Will the forgivable loan program save small businesses?
Updated – 04/23/2020 04/21/2020, Congress allocated an additional $ 320 billion to the Small Business Administration’s Paycheck Protection Program (PPP), of which $ 60 billion is earmarked for small lenders and community financial institutions. It also included an additional $ 60 billion for the Economic Disaster Lending Program (EIDL). Additional information is available here.
Updated – 04/16/2020
The Treasury issued advice on the Paycheck Protection Program (PPP) which is part of the massive $ 2.2 trillion CARES Act stimulus package. Unfortunately, as of April 16, 2020, the program has run out of money. Additional funding for small business assistance, to the tune of $ 250 trillion, is currently frozen in Congress. While almost everyone is excited to see that financing will help small businesses stay afloat in these tough economic waters, we are quickly seeing that the need runs much deeper than up-front stimulus financing can meet.
The program allows a low interest rate loan (1%) which will be forgiven if the salaries and number of employees are maintained until June 30, 2020 and if the money is spent on salary costs, rent, expenses. mortgage interest or utilities within eight week period from the original date. The program is available until June 30, 2020. Lenders were expected to start processing applications on April 3, 2020 and April 10. The application process was delayed and then opened, but most banks have now suspended applications. The banks were overwhelmed by the massive response.
This program is available to any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed workers) as well as non-profit organizations. PPP loan is different from economic disaster loan (EIDL).
PPP loans will be fully forgiven if the funds are used for salary costs and interest on mortgages, rents and utilities that were in place as of February 15, 2020. At least 75% of the canceled amount must have been used for the pay. The employer is obligated to retain or rehire employees. If the membership decreases, forgiveness is reduced. Loan payments are deferred for six months, but interest accrues during this period. No warranty or personal guarantee from the owners is required. Neither the government nor the lenders will charge borrowers a fee. The donated portions are not subject to income tax.
The PPP loan has a maturity of 2 years and an interest rate of 1%. the maximum loan amount is 2.5X the average monthly salary costs incurred in the year prior to the loan date, or if the business was not operational in 2019, 2.5X the total costs Average monthly salaries incurred for January and February 2020. ‘Average monthly salary costs include:
For employers –
The total compensation of employees which is:
• salary, wages, commissions or similar remuneration, such as tips in cash or the equivalent
• vacation, parental, family, medical or sick leave
• severance or severance pay
• group health care benefits, including insurance premiums
• retirement benefit, and
• payment of state or local tax assessed on the employee’s remuneration (state unemployment tax)
Compensation does NOT include:
Salary greater than $ 100,000 per employee
Payroll taxes (like FICA and Medicare)
Compensation paid to employees outside the United States, and
Qualified sick leave or family leave for which credit is authorized under the Families First Coronavirus Response Act
For sole proprietors, independent contractors and self-employed workers –
Remuneration is the income of a sole proprietor or independent contractor which is salary, commission, income, net income from self-employment or similar remuneration and the amount of which does not exceed $ 100,000 in one year, pro rata for the period covered.
The loans are administered by SBA approved lenders such as banks and credit unions. The SBA created a sample form for candidacy. The form is relatively simple (2 pages to complete), and you must certify:
You were in business on February 15, 2020 and had employees for whom you paid salaries and social charges or paid independent contractors,
You need money to meet your day-to-day obligations
· You will use the money to pay payroll, mortgage payments, rent, and utilities. [It will be important to keep good records]
You will document payroll, covered mortgage payments, rent and utilities for 8 weeks of request
You acknowledge that the rebate is based on covered expenses and that non-salary costs (rent, mortgage, utilities) will only be 25% of the rebate
You have not yet received an SBA 7 (a) loan
You tell the truth in the app, and
You provide information identical to that appearing on your income tax returns
CPAs and counselors anticipate a tsunami of applicants. Adam Hill, CPA, partner at Cohen & Company in Cleveland has been on an ongoing webinar circuit. “We spoke to industry groups via a web conference and the interest is, unsurprisingly, overwhelming. We advise borrowers to start with their current bank and get started quickly. Gather the financial information now. Hill also notes that the magnitude of the CARES stimulus far exceeds previous SBA applications. “In FY18, 7 (a) loans for the whole country totaled approximately $ 21 billion. The CARES Act stimulus is $ 349 billion. The banks will be overwhelmed. Start early. “
The loans are a first step in the recovery from the economic fallout from COVID-19. Jim boland, Advisory Partner, also at Cohen & Company, sees loans as a start. “We are in the process of sorting out some commercial customers; the first rule is to survive. We have created cash flow dashboards for our clients to help them manage the financial effects of the COVID-19 situation. This is a critical time for cash flow management. Boland adds that he sees the PPP program as a beneficial tool but is worried about flows. “There are millions of small businesses in the United States, and we have a narrow window to do something. “
The P3 program can be the economic equivalent of a fan – it can keep your business and your employees afloat in the short term. It’s worth considering for any small business impacted by the COVID-19 crisis, which unfortunately is most of us.
My email is [email protected] I was overwhelmed with questions but will do my best to answer them. Be careful; we are all in the same boat.