Note: The CARES Act was recently signed into law on Friday, March 27th 2020. This is written from the perspective of a small business and should not be considered legal nor tax advice.
As we continue to experience increasing COVID-19 cases and navigate through these unprecedented times with unemployment rates on the rise, we began to review the $2T economic stimulus bill that includes nearly $350B allocated for Small Businesses, which in this case is defined as businesses with <500 employees. The purpose of this bill is to provide small businesses, contractors, sole-proprietors and more in business and to ensure these businesses are able to pay their employees rather than laying off or furloughing their teams, including self-employed individuals who have seen their income dry up during this pandemic.
For specifics on this bill, I recommend reading through the documents below:
- Small Business Paycheck Protection Program
- PPP FAQs
- The Small Business Owner’s Guide to the CARES Act
While this program went live on Friday, April 3rd, many banks were not, and may still not be, ready to accept applications. Gusto came up with a crowdsourced list of participating banks, if they’re currently accepting applications or when they plan on accepting applications, as well as those banks who are openly accepting applications from businesses that do not have an account with them already.
What Kind of Programs are Available?
There are two main programs that are widely available to small business owners - the Payment Protection Plan and the Disaster Loan Assistance. While we are hearing you can apply for both, and if you're accepted for both they will 'net out' so there is no change in the funds you receive, it seems the recommended strategy is to apply for the Payment Protection Program (PPP) and use the Disaster Loan Assistance as a backup if needed. For more info on the Disaster Loan Assistance option, we recommend taking a look at the SBA’s Disaster Loan Assistance section.
For businesses that are eligible, the PPP is designed to provide a loan for 2.5x your average monthly payroll costs. While your payroll processing provider and/or accountant should calculate this for you, the basic formula is to take your previous 12 months of payroll costs (i.e. wages, commissions, benefits, State taxes, etc.), divide that number by 12 and then multiply it by 2.5x.
It’s important to remember that your 1099 contractors are not included in your costs, and that we’re hearing conflicting guidelines if Federal taxes are included or not. Again, we highly encourage your accountant and/or payroll processing company to calculate this for you, and this is simply our interpretation of the rules, not legal or tax advice.
What does all this mean for Small Business owners, who exactly is eligible and how can you take advantage?
As taken from The Small Business Owner’s Guide to the CARES Act, produced by the U.S. Senate, the types of businesses that are eligible for the PPP are:
- Businesses and entities must have been in operation on February 15, 2020
- Small business concerns, as well as any business concern, a 501(c)(3) nonprofit organization, a 501(c)(19) veterans organization, or Tribal business concern described in section 31(b)(2)(C) that has fewer than 500 employees, or the applicable size standard in number of employees for the North American Industry Classification System (NAICS) industry as provided by SBA, if higher.
- Individuals who operate a sole proprietorship or as an independent contractor and eligible self-employed individuals.
- Any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a NAICS code beginning with 72, for which the affiliation rules are waived.
- Affiliation rules are also waived for any business concern operating as a franchise that is assigned a franchise identifier code by the Administration, and company that receives funding through a Small Business Investment Company.
How are You Able to Use These Funds?
The PPP program is designed to ensure businesses stay in business and keep their employees employed. To ensure these funds are used for those purposes, the loan acts more like a grant and can be 100% forgiven if the funds are used for the below purposes:
- Payroll costs (as noted above)
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
- Employee salaries, commissions, or similar compensations (see exclusions above)
- Payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation)
- Rent (including rent under a lease agreement)
- Interest on any other debt obligations that were incurred before the covered period
For the purpose of calculating payroll costs, it’s helpful to review the language that is in the bill:
Payroll costs include: employee salary, wages and commissions; payment of cash tips; payment of vacation; parental, family, medical or sick leave; allowance for dismissal or separation; payment required for group health benefits (including insurance premiums); payment of retirement benefits; or payment of state or local tax assessed on employee compensation; and sole proprietor income or independent contractor compensation not in excess of $100,000.
Payroll costs exclude: compensation of an individual person in excess of $100,000 (as prorated for the period); federal employment taxes imposed or withheld taxes; compensation to an employee whose principal residence is outside of the U.S.; qualified sick leave for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act; and qualified family leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act.
If you take a loan and use the funds for other purposes, you’ll pay up to a 4% interest on the funds borrowed and the maximum term is 10 years. Each loan will be a bit unique as it goes by how much you borrow, so advise with a tax professional.
When you take a loan from the Payment Protection Program, you’ll need to show proof that you did use these funds for the intended purposes. To do this, you’ll need to prove to your lender by sharing the below documents (and potentially others):
- Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings
- Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities
- Certification from a representative of your business or organization that is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used in accordance with the program’s guidelines for use
How Do You Apply?
If your business is eligible or you believe it is eligible, that is great! We recommend getting all of your financial information together - each lender is likely going to have slightly different requirements, but from what we can gather you’ll need at least the below information and potentially others:
- 2019 IRS Quarterly 940, 941 or 944 payroll tax reports
- Last 12 months of Payroll Reports beginning with your last payroll date
- These 12 months of Payroll Reports should include the following:
- Gross wages for each employee, including the officer(s) if paid W-2 wages
- Paid time off for each employee
- Vacation pay for each employee
- Family medical leave pay for each employee
- State and Local taxes assessed on the employee’s compensation for each employee
- 2019 1099s for any independent contractors that would otherwise be an employee of your business (excluding 1099s for services rendered).
- Documentation showing the total of all health insurance premiums paid by the Company Owner under a group health plan for all employees and owners.
- Document the sum of all retirement plan funding that was paid by the Company Owner (exclude monies that came from the employees paycheck contributions). This includes 401K plans, Simple IRA, and SEP IRAs.
Once you have your documents, and have checked the crowdsourced list from Gusto, we recommend applying with your bank first if they’re accepting applications. If not, there are thousands of SBA approved lenders and since each bank must have the same exact terms for your loan, your terms will not and should not be affected based on which qualified lender lends you the funds.
Our unprofessional opinion and what we’ve been hearing is it is easiest if you can do this with a bank you already have a pre-existing relationship with however. Once again, please consult with your accountant, lawyer, etc. This is not legal nor tax advice. It is our interpretation of the bill as a small business based in the US.
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