On March 27, 2020 The Coronavirus Aid, Relief, and Economic Security Act (aka the CARES Act) was signed into law. The CARES Act provides financial relief to struggling small businesses in a few different ways including loans, grants, and credit programs.
This article will cover how employers can get access to key funding to help pay for payroll and other operating expenses from the Paycheck Protection Program via Division A, Title I, aptly named the "Keeping American Workers Paid and Employed Act". This $349 billion program, administered through the SBA via 7(a) loans, has arrived just in time, as many businesses are currently suffering economically from the fallout from Coronavirus- a pandemic turned (potential) global recession.
While the eagerly anticipated Act will provide much needed funding small business owners desperately need, we hope that additional legislation is enacted to fill the gap through the end of 2020 and into 2021. We will continue to post information about new programs as they become available.
>>>Read the CARES Act in full here. <<<
Jump to the topics you are most interested in here:
For those who prefer to watch, rather than read...
|
SBA Paycheck Protection Program (PPP) Loan Information |
|
|
Total Funds Available |
$349 Billion |
|
Funding Period |
February 15, 2020 - June 30, 2020 |
|
Maximum Loan Amount |
2.5x average monthly payroll costs or The outstanding amount of an Economic Injury Disaster Loan (EIDL) that was made during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available to be refinanced under the covered loan. or $10 Million |
|
Maximum SBA Guarantee |
100% |
|
SBA Guarantee Fees |
No Fee |
|
Personal Guarantee |
None Required |
|
Collateral |
None Required |
|
Use of Proceeds |
Payroll and other operating expenses |
|
Maximum Interest Rate |
1% |
|
Maximum Term |
2 Years |
|
Prepayment Penalty |
None |
|
Payment Deferral |
Not less than 6 months, including payment of principal, interest, and fees, and not more than 1 year. |
|
Turn Time |
~36 Hours after approval |
|
Where to Apply |
Eligible entities may file applications with an SBA-approved lender. Lenders have been delegated authority to make loans without SBA review. |
As of March 26, 2020 nearly 3.3 million Americans have filed for unemployment, which has put an enormous strain on state governments, who are in charge of approving and funding unemployment claims. Additionally, businesses feeling the financial pinch are forced to let their staff go, taking with them years of experience and institutional knowledge, both of which are incredibly valuable to the employer.
The Paycheck Protection Program, part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act provides the crucial funding businesses need to which aims to keep employees and workers paid during this time of crisis and uncertainty.
Eligibility is rather simple and is clearly defined in the CARES Act, but is centered around small businesses with fewer than 500 employees that were in operation as of February 15, 2020.
You are eligible if you are:
A small business with fewer than 500 employees
This includes full time, part time, and any other status
A small business that otherwise meets the SBA’s size standard
A 501(c)(3) with fewer than 500 employees
An individual who operates as a sole proprietor
An individual who operates as an independent contractor
An individual who is self-employed who regularly carries on any trade or business
A Tribal business concern that meets the SBA size standard
A 501(c)(19) Veterans Organization that meets the SBA size standard
Additionally, some special rules may make you eligible:
If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis. This includes:
Hotels and Motels
Casino Hotels
Bed-and-Breakfast Inns
All Other Traveler Accommodation
RV Parks and Campgrounds
Recreational and Vacation Camps
Rooming and Boarding Houses, Dormitories, and Workers’ Camps
Food Service Contractors
If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply
You must also certify that:
The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient
Acknowledge that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments
The eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan
During the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.
Many people have applied for an Economic Injury Disaster Loans (EIDL), however as of the fourth week of March, the SBA Disaster Loan Portal was overwhelmed, operating at a snail's pace (if at all), and applicants were forced to apply offline. When we (Accountingprose) filed for an EIDL, there was no notification that the loan documents were even received after being sent by email and uploaded to the SBA Box account. While #3 states that the borrower should not have a loan application pending, if you have applied and have not heard back from the SBA, it may be safe to assume that your application may be lost in the ether. However, we recommend that you speak to an SBA approved lender who can provide further guidance.
Also, it important to note that there is an opportunity to refinance the Economic Injury Disaster Loans (EIDL) made between Jan. 31, 2020 and the date this loan program becomes available into a new loan. We highly encourage you to speak to your lender about this potential if you apply for funding through this program.
|
Employer Information |
Maximum Loan |
|
Option1: If qualified business was in operation for one year prior to loan date |
2.5 x the average total monthly payroll costs incurred during the year prior to the loan date |
|
Option 2: If qualified business was not operational in 2019 |
2.5 x the average total monthly payroll costs incurred for January and February 2020 |
|
Option 3. Seasonal Employers |
2.5 x the average total monthly payments for payroll costs for the 12-week period beginning February 15, 2019 or March 1, 2019 (decided by the borrower) and ending June 30, 2019. |
Essentially, the maximum loan amounts are calculated by averaging your monthly payroll costs and multiplying that by 250%. Those businesses who were not operational as of 2019, but have payroll costs in January 2020 and February 2020 are still eligible to apply and will use the payroll costs in those two months to find their average.
