Cares ACT and PPP

Disclaimer: this is information that is simply being passed on from other resources.  E-rehab, LLC does not guarantee its accuracy and encourages you to verify the information with additional government and professional resources.  It is for educational purposes only and we cannot guarantee its accuracy.

Tomorrow, April 3, 2020, the Small Business Administration in conjunction with the bank you use for your business, will be launching the Paycheck Protection Program (“PPP”) to provide “covered loans” for a “covered period” to “eligible recipients” which includes “eligible self-employed individuals”.

To qualify, small businesses must employee fewer than 500 employees and this requirement is inclusive of sole proprietors, independent contractors, and eligible self-employed individuals provided your business can certify in good faith that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient and you acknowledge that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments per the terms of the law. The maximum “covered loan” amount (not to exceed $10,000,000) is in general 2.5 times the average total monthly payments for payroll costs (for the 12 month period prior to the loan origination) which is defined to include the compensation you pay on behalf of your employees (e.g. W-2 and benefits such as health insurance and pension) and the sum of payments of any compensation to or income of a sole proprietor or independent contractor (e.g. net self-employment income). However, the annual per employee or per self-employed person payroll costs are limited to a maximum of $100,000.

Allowable uses of the covered loans include at least: payroll costs; group health care costs; employee salaries, commissions or similar compensations; payments of interest on any mortgage obligation; rent; and, utilities. The loan is nonrecourse meaning no personal guarantees by you. Per the SBA and US Treasury websites, the initial loan has a maturity of 2 years at a fixed interest rate of ½ of 1% (i.e. .5%) with complete payment deferment relief for impacted borrowers for a period of not less than 6 months. Maturity for loans with remaining balance after application of forgiveness (discussed below) shall have a maximum maturity of 10 years while the interest rate cannot exceed 4 percent.

Loan Forgiveness Provision

The following section 1106 Loan Forgiveness provision states the following: The following are the essential parts of the non-taxable loan forgiveness: An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the “covered period”: payroll costs, “covered rent obligation”, “covered utility payment”, and any payment of interest on a “covered mortgage obligation”. Each of these terms are specifically defined in the law but the covered period is the 8 week period following origination of your PPP loan.

The loan forgiveness amount will be reduced based on a reduction in number of employees using a formula and factoring in a reduction relating to salary and wages if they drop more than 25% during the look back period in the law. There are exemptions for rehires if you have already let some employees go.

Finally, if you want to proceed with applying for a PPP loan then it is recommended that you contact the bank you do business with because the SBA is providing them guidelines to initiate and fund these loans very quickly starting with an application by you.

Applying for Forgiveness

Then, 8 weeks after loan origination you can apply for loan forgiveness provided you produce the following four things:

1. Proof of payroll tax filings, full-time equivalent employees and their pay rates;
2. Proof to verify payments on covered mortgage obligation, covered lease obligations, and covered utility payments;
3. Certification that the documentation is true and correct and the amount for any forgiveness was used to retain employees and make payments on those listed covered expense items;
4. Any other documentation that he Administrator determines necessary.

Examples Simply to illustrate the application of a forgiven PPP loan.  You should input your own financial data.

• High Salary Business: Let’s say the practice owners is paid an annual salary of a million dollars but all the rank and file are paid annual compensation packages that average $48,000/yr. Assume 10 rank and file full time employees and no layoffs. Then $48,000 x 10 employees equals $480,000 in annual wages. Divide that by 12 months to get average monthly payroll for them of $40,000 times 2.5 is $100,000. Then for the CEO you can only count $100,000 of his annual salary which you divide by 12 to get monthly average of $8,333 times 2.5 equals $20,833. Aggregate the two results of $100,000 plus $20,833 and the maximum PPP loan is $120,833. If in the next 8 weeks after the loan is funded that business complies with the rules discussed above and spends all $120,833 on those payroll costs plus the other covered costs for rent, utilities and mortgage interest payments, then the full loan of $120,833 is forgiven. (Complications are likely to exist to calculate fringe benefits related to “payroll costs” as well as full time equivalent employee headcount and pay rates.)
• Self-Employed Business making $48,000 net income : In this example the sole-proprietor divides $48,000 by 12 times 2.5 and their PPP loan is $10,000 which can be forgiven if their covered costs and net income in the following 8 weeks adds up to $10,000. (Complications exist to calculate applicable health insurance benefits related to the self-employed situation.)

Suggested Action Plan: Since the CARES ACT passed 3-27-20, during the evolving roll out by the SBA and banks on this PPP loan program, we encourage you to at least inquire with your bank and go onto the following websites to read current news from SBA and the US Treasury.  Also shown below you can find updated info at IRS.gov.

From the US Treasury website on the new guidance that has just been released on these loans:

https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses

https://home.treasury.gov/news/press-releases/sm961

Now on the SBA website, see what they are rolling out in terms of the paycheck protection loans.

https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp

You can also get Coronavirus Tax Relief update info on the IRS website at https://www.irs.gov/coronavirus

Finally, the actual law with the statutory language of the CARES ACT is found at https://www.congress.gov/bill/116th-congress/house-bill/748/text