Covid-19 Update, March 30, 2020
CARES Act: The Coronavirus Aid, Relief & Economic Security Act was signed into law provides critical relief for Americans struggling with the financial impacts of Covid-19. Our staff has read through the entire 800 page bill, and below are important facts, and answers to the most common questions from our clients.
PAYROLL PROTECTION PROGRAM: This is one of the most substantial pieces to benefit small businesses. We have already received a lot of emails and calls regarding this provision and the details are important.
This program allows small employers (under 500 employees) to obtain a loan that may become forgivable in the future.
The definition of payroll costs is key to understanding what is covered. Payroll for employees means: salary, wage, commission, cash tip, vacation leave, parental leave, family leave, medical leave, sick leave, allowance for dismissal or separation, group health care benefits, retirement benefits, and state/local taxes assessed on the compensation of the employees. You cannot include qualified sick or qualified family leave where you are utilizing the new payroll credit.
Payroll for employers that are sole proprietors or independent contractors include wage, commission, income, net earnings from self-employment that is not more than $100,000 in 1 year, as prorated for the covered period. Any compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period, is also excluded.****This is an area I would like to receive additional clarity, as it reads I believe the entire salary for someone making over the $100K is excluded, although the wording is not excessively clear and I do wonder if in final interpretation it will be that the first $100K is included. I have not been able to find any additional guidance at this point, to be conservative for now I would recommend excluding it from any potential calculations you are running. ****
What is the maximum loan you can take?
For this question, the "covered period" is defined as February 15, 2020 through June 30, 2020. It is the sum of the calculation below, or $10 Million, whichever is lower.
- Average total monthly payments for payroll costs incurred during the one year period before the date on which the loan is made, multiplied by 2.5
- Plus the outstanding amount of 7a loans made after 1/3/2020 that will be refinanced into this new loan.
- If you were not in business on February 15, 2019 - June 30, 2019, there is a different formula to follow.
This sum is then multiplied by a quotient. The quotient is:
- #FTEs for covered period per month over
- #FTEs average per month for 2/15/19-6/30/19 or 1/1/2020-2/29/2020
- There is also a seasonal quotient option for seasonable businesses.
What can you use these funds for?
- Payroll costs
- Group healthcare benefits
- Interest on any mortgage obligation (not principal)
- Interest on any other debt obligation that were incurred before the covered period.
Loan Forgiveness: Under this section the definition of "covered period" is the 8 weeks beginning the date of origination of the loan. For the covered period, the amount paid for:
- Payroll costs
- Payment of interest on mortgage obligations
- Payment on covered rent obligations
- Payment on covered utility payments (electric, gas, water, transportation, telephone and internet)
According to an AICPA interview, if you don’t plan to keep your people employed after the 8 weeks you will not get the forgiveness. ****This is not how I read the wording. I find this statement to be contradictory, and I can’t find any other support for or against this comment. Thus I will keep my eyes out for clarification, but to be conservative you should take this into consideration in case the AICPA knows something that hasn’t been put inside the wording yet.****
You will need to certify that your business has been affected by Covid-19. We are awaiting guidance from the SBA on what documentation will be required. There are no fees, prepayment penalties, personal guarantees or collateral required for these loans. If the loan is not forgiven, the loan can have up to a 10 year maturity and an interest rate not to exceed 4%. Payment deferment will be for at least six months but not more than 1 year.
Some notes: Payroll doesn’t count for anyone you reduce by more than 25% in comparison to the period prior to the covered period, with an exception for those employees making over $100K annually.
There is also an exemption for rehires in the calculation (if you let someone go after February 15, 2020 but rehire them by June 30, 2020.)
The forgiveness portion will be excluded from gross income for tax purposes.