Not every single payroll costs will be eligible to be included in this monthly average, so it is important to understand what to use to calculate the average.
Salary, wage, commission, or similar compensation
Payment of cash tip or equivalent
Payment for vacation, parental, family, medical, or sick leave
Allowance for dismissal or separation
Payment required for the provisions of group health care benefits, including insurance premiums
Payment of any retirement benefit
Payment of state or local tax assessed on the compensation of the employee
UPDATED as of 04/03/20- Payments to independent contractors
Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period February 15, 2020 to June 30, 2020.
Federal payroll taxes, railroad retirement taxes, and income taxes
Any compensation of an employee whose principal place of residence is outside of the United States
Qualified sick leave wages for which a credit is allowed via HR 6201, the Families First Coronavirus Response Act
Qualified family leave wages for which a credit is allowed via HR 6201, the Families First Coronavirus Response Act
The exclusion of the qualified sick and family leave wages paid/credited via HR 6201, is put in place so that the employer doesn't "double dip", essentially getting two benefits applied for the same wages paid.
You are also eligible for a PPP loan if you are an individual who operates under a sole proprietorship or as an independent contractor or eligible self employed individual, you were in operation on February 15, 2020. You must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099- MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount. You may apply for a PPP loan starting 04/10/20.
| Cost | Option 1. Amounts in 12 month Period |
| Payroll Wages | $1,000,000 |
|
Federal Employer Payroll Taxes Wages x 6.2% |
$62,000 |
|
State Employer Payroll Taxes (varies by state) Wages x 1.7% |
$17,000 |
|
Simple IRA Wages x 3% Employer Match |
$30,000 |
| Health Insurance | $60,000 |
| Total Payroll Cost | $1,169,000 |
|
Minus Excluded Costs Federal Payroll Taxes |
$62,000 |
|
Adjusted Payroll Costs |
$1,107,000 |
|
Average Monthly Payroll Costs Adjusted Payroll Costs / 12 months |
$92,250 |
|
Max Loan Amount Average Payroll Costs x 2.5 |
$230,625 |
We recommend that you set up a grouped Income Statement in Xero, our accounting software of choice, to calculate the total wages paid, average those wages, and see your max loan amount.
The Paycheck Protection Program is intended for small businesses to cover the following costs:
Payroll, commissions, and similar compensation (as noted in the allowable payroll costs above)
Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
Mortgage Interest
Principal payments and prepayments are excluded
Mortgage must have been in place prior to February 15, 2020
Rent
Rent agreement must have been in place prior to February 15, 2020
Utilities
Utilities must have been in place prior to February 15, 2020
Interest on any other debt obligations
For debt obligations in place prior to February 15, 2020
By limiting the usage to these types of expenses, it ensures that the funds are being used for what the CARES Act intended- keeping employees paid and employed.
Borrowers are eligible for loan forgiveness equal to the amount spent on the following expenses during the 8-week period beginning on the date the loan was originated:
Payroll costs (as outlined above)
For borrowers with tipped employees, additional wages paid to those employees
Mortgage Interest
Mortgage must have been in place prior to February 15, 2020
Rent
Rent agreement must have been in place prior to February 15, 2020
Utilities, including: Electricity, gas, water, transportation, telephone, or internet
Utilities must have been in place prior to February 15, 2020
Interest on any other debt obligations
For debt obligations in place prior to February 15, 2020
The CARE Act also states that the loan forgiveness cannot exceed the principal of the loan, so keep that in mind when you are making it rain.
|
Cost |
Amounts in 8-Week Period |
|
Payroll Wages |
$150,000 |
|
State Employer Payroll Taxes (varies by state) Wages x 1.7% |
$2,550 |
|
Simple IRA Wages x 3% Employer Match |
$4,500 |
|
Health Insurance |
$10,000 |
|
Rent |
$5,000 |
|
Utilities: Electricity |
$800 |
|
Utilities: Telephone |
$500 |
|
Utilities: Cable/Internet |
$300 |
|
Utilities: Gas |
$250 |
|
Interest for Other Debt Obligations |
$500 |
|
Total Potential Loan Forgiveness |
$174,400 |
Many employers have had to make tough decisions recently, like cutting their staff count or their staff's salaries in order to stay afloat. The Paycheck Protection Program was put in place to save jobs and keep wages up so, should you not rehire employees or return wages to their normal rate by June 30, 2020, you will see the following reductions in the loan forgiveness .
|
Average Number of Full-Time Equivalent Employees (FTEs) Per Month for the 8-Weeks Beginning on Loan Origination |
(Divided By) |
Option 1. Average number of FTEs per month from February 15, 2019 to June 30, 2019 |
|
Option 2. Average number of FTEs per month from January 1, 2020 to February 29, 2020 |
||
|
Seasonal Employers. Average number of FTEs per month from February 15, 2019 to June 30, 2019 |
||
|
18 FTE |
/ |
20 FTE |
|
= 90% or a 10% reduction in loan forgiveness
|
||
So this means that if this employer reduced their average headcount from 20 Full Time Employees to 18 Full Time Employees, their loan forgiveness amount would be reduced by 10%.
