What’s the big deal?

If you pay employees by W-2 or are self-employed (Schedule C proprietorship or partnership) you may qualify for a forgivable (more later) loan under the Paycheck Protection Program (PPP).

The PPP program may not be the best option for you. The CARES Act that birthed PPP and the Families First Coronavirus Response Act (FFCRA Act) initiated various loan programs, tax credit programs, and deferral programs that all inter-relate with one another. If you choose one program, it may prevent use of another program. Sage Software has created an assessment you might want to consider if you are a "do it yourself" person, here.

A second round of funding for the Paycheck Protection Program is headed to the US House today where it is expected to be approved and sent on to President Trump who has indicated his approval.
    
The PPP loan starts by calling a participating lender (more on that later) for their PPP loan process. Of the $310 billion of PPP funds, $60 billion in loans are to be made by small banks, credit unions, minority-owned banks, and other small lenders.

Further information about the PPP may be found on the SBA website here.
    
It is not clear how long this $310 billion in new PPP funds will last. The initial $349 billion was committed within 12 days, but the big companies got the lion’s share of that money. We do not know the status of the backlog of applications with banks.  If you want in, act quickly.
    
The first phase of lending resulted in two distinct experiences dependent upon whether you applied with a big national bank or a local/community bank. Our experience was that the big banks bogged down substantially, and the small community banks were champions and able to process the loans very quickly. More on that later.
    

Am I eligible?

As provided by the SBA, most of our clients will be eligible for PPP loans, including the following entities affected by Coronavirus (COVID-19):
·       Any small business concern that meets SBA’s size standards: 

o   Net worth of business not more than $15 million and 

o   Average net income after Federal income taxes for the two years before the application is not more than $5 million.

·       Any business, certain non-profit organizations, 501(c)(19) veteran’s organization, or Tribal business concern that employs no more than 500 employees whose principal place of residence is in the United States, or,
·       Sole proprietors, independent contractors, and self-employed persons (including partnerships and LLC members).  If you showed a profit in 2019, you should qualify.

Eligible small businesses must have: 1) been in operation on February 15, 2020 and 2) must have had employees for whom the entity paid salaries or wages.   

For sole proprietors or other self-employed individuals (partners and LLC members whether they employ anyone or not), self-employment income is a qualifying factor for the purpose of eligibility. Self-employed individuals regardless of whether they have filed a 2019 tax return will need to provide the 2019 Schedule-C or Schedule K-1 (partners and LLC members) with their PPP loan application to substantiate the amount of the loan.     

To be eligible, the business must certify (among many other certifications) that:

1.    "Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant", and

2.    Acknowledge that the funds will only be used to retain workers and maintain payroll, make mortgage payments, lease payments and utility payments.  

We believe it is important that you document this uncertainty in case the SBA comes knocking due to the public outcry over large and publicly-held companies getting more money than the small businesses that need it.

How do I get the loan forgiven?

It is all about how you spend it. 

If you’re fortunate enough to get a loan, your work is just beginning. Your actions during the eight weeks following funding, along with some SBA and Treasury rules yet to be released, will be used by your bank to determine how much of the loan will be forgiven and how much will need to be repaid over 2 years at 1% interest. 

It is important to note that forgiveness is not automatic.

At the end of the eight-week period beginning when the loan money hits your account (hopefully you will set up a separate account), you will need to make an accounting, to your bank, of how you spent the funds.  

The loan amounts eligible for forgiveness are the costs incurred during the eight-week period beginning on the date the PPP loan originated, including:
·       Payroll costs (using the same formula which was the basis to acquire the loan) 
·       Non-payroll costs:

o   Payment of interest on real property or personal property debt that was incurred before February 15, 2020

o   Payment on rent in which the obligation was in force before February 15, 2020

o   Utility payments for electric, gas, water, telephone or internet access in which the service began before February 15, 2020.

Your lender, based on guidance to come from SBA, is going to determine the amount forgiven. You will submit a request to the lender providing documentation on payroll and non-payroll costs.  Stay in touch with you banker about the rules around forgiveness, the documentation required, and the timing for submitting the application for forgiveness.

