| Read Time: 9 minutes | COVID

COVID Small Business Relief | Critical Details You May Not Know

CARES Act & Paycheck Protection On March 19, 2020, Congress introduced the CARES Act, a significant economic stimulus package program. One of the most critical aspects of this package was the highly publicized Paycheck Protection Program (PPP). While many members of the public are aware of the broad details of the PPP, local banks, accountants, and businesses of all kinds are struggling to understand the finer details of the program. Recent proposed regulations published by the U.S. Small Business Administration have begun to provide additional clarity. But first, the basics. For eligible small businesses and other organizations, the program makes forgivable loans available on an emergency basis. Business owners will need to apply for the loans to be forgiven and they will functionally operate as a combination of a grant and/or a loan. However, if a business is not careful to master the details of these SBA regulations, they may instead be required to repay a significant portion of the loans. Up to $349 billion dollars in aid is available to applicants on a first-come, first-serve basis. Contradictory information has been repeatedly provided regarding the interest rates of the loans, however, the latest proposal from the SBA sets the interest rate at 1%. The loans will mature within two years, and payments will begin within six months. Applications must be received prior to June 30, 2020, and a natural person is eligible to receive funds under only a single PPP loan, no matter how many businesses they operate. It is recommended that borrowers carefully review the formulas and instructions for the calculation of maximum loan amounts. Many businesses will find that they may not have applied for the maximum amount of funds that they are eligible for, in their original applications for aid. Others may find that they have elected to apply during a look-back period with payroll costs that may significantly reduce their eligibility for loan forgiveness. Borrowers may wish to consult their lenders and/or accounting professionals regarding whether it is prudent or possible to revise their applications without losing their position in the application queue, and/or without losing access to the funds entirely due to the intense competition for relief, and the limited funds available. Many banks have already expended all fees allocated to them under the program, while others have yet to begin processing applications. Who is Eligible? The most relevant eligible categories are U.S. businesses with 500 employees or less, non-profit organizations with 500 employees or less and 501(c)(3) status (which includes many churches), veterans organizations under 501(c)(19), independent contractors, certain self-employed individuals, and sole proprietorships. Certain other businesses and organizations may also be covered. You must also have been in operation as of February 15, 2020. CARES and SBA regulations also require businesses to meet the definition of a small business concern, under 15 U.S.C. 632. This includes criterion such as being independently owned and operated, and not dominant in its field of operation. Other criterion under Section 121.103 of Title 13, C.F.R, have been waived, which may allow greater loan access to businesses operating under a franchise model, and other similar arrangements. Certain categories are specifically excluded. These include household employers (individuals who employ nannies or housekeepers), businesses that engaged in any activity deemed illegal under federal, state, or local law (e.g. marijuana dispensary), an owner with 20 percent or more of the equity ownership who has been convicted of a felony within the past five years, or is incarcerated, on probation, on parole, or subject to an indictment, arraignment, or criminal charges. What is the Maximum Loan Amount? The maximum amount that can be received is the lesser of $10 million dollars, or a payroll calculation formula, designed to provide roughly 2.5 times the amount of average monthly payroll. For example, if a business has average monthly payroll of $100,000 per month, it could receive $250,000 in proceeds ($100,000 x 2.5). Ready for some math? Several methods of calculating payroll can be used. The payroll calculation formula recommended by the proposed SBA regulations as of the present date, is to aggregate all payroll costs over the last 12 months for employees who reside in the United States. Compensation paid at a rate that exceeds $100,000 a year, should be excluded. This payroll amount over the past twelve months should be divided by twelve. Then, multiply by 2.5. However, other payroll calculation methods may be more advantageous, depending on the nature of your business and its payroll history. While the instructions on the SBA application form recommend that payroll costs be calculated based upon the average monthly payroll for calendar year 2019, the recent proposed SBA regulations instead suggest using the last twelve months of payroll. The CARES Act itself suggests that the applicant use “payroll costs incurred during the 1-year period before the date on which the loan is made…”, which gave rise to these rival interpretations. These different methodologies could easily result in substantive differences. As of the time of this writing, this ambiguity may not have yet been fully resolved. The proposed SBA regulations describe their recommended 12-month look back period as “one of the methodologies contained in the act” that can be used to calculated payroll costs. For seasonal businesses, applicants may choose to instead use monthly payroll for the time period between February 15, 2019 and June 30, 2019. For new businesses, payroll may be calculated using the time period from January 1, 2020 to February 29, 2020. If any Economic Injury Disaster Loans were received, those amounts should be subtracted from the loan amount. The implementation of the CARES Act has been rapidly expedited due to the economic emergency, and as a result has received some criticism from the banking and accounting industries for being disorganized, or providing a lack of clarity in certain areas. Additional clarifications and refinements are anticipated, and should be closely monitored. The Treasury Department’s FAQ on PPP indicates that the U.S. government will not challenge lender PPP actions that conform to the guidance...

Continue Reading