SBA 7(a) Loan- Paycheck Protection Program (PPP)
There are now 2 types of loans that are available and will be available shortly: New 7(a) Loans that may be forgiven under certain circumstances and the existing SBA 7(b) Loans or Economic Injury Disaster Loans (EIDL). We have previously recommended that you get in line for the EIDL loans, but now that the new 7(a) program will be coming on-line, you may need to consider your best options.
The CARES Act amends the Small Business Act (SBA) to create a new Business Loan
SBA 7(a)
Program category (hereinafter, the “program”). For the period from
February 15, 2020 to June 30, 2020 (covered period
),
the law allows the Small Business Administration (Administration) to provide 100% federally-backed loans up to a maximum amount to eligible businesses to help pay operational costs like payroll, rent, health benefits, insurance premiums, utilities, etc. You may apply for this loan through the SBA or SBA Lenders (most banks). Subject to certain conditions, loan amounts are forgivable (see more detailed discussion on loan forgiveness below).
·
No Collateral or Personal Guarantees are permitted to be required by Lenders.
·
Interest Rate cannot exceed 4%
·
No Fee charged to the borrower and no prepayment penalty
·
The SBA has no recourse against any borrower (individual, shareholder, partner, member) unless the money is used for unauthorized purposes.
·
Can apply for this loan and the SBA EIDL Loans
Eligibility –
·
Company employs 500 or fewer employees
·
Special eligibility for the Accommodations and Food Services sector (NAICS 72)
o
Entity affiliations are waived for the NAICS 72, franchises with SBA Franchise Identifier codes (means that if you are a franchisee of a large franchisor, -Marriott, McDonalds, etc) and your company has fewer than 500 employees, you are eligible.
Maximum Loan Amount – Lesser of:
·
$10 Million
OR
·
2.5 times the Average total monthly payroll cost incurred in the 1 year period before the loan is made PLUS the balance of previous SBA loans refinanced under this program. Different rules if you are a new company not yet in existence for 1 year.
Example: Your average monthly salary is $50,000 per month. You may borrow $125,000.
Loan Uses:
·
Payroll Costs – Pretty much all compensation plus health insurance costs up to $100,000 per person cap on an annualized basis.
o
Excludes compensation over $100,00 per person (annualized) certain federal taxes and any Sick or Family Leave employees for which the company is claiming the credit.
·
Group Health Benefits
·
Interest on Mortgages
·
Rent/Lease payments
·
Utilities
·
Interest on debt incurred before the covered period.
Loan Forgiveness and Payment Deferral
Deferral
- Businesses operating on February 15, 2020, and that have a pending or approved loan application under this program are presumed to qualify for a payment deferral of 6 month - 1 year.
Forgiveness
– The loan principal is forgiven equal to the following costs incurred and payments made for:
·
Payroll Costs
·
Interest Payments on Mortgages (for loans prior to 2/15/20)
·
Rent &
·
Utilities
These forgiveness amounts shall be reduced by any employee cuts or reductions in wages.
·
Reduction Formula:
Maximum Available Forgiveness TIMES Average Number of Full-time Equivalent Employees (FTEs) per month DIVIDED by either (1) Average number of FTEs per month employed from 2/15/19 – 6-30-19 or (2) Average number of FTEs per month from 1/1/2020 -2/29/20. This is calculated for the
Covered Period, which is 2/15/20 – 6/30/20.
The CARES Act notes that employers with tipped employees (as described in the Fair Labor Standards Act) may receive forgiveness for additional wages paid to those employees.
Example: You borrow $125,000 and you have 10 employees for the periods 2/15/19 – 6/30/19. On April 1
st
,
you fired 1 employee. The loan forgiveness will be calculated:
$125,000 X 9 FTEs / 10 FTEs = $112,500
Only this amount of the loan can be forgiven. It’s actually slightly higher than this as the number of days in the 2 periods have to be taken into account.
Borrowers seeking forgiveness of amounts must submit to their lender –
·
Documentation verifying FTEs on payroll and their pay rates;
·
Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
·
Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
·
Any other documentation the Administrator may require.
