March 28th: CARES Act Information & FAQs

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Clients & Friends, As you can imagine, there are lots of questions about the CARES Act, especially with regards to the Paycheck Protection Program provisions.  We have summarized our thoughts below. Summary

  • The President signed the CARES Act into law on March 27, 2020
  • $349B for the SBA to guarantee loans to small businesses
  • Paycheck Protection Program establishes a loan that has the potential to be completely forgiven.
    • Distributed using existing framework of the Small Business Administration’s 7(a) program, which is a partnership between private financial lenders (issues loans) and SBA (guarantees them) – Borrowers will obtain this loan through their local SBA approved bank
  • Employee retention credit allows businesses that have had suspended or closed operations, yet continued to pay employees, to receive a refundable payroll tax credit for 50 percent of wages paid during the COVID-19 crisis, if not approved for the PPP loan
  • Delay of payment ofemployer payroll taxes – with half of the amount to be paid by 12/31/2021 and the other half by 12/31/2022
  • Expanded unemployment that provides an additional (up to) $600/week, and provides payments to those not traditionally eligible for unemployment benefits (self-employed, independent contractors)
  • A summary of relative provisions within the CARES Act to support this document included here

Paycheck Protection Program

What will I need to apply for the loan?

  • 2019 tax returns or 2019 P&L
  • Last 4 quarters of payroll tax forms (941) and verification of the number of employees and payroll incurred over the most recent 12-month period
  • 1099s for 2019 issued to those who you paid non-employee compensation
  • Document the total of all health insurance premiums paid by you, as the owner, for you and your staff under a group health insurance plan for the last 12 months. Your insurance provider should be able to provide this figure
  • Document the sum of retirement plan funding (401(k) plan, SIMPLE IRA plan, SEP IRA plan) that came from you as the employer. This should not include any funding that came from the employee’s out of their paychecks for their deferrals for the past 12 months

How and when can I apply?

  • Apply thru local SBA approved lenders
    • 1,800 private lenders currently approved to issue 7(a) loans
    • Steven Mnuchin said department plans to issue new regulations that will make it possible for almost all FDIC-insured banks to make SBA loans
    • Best way to start is talk to your lender and ask about applying for a 7(a) small business loan under the Cares Act
  • Banks will need time to understand the application process as determined by the federal government

Who is eligible?

  • Businesses & nonprofits with < 500 employees
  • Borrowers in business as of February 15, 2020

What credit profile is needed to borrow?

  • Will be relaxed compared to 7(a) loans in typical times
  • Proof of payroll costs, based on payroll of last 12-months
  • Expect SBA to release detailed guidelines in coming days on underwriting and application criteria

How long will it take to receive money?

  • Mnuchin said he expects “by the end of next week, we will have a very simple process where these can be made and disbursed in the same day.”
  • However, historically, SBA loans have taken several weeks.  Businesses should plan to wait 4-6 weeks to receive funds, just in case

How much can I apply for?

  • Amount you may borrow is limited payroll costs,  including:  wages, commissions, salary, or payment to independent contractors; PTO; parental, family, medical, or sick leave; severance payments; premiums and payment for group health benefits; retirement benefits; and any state or local compensation taxes
  • Payroll costs do not include: compensation for any employee in excess of $100,000 annual salary; payroll taxes; payroll for employees with primary residence outside of the U.S.

What can I use the money for?

  • May be used to cover payroll for employees who make less than $100,000 annually, mortgage payments, rent, utilities, and any other debt service requirements

Can this loan be forgiven?

  • Borrower can have a portion of the principal of the loan forgiven in an amount equal to payroll costs, mortgage interest, rent, or utility costs incurred during the 8-week period following origination of the loan
  • Forgiven amount may be reduced based on the number of employees and each employee’s wage or salary in such 8-week period as compared to a specified pre-COVID-19 period
    • The formula compares the number of employees during the 8-week covered period to the period (below options determined by borrower):
      • February 15, 2019- June 30, 2019, OR
      • January 1, 2020 – February 29, 2020
    • If you rehire employees by June 30, 2019, then you are not considered to have reduced payroll for purposes of forgiveness

SG Commentary: By calculations of large investment banks the $350B program would only cover all-in expenses in the small business sector for about a month. This means if social distancing causes disruptions longer than this (we expect it will) then the government will have to increase the funding. Complications exist as to how quickly loans can get processed and into the hands of small businesses, as well as how the incentives for rehiring conflict with state and city mandates for businesses to shut their doors. What happens if I don’t use the loan for payroll, mortgage interests, rent, or utility cost?

  • The amount used for expenses or costs other than those specified will still be considered a loan.  That portion of the loan will not be forgiven
  • The interest rate of the loan will be 4%
  • Payments will be deferred for 6 months – 1 year, following which will be a maturity of 10 years, maximum
  • No prepayment penalty

What if I have other available credit:

  • Other available credit doesn’t impact your ability to receive a PPP loan, unlike the Economic Disaster Recovery loans

What if I laid off employees due to crisis and shut down most of my operations? Am I still eligible to apply for this loan?

  • You can apply for the loan, the amount forgiven will depend on your hiring or rehiring to the same number of employees, at their full rate consistent with either the time period February 15 , 2019 June 30, 2019 or January 1, 2020 – February 29, 2020, by June 30th, 2020

Should I immediately rehire my employees if I plan to apply for this loan? Our interpretation of the Act, as we understand it, is as follows.  We hope to receive more clarity: The date you would be required to hire back employee by, in order to maintain the same workforce as before the crisis so that your loan can be forgiven, is June 30th.  The proceeds would only cover 2 ½ months of payroll (since that’s the maximum you can borrow).  The proceeds have to be used for payroll, utilities, rent, during the 8-week period after your loan originates. If you anticipate being closed for longer than 8 weeks (unknown at this time), and you rehire your employees too soon, it’s possible you’ll run out of PPP funds. If you rehire your employees to late, it’s possible you won’t have 8 weeks’ worth of payroll by the end of the covered period (June 30th) to forgive. Included in the CARES act is expanded unemployment insurance, which increases the amounts recipients receive by $600/week.  Since unemployment benefits would be larger than originally anticipated, this allows business owners to consider delaying receipt of PPP funds until there their business reopens, and then rehiring employees when the business is ready.  This strategy would allow for the first 8 weeks of employment to be covered under the PPP loan. What other help is available?

  • Several states are offering low interest lines of credit
  • The maximum amount for an SBA Express loan increased from $350,000 to $1 million through December 31, 2020
  • Small businesses in all states are eligible to apply for a separate SBA program that provides disaster loans called the Economic Injury Disaster Loan. These are low-interest loans issued directly from the agency
    • Loans carry a 3.75% interest rate for businesses and 2.75% rate for nonprofits
    • Businesses interested in this apply directly with SBA
    • Information below, from our friends at Live Oak Bank, is a nice summary of the PPP and EIDL

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