Last Friday, Congress signed a mammoth $2 trillion stimulus package into law called The Cares Act (Coronavirus Aid, Relief and Economic Security). Many of the programs and initiatives in The Cares Act are intend to assist business owners through a variety of needs. In this episode of The Agent of Wealth Podcast, host Marc Bautis shares details on the three relief programs: The Economic Impact Disaster Loan (EIDL), The Payroll Protection Program (PPP) and The Employee Retention Tax Credit (ERTC). Bautis also answers frequently asked questions about each program, such as:
- What are the eligibility requirements?
- Do I have to personally guarantee the loan or provide any collateral?
- What do the loan funds have to be used for?
- Is the loan forgivable?
- What’s the maximum loan amount I can receive?
- How do I apply?
This is the second part of a two-part series on The Cares Act. Listen to the first part, which covers the individual relief efforts outlined in the Act.
Key Business Provisions of the CARES Act
Economic Injury Disaster Loan (EIDL)
This is a program through the small business administration.
The SBA has been a great resource for businesses who need start-up money or come across hard times and need loans to get through disasters.
That’s why the CARES Act now permits businesses to take an Economic Injury Disaster Loan (EIDL) for up to $2 million for businesses impacted by the coronavirus.
The EIDL is now available in all 50 states and can be used by any small business that has fewer than 500 employees. Self-employed individuals and non-profits are also eligible for this program.
How is this different from a regular SBA loan?
Under a normal SBA loan, there is stringent qualification and testing that must take place to complete the loan. The red tape is significantly easier to cut through with the EIDLs. Qualification can be based solely on sufficient credit and/or some way to prove that you have the ability to repay the loan. Further documentation may be required, but whatever is required should be limited.
For self-employed individuals, you’ll need a copy of your Schedule C or proof of income and expenses as well as potentially 1099-MISCs.
In addition to a small business disaster loan, there is also a grant component that is available
- The CARES Act allows for a $10,000 emergency grant to be issued for anyone who applies for an EIDL.
- The reason for the grant is due to the fact that processing for EIDLs can take quite a bit of time, especially with the additional business owners who are sending in applications.
- The $10,000 emergency grant is given to business owners within three days of their application, and they’re allowed to keep that money regardless of whether or not they ultimately qualify for an EIDL or not.
What can the EIDL be used for?
Basically anything. You have to prove that your business has had an economic injury, and once that injury is proven, the EIDL can be used for things like payroll, monthly debt payments, rent, accounts payable or other operating expenses.
What are the terms of the EIDL?
The terms for the EIDL are designed to be incredibly favorable. Though the SBA has final say on the terms, repayment can be stretched over 30 years, and the interest rate is set at 3.75%. To give you an idea of just how affordable that is for most businesses, injecting $100,000 into your business and paying it back over 30 years would only cost $463 per month.
Next we’re going to talk about the paycheck protection program which is looked at as the golden goose of the CARES Act.
If you had already acquired an EIDL before the PPP program became available, your EIDL can be wrapped into your PPP. However, if you received the $10,000 emergency grant, that money will be docked from the amount that is ultimately forgiven on the PPP.
Paycheck Protection Program (PPP)
The PPP is a $349 billion dollar program as part of the CARES Act. It’s backed by an SBA Loan and is potentially forgivable.Potentially forgivable.
The SBA and the Treasury are putting the rules out as this is written. Even though the bill was passed last week, the guidelines aren’t out on it yet. The law requires the SBA put regulations out within 15 days from enactment. Because of that you have to take everything I’m going to tell you to take with a grain of salt. It may change.
While regulations may not be out for several weeks, the first applications are going to be accepted this Friday, April 3rd. You heard that right. Loans are going to be given out before we understand all of the rules of the loans that are applied for.
Sole Proprietors and Small Businesses can begin to apply by 4/3
Self Employed and Independent Contractors can begin by 4/10
Who qualifies for the loan?
