Business-wise the CARES Act, the giant economic stimulus package, is now law and we’re studying as hard as we can to make sense of the many different provisions for each of our clients.
To our clients and friends —
This piece is aimed primarily at our business clients, i.e., sole proprietors, corporations and partnerships. We anticipate we will receive many inquiries about the specifics of the programs and the application process. Please help us treat everyone’s questions thoroughly by replying to this email with a time when you will be available for a telephone discussion of your specific questions. Note that the EIDL programs are available now, but the administrative procedures for the PPP loans (the forgive-able program) won’t be set for two more weeks.
The SBA acted quickly and has implemented its portion of the CARES Act relatively thoroughly. The have helpful websites already established and explanations of the new programs on their website, https://www.sba.gov/. The latest we have from the SBA announces that all existing home and business disaster loans (from previous disasters) are in automatic deferral until 31 December 2020.
The following information relates to the loan provisions of the CARES Act.
Economic Injury Disaster Loan (EIDL)
The CARES act expands the SBA’s existing Disaster Loans Program, both streamlining and simplifying the application-to-approval process. The details are very business-friendly and are designed to get money into the hands of businesses very quickly. The covered period for this program is 31 January 2020 to 31 December 2020. The interest rate on EIDLs is 3.75% with maximum repayment term of 30 years. The term depends on the business’s ability to repay. The new guidelines do not require personal guarantees or tax forms if the loan is under $200,000.
One important new provision is the ability to apply for an emergency grant of up to $10,000 which must be issued within three days and need not be repaid, even if the loan application is denied. An important caveat – if the business subsequently obtains a forgive-able 7(a)(36) Payment Protection Program (PPP) loan discussed later, the forgiveness amount will be reduced by the amount of the emergency advance. We do not believe this is a problem.
Disaster loan proceeds can be used for purposes already authorized under the SBA program, specifically including:
- Providing sick leave to employees who cannot work due to COVID-19;
- Maintaining payroll during business disruption;
- Meeting increased supply chain costs;
- Making rent or mortgage payments; and
- Repaying debts that cannot be paid due to loss of revenue.
This links to the website where you can apply for an EIDL now:
https://www.sba.gov/funding-programs/disaster-assistance
Payment Protection Program (PPP) forgive-able Loans
This is a new program also called “7(a)(36) loans.” The loans are available for amounts equaling 2.5 times average monthly payroll cost for the 12 months before your application, up to a maximum $10 million. Payroll cost includes paid time off, health insurance payments, pension benefits, and state and local payroll taxes, not just paycheck amounts. The maximum term for the portion not forgiven is 10 years at a 4% rate.
The main distinction of the PPP loan program is that if you receive a PPP loan and spend the loan amount on payroll costs, rent, mortgage interest, and utilities, you can apply to have up to 100% of the principal amount forgiven, with no income tax consequences. Businesses may spend the money on other things, but the forgiveness cannot be more than the total of the expenses listed. Payments are automatically deferred for six months and can be deferred up to one year.
This is a link to a brief summary of the PPP loan program on our website www.wernercpa.net that summarizes the program well.
It is important to note that payroll cost under the PPP rules include owner’s compensation up to $100,000 per year and 50% of self-employment taxes for sole proprietors or partners who cannot by law receive a payroll check.
The $100,000 limitation applies to any employee as well as to the owner. For example, if an employee earns $120,000 per year you would include $8.333 and compensation in calculating the monthly average payroll cost instead of including the average gross pay of $10,000 per month.
We will email and post new information as we receive it. Please remember to reply to this email so we may schedule a time to discuss your specific case.
In the meantime, please stay safe, follow the new rules, and listen to the CDC and the medical professionals. We want all of us to see all of you as soon as possible, safe and healthy!