Unfortunately, the SBA has moved at a snail’s pace on the forgiveness rules, and they have not provided final guidance as to the exact calculations. (To their defense, their workload has been unbelievable, and SBA has performed admirably in getting funds to the banks.)  The Treasury interim final rules provide that no more than 25 percent of the forgiven amount may be attributable to non-payroll (last three bullet points above). 

What we have been able to determine from various sources is that the forgiven amount can be 100% of your eligible payroll costs. However, if you decrease wages by more than 25% for any employee who made less than $100,000 annualized in 2019, or the number of Full-Time Equivalents (FTEs) decreases, the forgiveness will be reduced. 

But what if you are closed and all of your employees filed for unemployment?  Let's hope they deal with that in the upcoming rules.  Since most of the funds must go to payroll, you may consider just sending payroll checks to your former employees, who will be required to report that money to unemployment.  And that will affect their benefits.  If you do not pay payroll dollars, you will need to repay the loan.  And the amount of non-payroll costs are limited by the amount of payroll, and limited to 25% of the loan, and may not all be forgivable.
Divide your forgivable payroll costs by .75 to arrive at the maximum forgivable loan amount, not to exceed the total loan. 25% of the forgivable amount may be use for non-payroll costs.
Nonetheless, there is hope! The loan amount can still be forgiven for the full amount of your payroll cost if you rehire your employees by June 30, 2020, and restore your FTEs and wage levels for any changes made between Feb. 15 and April 26, 2020.  Most certainly there will be rules around this, which are unknown at this point.

We expect that SBA and banks will provide a spreadsheet to estimate loan disbursements/forgiveness during the 8 weeks.  If your bank provides one, please send a copy to us.  

Where do I apply for the PPP loan?

We suggest community banks or fintechs.

During the first round of PPP loan applications, our firm experienced big banks, smaller community banks, and fintech's. After the dust settled, big banking made the most loans. Bloomberg News reports that Wells Fargo, Bank of America, JP Morgan Chase and U.S. Bancorp have been sued for prioritizing large loans and shutting out the smaller firms seeking these funds.  

Our accounting firm has relationships with all sizes of financial institutions.  In the upcoming "PPP Round 2", with so many applications left pending from the first round, applicants may wish to consider using a fintech service such as Square, Kabbage or PayPal, or a small community banking institution such as Fidelity Bank in Fuquay-Varina, NC, Live Oak Bank in Wilmington, North State Bank based in Raleigh or Union bank based in Greenville. 

The Senate bill, as approved, includes a provision that sets aside $60 billion to smaller banks and other institutions with less than $50 billion in assets. These smaller banking institutions will probably be able to react quicker to the new applications.  

For some original applicants in "Round 1" who were denied, the question may arise whether they should stay with their current application, or possibly apply also with one of these smaller institutions.  According to our sources, the SBA has systems in place entitled E-Tran, and if an applicant’s loan request is reserved and approved, then a duplicate application with that same Taxpayer Identification Number will be deleted from the SBA system so as to avoid any possibility of duplicate applications.  Accordingly, it may be proactive if you did not make the first round to consider some of the alternative lenders mentioned above if you believe your original application will not make it out of the original lender’s queue.  


When do I apply?

ASAP, if the PPP program is right for you. This supplemental package could be consumed in a matter of days, with no guarantees as to the creation of a third stimulus package in the future.

Caution:

This decision is a big deal, and it may be lifesaving for many businesses.  But, there is not much guidance out there. Repeatedly, we have stated that we are waiting for rules and guidance from SBA and Treasury and your bank.  So be forewarned.  Our advice is intended to provide an overview of certain aspects of the PPP program. The information and recommendations provided herein does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Information contained herein is subject to change and may not constitute the most up-to-date information.  It is recommended that you contact your attorney or banker (who will be the final arbiter of forgiveness) to obtain advice with respect to any particular legal or lending matter, and you should not act or refrain from acting on the basis of information contained herein without first seeking advice from your attorney and/or banker.  Only your individual attorney and/or banker can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.  There are other programs available to you that, if you accept PPP, will no longer be available. All liability with respect to actions taken or not taken based on our advice and the contents hereof are hereby expressly disclaimed. The content herein is provided "as is;" no representations are made that the content is error-free.

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On behalf of everyone at Holden Moss Knott, we wish you our best.

(As of April 23 ,2020….updates and guidance are issued daily. The information above may have changed. Contact us if you have questions.)