There are Three factors to qualify
- You have a business
- You have less than 500 employees
- You have to meet certain certifications
- There’s an economic uncertainty of this crisis that makes the loan necessary to support ongoing operations
- Certify that you’re going to use the funds for payroll, leases, utilities, mortgage payments
- Certify that you’re not going to get any other loan under the program
Terms of the Loan
A lot of confusion, because the law had wording such as “up to this” or “max of this.” The Treasury came out and provided some clarity. Everyone is going to get
- 1% interest rate
- Payments would be deferred 6 months
- 2 year loans for everyone
What the loan can be used for
- Rent in force before February 15th
- Interest on mortgages that were in force prior to February 15th
- Utilities (Heat, Electric, Oil & Gas, Phone, Internet, ..)
- Payroll costs the big one and it is up to $100,000 ratably per employee
- Wages, sick leave, health insurance premiums, state and local taxes, net earnings from self employment
- You can apply for a loan to pay yourself an amount for your own net income
- If you get to $100k of compensation that equates to 20,833 of compensation over a 2.5 month period which is the maximum amount that you would be able to take advantage
How much of a loan can you get
- The amount of the loan a business will receive is the lessor of $10MM or 2.5 x monthly average payroll costs over the prior year
- For self-employed or independent contractors it will be your net income divided by 12 multiplied by 2.5.
How much of this loan can be forgiven?
- The amount that you spend on qualified expenses in the 8 weeks from when you get the loan
- Payroll costs are the big one. Mortgage interest, rent, and utilities. The non-payroll costs that are forgiven cannot be more than 25% of the forgiven amount
Because there is a limited amount of money allocated to the Paycheck Protection Program bucket,there is a lot of urgency applying for the loan. The loans are given out on a first come / first serve basis.
Secretary Mnuchin said they would go back to congress and ask for more money. You don’t want to leave yourself at the mercy of Congress to allocate more money to it
There is a catch. The whole purpose is to keep your staff employed. There are two things you cannot do or the forgivable portion will be reduced
- You cannot reduce the compensation for employees earning $100k or less by more than 25%
- Not decrease full time equivalent headcount. Either from 2/15/2019 through 6/30/2019 or from 1/1/2020 through 2/29/2020. You get to pick which of those time frames to be judged against.
The rules will allow you to hire back those people through June 30th and you will not be impacted
How do I get the loan?
- It’s going to be done through either SBA approved lenders. If you have a relationship with a bank I would reach out to them first and ask for an application.
- Federally insured banks, credit unions
- CARES act also authorize the SBA to authorize other lenders
There’s a four page application that just got released out there. It will be linkedin the show notes. It’s pretty straightforward
You can have a consultant or CPA help you fill out. The compensation for that service will come from the loan originator. You can’t be charged for those services
What are some Questions?
How does the PPP interact with other parts of the CARES act?
One of the other programs of the CARES Act is the Employee Retention Tax Credit ERTC. You are not allowed to take both the ERTC and PPP.
For some businesses, the better alternative will be to use the ERTC. It is up to a 50% credit on up to $10k of an employees wages. It’s capped at the $10k. The more you have average salaries that low, the more it may make sense. We’ll cover this option in a second
The second option is the deferral of payroll taxes. An employer may defer half of their 2020 payroll taxes until 12/31/2021 and the other half until 12/31/20202.
Company A has existed for a number of years and has three employees. In the last 12-month period, Employee 1 made $50,000, Employee 2 made $60,000 and Employee 3 made $150,000.
Company A’s total compensation for the prior 12-month period is $260,000.
But remember, the total compensation for Employee 3 is $150,000. Since we’re capped at $100,000 per employee, we have to deduct $50,000 from our qualifying payroll costs to come to a total of $210,000. Take that number, divide it by 12 months and multiply it by 2.5 months to come up with a total loan amount of $43,750.
What Happens Next?