Changes to the Existing EIDL SBA 7(b) Loans
·
Waives personal guarantees of $200,000 or less for each applicant
·
Waives the 1 year in business requirement
·
Waives the requirement that business should first find a loan elsewhere
·
Allows the SBA to approve loans based on credit scores (no tax return to be submitted)
·
Allows an emergency advance of $10,000, which does not have to be repaid even if the loan is not granted.
NOTE:
You
cannot
receive a Payroll Protection Program Loan (SBA 7(a)) and an EIDL (SBA 7(b)) and use for the same purpose
o
Senate Explanation: “Provides a limitation on a borrower from receiving this assistance and an economic injury disaster loan through SBA for the same purpose. However, it allows a borrower who has an EIDL loan unrelated to COVID-19 to apply for a PPP loan, with an option to refinance that loan into the PPP loan. The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the Paycheck Protection Program.”
The EIDL Loans can be used for:
- Providing sick leave to employees unable to work due to direct effect of COVID-19;
- Maintaining payroll during business disruptions during slow-downs;
- Meeting increased supply chain costs;
- Making rent or mortgage payments; and
- Repaying debts that cannot be paid due to lost revenue
Unemployment Insurance
Employees that you have furloughed, temporarily laid off, or terminated will get an increase of $600 per week for 4 months and an additional 13 weeks from participating states under the Senate plan. I believe the current maximum GA unemployment benefit is $365 per week. This is how I understand it: If the Employer reduces an employees’ hours (furloughs) or lays them off during the epidemic (lay-off), the employer files the partial unemployment claim with the GA DOL. We have previously discussed this.
If you permanently terminate an employee or they “walk-off” the job even if they are self-quarantining, the Employer does not file this with the GA DOL and the Employee must seek unemployment on their own.
If you lay employees off, you need to determine if they are still eligible for health insurance and other benefits. If you lay-off or terminate an employee prior to 4/1/2020, the employees may not be eligible for Sick Pay or Family Leave under the Previous Law passed.
Tax Rebates
The CARES Act provides for tax rebates up to $1,200 per person ($2,400 joint) plus $500 per child. The IRS will deposit the money into the account on record with the IRS or will mail a check, if not. These rebates are phased out for taxpayers earning more than $75,000 ($150,000 joint, $112,500 head of household).
Retirement Plans
IRA contributions are automatically extended until 7/15/2020 for 2019. You can withdraw money from your retirement plan penalty free up to $100,000 and if you repay the money to your IRA within 3 years, the money withdrawn (up to $100,000) will not be income to you. There are other rules and restrictions.
Student Loans
The Act allows Employers to provide educational assistance to Employees of up to $5,250 through the end of 2020. This also means that an employer can repay up to $5,250 of an employee’s student debts without it being income to the employee (while still being deductible to the employer).
Business Employee Retention Credit
The Act provides eligible businesses including tax-exempts a refundable credit against Social Security taxes paid up to 50% of the first $10,000 in wages per employee, including health benefits. To get this the entity must meet 1 of the following:
·
Your business was fully or partially suspended due to orders frog rom a governmental entity limiting commerce, travel, or group meetings OR
·
Have a reduction in gross receipts of at least 50% year over year until gross receipts exceed 80% year-over year.
(The Mayor of Savannah has ordered a Shelter in Place ruling, which seems to meet the first standard. I do not know if this still applies if your company is exempt under the order.)
Delay Depositing Employment Taxes
You can delay depositing social security taxes and 50% of self-employment taxes depositing half on by 12/31/2020 and the other half by 12/31/2021.
Allows NOL Carrybacks again
The TCJA eliminated NOL carrybacks and this law suspends that provision. Accordingly, you may carryback 2018, 2019, & 2020 losses back 5 years.
Fixes the Qualified Improvement Property Mistake
Under the TCJA Congress meant to provide faster depreciation for Qualified Improvement Property. Instead, they accidentally made the depreciation period longer. This fixes the original intent of the law and allows a 15year old write-off for Qualified Improvement Property instead of 39 years.
