The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law late last Friday, March 27, 2020. This legislation represents continuing efforts by the federal government to mitigate the financial damages resulting from the virus—-this is the 3rd “phase” of legislation which most experts believe will require further action steps/phases to battle the economic damages resulting from the virus.
The CARES Act includes trillions of dollars in federal financial assistance to people and businesses/non-profits. The focus of this PayDay is on the $349 billion allocated for SBA Section 7(a) loans, which is included in the CARES Act. We are already in the process of writing additional PayDay’s to discuss payroll tax credits, deferred employer payroll taxes, the previous legislation about mandated wage requirements, and unemployment claims/benefits.
AccuPay is already answering many questions about various aspects of the legislation which impact HR and payroll, BUT we believe the funds available for SBA loans is the most urgent “first stop” for many small/medium sized employers who need money to open/reopen their businesses or private non-profits and churches.
A FEW LINKS TO GOOD ARTICLES FOR DETAILS
The US Chamber of Commerce has written an excellent 4 page “Small Business Guide” about “emergency loans”, which is easy to read and well organized. You can access the Chamber’s easy to read Guide here.
The US Senate Committee on Small Business has also written about a “Small Business Owner’s Guide to SBA loans in the CARES Act,” which you can link onto here.
PURPOSE OF THE SBA EMERGENCY LOANS
The purpose of the SBA loans, also referred to as “Paycheck Protection Loans”(PPL’s), is to provide funds to small employers (generally those with less than 500 total employees per physical location) so they can retain or rehire their employees, pay rent, utilities, etc and essentially to “keep the doors open”. The federal government realizes that over 29 million “below 500 employee” employers exist in the USA, which together employ about 50% of the total workforce. As such, $349 billion has been allocated in the CARES Act to help those employers stay open or reopen as a “first line of defense” to protect workers who otherwise will receive unemployment benefits.
WHO QUALIFIES FOR THESE SBA EMERGENCY LOANS?
Businesses, churches and 501(c)(3) employers with less than 500 employees and who were established as of February 15, 2020 with employees “on the payroll”, and who have suffered economic damages due to the Coronavirus are generally eligible to apply for the SBA Section 7(a) loans. If an employer has already applied for a previous SBA “Economic Injury Disaster Loan”, our understanding is they can roll those loans into the much better SBA Section 7(a) loans. Employers who are in the “food accommodation industry” with a NAICS classification starting with “72” are eligible for loans for all restaurant, hotel locations which have fewer than 500 employees at a specific location. These loans also are available for sole proprietors, self-employed people and independent/1099 contractors. The owner/authorized official of the employer must certify that they are applying for the loans , in good faith, and that the loan is needed to support ongoing operations due to the uncertainty of economic conditions due to the Coronavirus.
WHERE DO YOU GET THESE LOANS
If your bank is an authorized lender for SBA Section 7(a) loans, you should talk to your banker now about these loans. There are a large number of authorized SBA Section 7(a) lenders you can apply with—-simply ask the bank/lender IF they are already approved as SBA Section 7(a) lenders—if they are not but will be, you may wish to use a SBA lender already approved for these loans. These loans can be made starting now (or we have heard April 3rd is the first date applications will be taken for processing) and the PPL loan program will run through June 30, 2020 OR until the $349 billion “runs out” for these loans.
WE BELIEVE THAT TIME IS OF THE ESSENCE ON THESE LOANS AND YOU SHOULD TALK TO YOUR BANKER NOW TO LEARN MORE ABOUT THEM AND APPLY FOR THEM. AccuPay knows of many small employers who have already provided their SBA lender with information to start the process and “get in the queue” for loan processing
THE LOAN TERMS ARE VERY GOOD
These CARES Act loans require no collateral, no personal guarantee, and have “debt forgiveness” provisions based on retention of your employees or hiring new employees/rehires within the first 8 weeks after receiving the loan proceeds. The amount of the loan is totally based on your “payroll costs”—-so you do not request a certain loan amount, your SBA lender will help you calculate the amount of loan proceeds you qualify for, based on your previous payroll costs.
