Late on March 25, 2020, the US Senate released the final tax of the CARES Act, the third Coronavirus related Bill and much needed stimulus package. The Bill passed the House and signed into law by the President on March 27th.
At this time, we want to stress to our clients that so far, all that has been done is the passage (eventual) of the law. We still need to get regulations issued to help define the key questions and details of the law along with guidance from Federal agencies on the mechanics of claiming these benefits. As more information is released, we will share with you and begin to help you navigate (along with your team and other providers, such as payroll processors & bank lenders) these waters to get the necessary assistance for you and your business.
Paycheck Protection Program Loans
The major lending provision to help small businesses in the CARES Act comes in the form of the new Paycheck Protection Program loans. These loans are being offered as an expansion under the existing SBA 7(a) loan programs, but luckily, on an expedited basis to businesses. Based on the size of the appropriation and its terms, this will be the most popular facility for businesses to access capital during the COVID-19 outbreak.
What are Paycheck Protection Program Loans?
A PPP Loan is a new loan program that is designed to help small businesses during this outbreak and related economic effects maintain payroll and certain other fixed costs. The loans are 100% backed by the SBA and will be originated through existing SBA Lenders, such as your current bank.
What is a “covered loan”? What is the period for these loans?
A covered loan is a loan made during the period of February 15, 2020 – June 30, 2020 under this program.
What are the terms of this loan?
These loans are for a maximum of the following:
a. 2.5 times total average monthly payroll costs incurred in the one-year period before the loan is made, OR
The loans will have a maximum term of 10 years and a rate of 4%. The loans will offer a forgiveness component related to amounts spent during the initial 8 weeks of the loan. The permissible uses of the loans are as follows:
a. Payroll Costs
b. Rent/lease payments
c. Payments of interest on mortgage obligations
e. Interest on debt costs
It is important to note that permitted uses only cover the interest on debt obligations, not the principal. Uses of this loan for nonpermitted purposes may change the recourse obligation to the owners. Care should be taken for any recipient of this loan to only use for permitted purposes.
What are Payroll Costs?
Per the laws definition, payroll costs are:
a. Salary, wage, commission or similar compensation
b. Payment of cash tip or equivalent
c. Payment for vacation, parental, family, medical or sick leave
d. Allowance for dismissal or separation
e. Payment required for group health care benefits
f. Payment of any retirement benefits
g. Any State or Local Tax assessed on compensation
h. Payments of any compensation of a sole proprietor or independent contractor that is net earnings from self-employment.
These payroll costs are limited to salary (or in the case of contractors, payments) of up to $100,000 per year. Any amount above these are ineligible.
Additionally, payroll taxes (FICA) do not appear to be included as a covered payroll cost. The text of the bill refers to Chapter 24 of the Internal Revenue Code, which deals with withholding at the source. It is unlikely however that the PPP will only cover net payroll. We will keep an eye out for this in the regulations that follow.
Who is eligible for these loans?
The CARES Act has increased both the eligibility and decreased the requirements to obtain these loans. The following are eligible for these PPP Loans:
a. “Small Business Concerns,” meaning a business that is independent owned and operated, not “dominant” in its field of operation and not exceeding the relevant business size. Generally, most small businesses will be considered this.
b. Any business concern – so even if you are ineligible per the above, so long as other criteria (below) are met, a business is eligible.
c. Nonprofit organizations – which for this specific program, refers to an organization that is described in Section 501(c)(3) and is exempt under Section 501(a). This should cover most nonprofit organizations.
d. Veterans organizations & tribal concerns.
The above entities are ONLY eligible for these loans if they employ less than 500 employees or less than the “applicable size standard” per SBA regulations for the business NAICS code, whichever is greater. Said another way, these loans are allowed for any of the above organizations that have 500 or fewer employees. If an organization has more than 500 employees, but is below the SBA published standard size, they may be eligible as well. It is important to note that sole proprietors and independent contractors are also eligible for these loans but may have slightly different documentation requirements.
Where and how do businesses apply for these loans?