Over the course of the next eight weeks, Company A uses the PPP loan to pay not just wages and benefits, but its rent, mortgage interest, utilities and interest on debts that were acquired before February 15, 2020, too.
At the end of the 8-week period, Company A gets to go back to the bank that gave him the loan in the first place and provide them with payroll records and receipts for these miscellaneous qualifying payments. If those items total at least the $43,750 that was borrowed in the first place, the entire loan is forgiven.
What if the company doesn’t use the whole PPP loan in qualified expenses?
More good news. It isn’t like you have to give the money back to SBA immediately. The remainder is put into forbearance for a term of 6-12 months, and at the conclusion of the forbearance period, the loan becomes a 2-year term with an interest rate of 0.5%
What happens if your headcount changed and the impact to the forgiveness of the loan.
Let’s go back to our example from Company A. In that example, what if Employee 1, who earned $40,000 in the last 12-month period, was let go in advance of this loan?
The PPP requires that you have the same number of full-time employees or equivalents in place from the period of February 15, 2020-June 30, 2020 as you had for the same period in 2019. If you’ve reduced staff, you’re going to get the amount of your forgiveness docked. You also can’t reduce wages by more than 25% year-over-year to any individual, or you also get docked.
If we just look at the reduction of staff, Company A would be penalized to the tune of 33% of its forgiveness for not having Employee 1 on payroll. But if Employee 1 was rehired by June 30, 2020, that forgiveness penalty is waived.
The same can be said for reduction in wages. If the wages are restored by June 30, 2020, the full forgiveness is also restored.
Employee Retention Credit
What is it?
It’s a new credit against payroll taxes from March 13, 2020 to December 31, 2020 up to 50% of wages paid to each employee up to a max of $10k of wages per person.
How do I qualify?
In order to qualify for the ERTC, your business needs to fall into one of two categories:
- Was completely or partially shut down by local, state or federal government order
- Experienced a “significant decline in gross receipts”
Let’s take these two qualifiers one at a time.
Was completely or partially shut down by local, state or federal government orders
It seems to be the intent of Congress that if your business is forced to shut down for any COVID-19-related reason for even a single day in a quarter, you would qualify for the entire quarter’s wages. If this interpretation is correct, if your local government officials were to issue a stay-at-home order on March 31 and lift the ban on April 2, you would theoretically qualify for the ERTC for both the first and second quarters. However, this is going to be up for IRS determination when it comes up with its regulations at a later date.
We also don’t have a great idea of what “completely or partially” shut down means yet either. My best assumption for the time being is that your business would have to be located in a place where stay-at-home orders are in place, and you don’t meet the local list of essential businesses OR if your business is in an industry that has been forced to shut down nationally such as sporting events, travel or tourism.
Experienced a “significant decline in gross receipts”
A “significant decline in gross receipts” is defined as any given quarter during the year in which your business has no more than 50% of the gross receipts that it had in the same quarter the previous year. If Company A had $100,000 in gross receipts in the second quarter of 2019 and $49,000 in gross receipts in the second quarter of 2020, that would be a qualifying quarter. But if Company A had $100,000 in gross receipts in the second quarter of 2019 and $51,000 in gross receipts in the second quarter of 2020, Company A would be out of luck and wouldn’t qualify for the ERTC.
Do I get unemployment compensation as well as qualify for PPP? It’s a little bit of a grey area.. There is federal unemployment pandemic assistance as part of the CARES Act that gives self employed the equivalent of unemployment. If you receive a loan and you are using it to pay yourself a salary I would assume that you would not be able to double dip and collect unemployment and a loan that is designed to keep people on the payroll. If you run out 2 months of the PPP loan you may then be able to collect unemployment insurance
Alright so we covered the Economic Injury Disaster Loan, Payment Protection Program, and the Employee Retention Tax Credit. There are pros and cons to each and one may be better than the other for you.
When you couple this with the regulations and details of the loans and credit programs are still being flushed out it could be hard to make a decision of which one to go with. If you have any questions I’d be happy to talk.