If you own a small business, are self-employed or are an independent contractor, the Coronavirus Aid, Relief and Economic Security (CARES) Act provides billions of dollars of assistance that may be able to help you. More specifically, the Act includes the Paycheck Protection Program (PPP), which provides cash-flow assistance through Small Business Administration (SBA) loans for employers to maintain payroll during this crisis. Attractive features include the opportunity for debt forgiveness, no loan fees, a 6-month deferral on loan payments and there are no personal guarantees, or collateral, required. The PPP funding is available through June 30, 2020. The rush for PPP loans is on and there is plenty of confusion and chaos to go with it. If you think you may qualify, read on and submit an application as soon as possible. A sample application can be found here.
Who can Apply for Assistance?
The following entities affected by Coronavirus (COVID-19) may be eligible:
• Any small business with not more than 500 employees.
• Individuals who operate as sole proprietors, independent contractors or self-
• 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or Tribal
business concern (sec. 31(b)(2)(C) of the Small Business Act).
• Any business with a NAICS Code that begins with 72 (Accommodations and
Food Services) that has more than one physical location and employs less than
500 employees per location.
How to Apply for a PPP Loan?
You can apply through any existing SBA 7(a) lender or banker, or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. We recommend that you consult with your local lender or banker, with whom you have an existing relationship, to see whether they are participating in the program. Because this is a new program and many smaller lenders or bankers may be overwhelmed with PPP loan requests, you may need to look outside your current business banker or lender in order to receive prompt service on your loan application. The 100 most active SBA 7(a) lenders in the United States by lending volume through December 31, 2019 are listed here.
In light of the vast number of small businesses around the country, the initial PPP allocation of $350 billion may be exhausted, but we still advise that you apply for a loan since there may be a second round of funding by the government.
How much can you borrow?
You can apply for a loan up to 2.5 times your average monthly payroll costs, to a maximum of $10 million. Payroll costs include:
• Salaries, wages, commissions, tips, etc., however there are limitations for
employees who earn over $100,000 a year.
• Vacation, parental, family, medical or sick leave.
• Allowance for separation or termination.
• Payment for employee benefits consisting of group health coverage,
including insurance premiums and retirement.
Your eligible payroll costs are based on average payroll for the last 12 months. However, if your business is new, then payroll costs are based on average payroll for January and February 2020. If your business is seasonal (e.g., doesn’t operate year-round), payroll costs are based on what you paid during the 12-weeks beginning either Feb. 15, 2019 or March 1, 2019.
The PPP loan has a maturity of two years and an interest rate of 1%. Furthermore, actual loan payments can be deferred for up to six months, and some, or all, of this loan can be forgiven if certain requirements are met (see below).
What can the Loan be Used for?
Your business can use the loan proceeds to fund the following costs incurred between Feb. 15 and June 30, 2020:
• Payroll costs for your employees, whether they are able to work or not. For
example, your business may be unable to open due to government restrictions.
But if you continue to pay your workers, those costs are included in the eligible
payroll costs. This can include paying sick, medical or family leave
• Payment for group health care benefits, including insurance premiums
• Interest on mortgage loans
• Rent and utilities
• Interest payments on other debt (incurred before Feb. 15, 2020)
How Much of the Loan can be Forgiven?
The goal of the Paycheck Protection Program is to keep employees paid during the eight weeks, beginning with the date of your loan. Any reduction in the number of employees or the wages you paid affects the forgiveness of the loan. The amount that is forgiven is the amount spent on the eligible costs outlined above. However, if there is any reduction in the number of full-time employees, or a decrease in wages paid by more than 25%, the loan forgiveness is reduced. Here is a closer look at what triggers a reduction in the amount of the loan that is forgiven:
• If you decrease wages by more than 25% for any employee who made less
than $100,000 annualized in 2019.
• If the number of full-time employees decreases.
If you happen to have already laid off employees or cut pay prior to the loan application process, the loan amount can still be forgiven for the full amount of your payroll cost if you rehire your employees by June 30, 2020, and restore your full-time employees and wage levels for any changes made between Feb. 15 and April 26, 2020.
You should work closely with your business accountant to ensure that you maximize the forgivable amount of the loan. This requires properly documenting the use and allocation of the funds. As part of this effort, you may want to segregate the PPP funds and take steps to ensure that proper accounting mechanisms are in place. Due to the likely high subscription of PPP loans, the Small Business Administration (SBA), in its April 2, 2020 Interim Rule, announced that no more than 25% of the loan forgiveness amount can be attributable to non-payroll costs (i.e., 75% of the loan needs to be used for actual payroll).
To request the loan forgiveness after the eight-week period, you will need to file another application with the lender that is servicing your PPP loan. By that time, if you have been following the correct guidelines, this should hopefully be a relatively easy process. Lenders are required to make the forgiveness determination within a 60-day period after the application is submitted.
Other CARES Act Provisions to Help Business Owners
If you do not qualify for a PPP loan, there are other provisions of the CARES Act that may provide assistance to your business, such as the Employee Retention Credit.
Any employer, regardless of size, is eligible for the credit during calendar year 2020 if your business is fully or partially suspended due to a governmental order related to COVID-19, or if your business experiences a significant decline in gross receipts (i.e., a reduction of 50 percent of gross receipts from the same quarter in 2019).
As a general rule, the Employee Retention Credit is a refundable credit that is equal to 50 percent of the qualified wages of each employee of an eligible employer. The amount of qualified wages, with respect to any employee for all calendar quarters in 2020, cannot exceed $10,000. In other words, there is a $5,000 total cap on the credit per employee for the 2020 tax year. The credit is calculated on a calendar quarter basis and is applied against applicable employment taxes of the eligible employer.
FICA Tax Deferral
The CARES Act allows all employers to defer payment of employer Social Security taxes that are otherwise owed for wage payments made after March 12, 2020, through the end of the calendar year. Instead of depositing these taxes on a next-day or semi-weekly basis, the deposit due date for 50% of the taxes is deferred to December 31, 2021, with the remaining 50% deferred until December 31, 2022.
If you are a business owner think the Paycheck Protection Program may apply to you, or would like to learn more about how other provisions of the CARES Act may benefit your business, please reach out to your Wescott Advisor to discuss these resources in more detail.