Unlike with traditional SBA loans, these PPP loans will be generally available from whatever banking institution you currently use for your primary relationship. If your current bank does not offer these loans, we will leverage our network to find a lender that can provide these loans for you.
As of right now, the SBA and banks are currently working on a beta test of an online lending platform to allow for rapid approval and application on these loans. There is currently no application available; however, based on public comments and information within the law, it is expected that the application process will be relatively simple and straightforward.
Consideration for getting these loans
The CARES Act provides that lenders will have a delegated authority to make these loans and that the following are used for consideration for eligibility for these loans:
a. Was the business in operation by February 15, 2020?
b. Did the business have employees to whom salaries and payroll taxes were paid?
Additionally, borrowers will be required to self-certify, as part of the lending process:
a. A Good Faith Determination that the loan is necessary because of economic uncertainty as a result of the COVID-19 outbreak.
b. Acknowledgment that the funds will only be used for permitted purposes.
c. The borrower is not receiving this loan and another SBA Loan (Economic Injury Disaster Loans) for the same uses during the period (February 15, 2020 to December 31, 2020)
Unlike other SBA programs, there will be NO personal guarantee or collateral required. Owners, members, officers, or shareholders have NO recourse on these loans, except for cases where the proceeds were used on nonpermitted purposes. Additionally, the SBA will make these loans without regard to the “Credit Elsewhere” requirement, which typically requires the SBA to function as a lender of last resort. There will be no fees for the borrower to apply, all fees will be paid directly to financial institutions by the SBA, depending on loan size.
We are eagerly awaiting more guidance from the SBA and lenders as to what documentation will be necessary for these loans. Our anticipation is that you will need to provide some proof of prior payroll costs and calculations as to the maximum amount allowable. In addition, lenders will have forms to sign for the certifications.
The program allows for a deferment of up to 1 year, but not less than 6 months, on any payments of interest and principal. There will be more regulations forthcoming on these provisions. It is due and expected within 30 days of the passage of the CARES Act.
One of the most popular provisions of this program is the loan forgiveness. In summary, the loan proceeds that are used within 8 weeks of the origination of the loan are eligible for forgiveness, subject to the following:
a. The loan proceeds are used for permitted purposes (except for non-mortgage debt interest).
b. The loan recipient maintains a certain salary level for staff, subject to limits.
c. The loan recipient maintains a certain number of full-time equivalent employees.
The forgiveness will NOT be considered taxable income.
Calculation of the Loan Forgiveness
Loan forgiveness will be allowed for the following uses of the loans incurred and paid within 8 weeks of loan origination.
a. Interest on a mortgage originated prior to February 15, 2020
b. Lease or rent in place prior to February 15, 2020
c. Utility payments for the following which were in place prior to February 15, 2020
f. Internet Access
d. Payroll Costs (not in excess of $100,000 per employee, prorated).
The limit of the forgiveness is calculated as follows:
a. The loan amount
b. A reduction for number of employees
c. A reduction for the salary and wages
Reduction for number of employees is based on the number of Full Time Equivalent employees (FTEEs) in a prior period (either per month from February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020) in ratio to the number of FTEEs per month in the 8 week covered period.
The number of FTEEs is divided by the number of base FTEEs, and will be used to only reduce the payment amount, not increase. The act says the FTEEs will be calculated by the average number of FTEEs per pay period. No guidance was given on how FTEEs will be determined yet; given other references in the CARES Act, it is likely the calculation will be similar to the ACA calculations but this is not confirmed.
The reduction for salaries and wages is calculated by a straight reduction in excess of 25% for any employee salary during the 8-week period. So, by example, if an employees wages are reduced by 20% (can either be as part of a plan or because of lack of supplemental wages like commissions), there is no reduction; however, if the employee reduction is 27%, the forgiveness will be reduced by 2%, (27% – 25%). As the wages are limited to $100,000, any such employee that earns more than this in an annualized rate of pay is excluded from this reduction.
