Updated - 4/23/2020 On 04/21/2020, Congress appropriated an additional $320 billion for the Small Business Administration’s Paycheck Protection Program (PPP), $60 billion of which is set aside for small lenders and community financial institutions. It also included an additional $60 billion for the Economic Injury Disaster Loan (EIDL) program. Additional information is available here.
Updated - 4/16/2020
The Treasury has issued guidance on the Paycheck Protection Program (PPP) that is part of the massive $2.2 trillion CARES Act stimulus package. Unfortunately, as of April 16, 2020, the program has run out of money. Additional funding for small business relief, to the tune of $250 trillion, is currently stalled in Congress. While almost everyone is thrilled to see the funding going to help small businesses stay afloat in these difficult economic waters, we’re quickly seeing that the need is much deeper than the initial stimulus funding can address.
The program allows for a low-interest (1%) loan that will be forgiven if employee wages and count are maintained through June 30, 2020 and if the money is spent on payroll costs, rent, mortgage interest, or utilities in the eight-week period from the origination date. The program is available through June 30, 2020. Lenders were scheduled to begin processing applications on April 3, 2020 and April 10. The application process was delayed, then opened, but most banks have now paused applications. Banks have been overwhelmed by the massive response.
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This program is available for any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons) as well as non-profit organizations. The PPP loan is different from the Economic Injury Disaster Loan (EIDL).
PPP loans will be fully forgiven if the funds are used for payroll costs and interest on mortgages, rent, and utilities that were in place as of February 15, 2020. At least 75% of the forgiven amount must have been used for payroll. The employer is required to maintain or rehire employees. If headcount declines, the forgiveness is reduced. Loan payments are deferred for six months, but interest does accrue during that period. No collateral or personal guarantees from owners are required. Neither the government nor lenders will charge borrowers any fees. Forgiven portions are not subject to income taxes.
The PPP loan has a maturity of 2 years and an interest rate of 1%. the maximum loan amount is 2.5 X the average monthly payroll costs incurred during the year prior to the loan date, or if the business was not operational in 2019, 2.5 X the average total monthly payroll costs incurred for January and February 2020. ‘Average monthly payroll costs’ include:
For Employers –
The total compensation of employees that is:
• salary, wages, commissions, or similar compensation, like cash tips or equivalent
• vacation, parental, family, medical, or sick leave
• allowance for dismissal or separation
• group health care benefits, including insurance premiums
• retirement benefit, and
• payment of state or local tax assessed on the compensation of the employee (state unemployment tax)
Compensation does NOT include:
· Salary over $100,000 per employee
· Payroll taxes (like FICA and Medicare)
· Compensation paid to employees outside the US, and
· Qualified sick leave or family leave for which a credit is allowed under the Families First Coronavirus Response Act
For Sole Proprietors, Independent Contractors, and Self-Employed Individuals –
Compensation is the income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in one year, as pro-rated for the covered period.
Loans are administered through SBA-approved lenders like banks and credit unions. The SBA has created a sample formfor application. The form is relatively simple (2 fillable pages), and you need to attest:
· You were in business on February 15, 2020 and had employees for whom you paid salaries and payroll taxes or paid independent contractors,
· You need the money to support your ongoing obligations
· You will use the money to support payroll, mortgage payments, rent, and utilities. [It will be important to keep good records]
· You will document the payroll, covered mortgage payments, rent and utilities for the 8 weeks following the application
· You acknowledge forgiveness is based on the covered expenses, and that non-payroll costs (rent, mortgage, utilities) will only be 25% of the forgiveness
· You haven’t previously received an SBA 7(a) loan
· You’re telling the truth in the application, and
· You are providing information identical to what is on your tax returns
CPAs and advisors anticipate a tsunami of applications. Adam Hill, CPA, Partner at Cohen & Company in Cleveland has been on a continuous web-seminar circuit. “We’ve been talking to industry groups via web conference and the interest is, not surprisingly, overwhelming. We’re advising borrowers to start with their current bank and start quick. Get the financial information together now.” Hill also notes the magnitude of the CARES Stimulus far surpasses prior SBA applications. “in FY18, 7(a) loans for the entire country totaled around $21 billion. The CARES Act Stimulus is $349 Billion. The banks will get overwhelmed. Start early.”
The loans are a first step of the recovery from the economic fallout of COVID-19. Jim Boland, Advisory Partner, also at Cohen & Company, sees the loans as a start. “We’re in triage for some business clients; the first rule is to survive. We’ve been building cash flow dashboards for our clients to help them navigate the financial effects of the COVID-19 situation. This is a critical time for cash flow management.” Boland adds that he sees the PPP program as a beneficial tool but is concerned about flow. “There are millions of small businesses in the United States, and we have a narrow window to do something.”
The PPP program might be the economic equivalent of a ventilator – it may keep your business and your employees afloat in the short term. It’s worth looking into for any small business affected by the COVID-19 crisis, which unfortunately, is most of us.
My email is llabrecque@sequoia-financial.com. I have been overwhelmed by questions but will do my best to respond. Stay safe; we’re all in this together.
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