived and it will pay lender fees.
What actions should I take now?
In preparation for the application process, you should immediately contact to your accountant and payroll provider to assist in compiling the payroll cost information necessary to determine the maximum amount of PPP loan you are eligible to receive.
We will be happy to guide you in this process and assist in preparing the data for the bank, as well as identifying the information needed to track the qualifying amounts eligible for forgiveness.
Once the banks begin accepting applications, it will be very important to time your application with the current status of your business so that you can maximize the benefits of the PPP.
Final thoughts
The specific provisions of the CARES Act targeted at the small business community should provide a stopgap for those businesses disrupted while our country attempts to curtail the havoc COVID-19 is wreaking on society.
While we are pleased that congress wasted little time in putting together a mammoth program for both individuals and businesses, there is still much work to be done to effectively implement these programs.
There is little doubt that business owners who are eligible to participate in the PPP should participate. While lending institutions wait for the SBA to release final guidelines and procedures to begin accepting applications, time will be well spent assembling information required and determining the optimal strategy and timing for utilizing the program.
For many business owners, especially those whose businesses are currently closed and have already furloughed employees, it may be better to delay applying so that the beginning of your 8-week covered period is calibrated with the reopening of your business. If your loan is funded too early, you may be paying employees without generating income, which would result in lost opportunity and a slower recovery.
We did not spend much time on the EIDL and Emergency Grants. It is noteworthy that if you have an immediate need for cash, the EIDL provides $10,000 in emergency grants in three days and this grant can roll over into the PPP. However, the paperwork to secure this grant may be more cumbersome than the PPP. We are happy to work with you to determine if you might benefit from these programs and how participating in them may impact obtaining funds from the PPP.
As always, we are here to provide you with the information you need and help guide you through these complicated decisions.
For informational purposes only. Not intended as legal or investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000.
Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.