The above reductions can be mitigated by a rehire to FTEE levels or salary by June 30, 2020, if the reductions occurred between February 15, 2020 and 30 days after the enactment of the CARES Act (assumed to be April 27, 2020, if the act is passed and signed by March 27, 2020).
Application for Loan Forgiveness
Borrowers will be required to submit to lenders an application for the loan forgiveness. The application (not released or prepared as of yet) will require the following information.
a. Documentation verifying number of FTEEs and pay rates, including payroll tax filings
b. Documentation, including cancelled checks, receipts, transcripts of accounts or other documents for payments on covered mortgage applications
c. A certification from the company that the data provided is true and the amounts were used for permitted purposes of forgiveness
d. Other documentation as required by the SBA, to be determined.
The regulations will be key in determining the timing and manner of providing this information, as well as individual applications and forms from banks. For now, we wanted to highlight what future information may be necessary. Lenders will be required to issue a decision on forgiveness within 60 days of the application.
The regulations for the loan forgiveness are expected within 30 days of passage of the act.
Interactions with other CARES Act provisions
Any recipient of these loans under the CARES Acts will NOT be eligible for either the employee retention credit or the deferral of payroll taxes as allowed under the business tax provisions.
Expansion of the SBA Disaster Loan Program
In addition to the new Payroll Protection Program, the SBA has also expanded the Economic Injury Disaster Loan (EIDL) program. This expansion includes:
Increase in eligible entities
Eligible entities now include businesses with 500 or fewer employees, sole proprietorships, cooperatives with less than 500 employees, ESOPs with less than 500 employees and tribal small business concerns.
Changes in Loan Program
The CARES Act will allow for the following changes in the EIDL program
a. Waiver of a personal guarantee on loans for $200,000 or less under the EIDL.
b. Waiver of the “1 year in business” prior to disaster requirements.
c. Waiver of the “Credit Elsewhere” requirement, which would look at traditional underwriting standards of the business and financial resources of owners.
d. Allow for faster turn around time by allowing the approval of loans solely on the credit score of the applicant, not requiring any tax returns, and “appropriate alternative” procedures to determine ability to repay.
The EIDL are still loans that the SBA will want to see a full ability to repay. Based on prior SBA guidance, the expected turn around time is between 21 – 45 days on these loans.
The program is also expanded to allow for an emergency advance of up to $10,000. The grants are granted via a self-certification, and these grants are to be provided within 3 days of application. Any advanced emergency grants received are NOT required to be repaid if the recipient does not qualify for the Economic Injury Development Loan. Any grant received under this program will be a direct reduction on any amount of Loan Forgiveness.
No indication was given whether other SBA required forms under the EIDL (information on these can be found here), will be required for these loans. The above says that loans will not require tax returns as required here, so perhaps that step may be skipped, but it may take some time for SBA systems to be updated for these requirements, time which many business owners may not have.
Interaction between the PPP Loans and the EIDL Loans
As noted, and for emphasis, a business CANNOT apply for both a PPP Loan and an EIDL for the same expenses. This will generally mean that business can only apply for one or the other. However, a few key notes:
1. An EIDL can be refinanced by a PPP Loan, meaning any current EIDL loans related to COVID-19 in process or disbursed can be refinanced.
2. An EIDL, per the most recent SBA guidance, has a 21-45 day turnaround time vs PPP Loans are expected to be a “rapid” turnaround of 1-3 days when up and running.
3. EIDL program has an underwriting component and is not fully guaranteed liked the PPP loans. The EIDL are not eligible for any loan forgiveness.
4. EIDL can cover certain expenses not covered by the PPP Loans, including:
a. Increased Supply Chain Costs
b. Accounts Payable and Bills
c. Repaying Debts that cannot be repaid
A viable strategy for many businesses may be to apply for an EIDL to cover the above expenses and request the emergency grant (which should only be used for the above expenses), and then apply for the PPP Loan when available for other expenses. The businesses are under no obligation to accept an EIDL if offered, and the expanded flexibility may be useful for businesses. We would advise keeping the requests below $200,000 to avoid any personal guarantees.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.