|
Total Potential Loan Forgiveness |
$174,400 |
|
10% Reduction for Reduced Headcount |
$17,440 |
|
Adjusted Loan Forgiveness |
$156,960 |
|
Loan Amount without Forgiveness |
$230,625 |
|
Adjusted Loan Amount After Forgiveness is Applied |
$73,665 |
This means that if the the borrower had received a loan for the maximum loan amount $230,625 but let 2 full time employees go, their loan forgiveness would be reduced by $17,440 as a penalty for not keeping their employee headcount at pre-Coronavirus levels
"The total number of regular straight-time hours (i.e., not including overtime or holiday hours) worked by employees divided by the number of compensable hours applicable to the fiscal year, as defined by the Office of Management and Budget, Circular No. A-11.
For the purposes of estimating FTEs in this survey, 2,080 hours (per year) would be equal to one FTE.
8 hours per day x 5 days per week x 52 weeks = 2,080 hours per year
or if you want to see it by week....
2080 hours per year / 52 weeks = 40 hours per week
|
Employee |
Hours Worked Per Week |
|
Leslie |
40 |
|
Ron |
35 |
|
Donna |
25 |
|
Tom |
40 |
|
Total Hours Worked |
140 |
|
Total Hours Worked |
FT Hours in Week |
# of FTEs |
|
|
140 Hours |
/ |
40 |
3.5 |
While some employers choose to layoff or furlough employees, others choose to reduce salaries instead.
|
Payroll Costs |
- |
Any employee who did not earn during any pay period in 2019 wages at an annualized rate more than $100,000, the amount of any reduction in wages that is greater than 25% compared to their most recent full quarter. |
|
Name |
Previous Period |
Covered Period |
% Diff |
Excess Reduction over 25% |
Forgiveness Reduction Excess % x Salary in Previous Period |
|
Joe |
$9,000 |
$7,000 |
22% |
0% |
$0 |
|
Bob |
$12,000 |
$8,000 |
33.33% |
8.33% |
$1,000 |
|
Jane |
$15,000 |
$9,000 |
40% |
15% |
$2,250 |
|
Total |
$3,250 |
||||
In this case, this employer reduced wages for Joe, Bob, and Jane.
In total, the loan forgiveness will be reduced by $3,250.
If the employer can re-hire for the same position (whether the same employee or a replacement) and return to the average pre-Coronavirus headcount or if they can eliminate wage reductions by June 30, 2020 they will not be penalized and will receive the loan forgiveness at the normal rate.
Each borrower must apply for forgiveness with the lender servicing the loan. The lender will have 60 days to review the forgiveness request and will determine if the borrower's loan can be reduced to reflect the forgiveness total. Be prepared to provide the following information:
Documentation verifying the number of full-time employees on payroll and pay rates via:
Payroll tax filings reported to the IRS
State income, payroll, and unemployment insurance filings
Documentation to prove your mortgage, lease, or utility payments, including:
Cancelled checks
Payment receipts
Account statements
Certification from the borrowed that states:
The documentation presented is true and correct; and
The amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
Any other documentation the Small Business Administration determines necessary
We recommend setting up a second checking account to deposit the loan funds in, and paying for all qualified expenses with this account to make the forgiveness process go more smoothly.
Super Bonus: The amount of the loan that has been forgiven will not be included in gross income of the borrower.
Lenders who have opted into the Paycheck Protection Program have a massive incentive to lend via the Paycheck Protection Loan Program. The SBA has promised to pay each lender a percentage of the loan amount, to make lending more enticing. They also promise to pay lenders their fee within 5 days after funding- so the faster the lenders get loans through, the faster they get paid.
|
Loan Amount |
SBA Pays Lender |
|
<$350,000 |
5% |
|
>$350,000 and <$2,000,000 |
3% |
|
>$2,000,000 |
1% |
Additionally, the SBA has told lenders to prioritize certain borrowers, including:
Businesses in underserved and rural markets
Veterans and members of the military community
Businesses owned and controlled by socially and economically disadvantaged individuals
Businesses owned by women
Businesses in operation for less than two years
They are also waiving the following:
Finally, SBA approved lenders have been delegated authority to make loans without SBA review, which will further speed up the process.
But an applicant business must certify that:
However, A recipient of an Economic Injury Disaster Loan (EIDL) that was obtained between January 31, 2020, and the date PPP loans are first available is not precluded from receiving a PPP loan so long as the EIDL was obtained for purposes of paying costs other than payroll costs and the above obligations.
In order to get lending with this program you should:
Your SBA lender will be able to provide a complete list of required documentation. We will update this blog once the applications go live next week.
Sources:
Dept of Treasury Interim Ruling
Legal Disclaimer: The information provided by Accountingprose is for general informational purposes only. All information is provided in good faith, however we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability or completeness of any information on our website. Under no circumstance shall we have any liability to you for any loss or damage of any kind incurred as a result of the use of the site or reliance on any information provided on the site. Your use of our website and your reliance on any information on the site is solely at your own risk.