HOW MUCH CAN I BORROW ON THESE SBA SECTION 7(a) LOANS
The loan amount available for employers with less than 500 employees (exceptions for standard industry classification codes beginning with “72”—restaurants, hotels, bars), which includes churches and 501(c)(3) charitable organizations revolves around your previous “average monthly payroll costs” for the 12 month period ending before you obtain the SBA loan—-which generally would be for the period April 1, 2019-March 31, 2020 (“word on the street” is that some lenders are using the 12 month period ending February 29, 2020, which would eliminate the month of March, 2020 from your average payroll costs calculation—talk to your SBA lender about this, since they too are all trying to understand this law and how to process loans for it). Your “payroll costs” are your gross wages (employees paid for both hours worked as well as various types of “paid time off”) plus employer paid medical benefits/insurance premiums, employer paid retirement benefits, and “state or local taxes assessed on employee compensation” (not clear what these taxes are, but certainly would include any employer share of “local/city” taxes—-could include state unemployment taxes/contributions, but not clear).
Cash tips reported by tipped employees to their employers are included in “payroll costs”, as are commissions, bonuses, etc. Your “payroll costs” would appear to include payments for work to “independent contractors/1099’s” as well. The amount “counted” in “payroll costs” does not include the excess over $100K per year of compensation for all employees who earn over $100,00 per year—–so it appears that $8,333 per month is the “cap” to include for all employees who earn over $100K per year, to include the owner-employees of the employer. Payroll costs do NOT include the employer share of federal payroll taxes, such as FICA and Medicare.
Once you calculate your “average monthly payroll costs” for the 12 month period ending before the loan date/process, you simply multiply those average monthly costs by 250% (2 1/2 X) to determine the amount of the CARES Act loan you qualify for——there is no need to take less than the total amount you qualify for since prepayments of loan proceeds not forgiven can be paid without penalty.
The SBA loan amount can not exceed $10 million in total.
WHAT CAN I USE THE SBA LOAN PROCEEDS FOR
These SBA loans are intended to be used to maintain your employees on the payroll, to include new hires and rehires, for at least the 8 week period beginning after you receive the loan, PLUS rent/mortgage payments, all utilities, interest on debts entered into before February 15, 2020. The total amount you spend on “payroll costs”, rent/mortgage debt, business interest, and utilities for the 8 weeks following the date of the loan will qualify for “debt forgiveness”, which will be calculated with your SBA lender after the conclusion of the 8 week period after you receive the loan proceeds. These SBA loans can be made up to June 30, 2020, BUT the debt forgiveness only applies to the above expenses you incur for 8 weeks or up to June 30, 2020. If you “do the math” on the calendar, May 7th is the latest loan date which provides 8 weeks of potential “debt forgiveness” through the June 30, 2020 deadline for debt forgiveness.
The calculation of the loan amount at 2 1/2X your “average payroll costs” will provide a borrower with funds to continue their payroll at “normal levels” (need to be creative at what employees can do for their wages!!) for the 8 week period PLUS have a portion of the loan proceeds available for rent, utilities and business loan interest for the 8 week potential “forgiveness period”. Forgiveness of debt revolves around retaining, hiring and rehiring employees for the 8 week period at levels compared to the same 8 week period of year 2019.
HOW MUCH DEBT WILL I NOT HAVE TO REPAY
Expenses which qualify for debt forgiveness are those mentioned above—“payroll costs”, rent or mortgage obligation, utilities, during the 8 week period after the date of your SBA loan. Those are the exact same costs which are included in the calculation of the original loan amount. The actual calculation of the amount of debt forgiveness is based on the number of employees (FTE’s, not yet clarified by the IRS) during the 8 week period post loan processing compared to prior levels of employee “counts”, as well as how your wage/salary amounts compare to wage/salary amounts in similar periods in the previous year (or Jan-Feb 2020). Maximum debt forgiveness, and possible complete forgiveness of the SBA loan, revolves around the employer’s retention of employees as to actual numbers of employees (FTE’s) as well as payment of wages/salaries during the 8 week period which are as much as those from earlier, “normal”, time frames in 2019 into the first 2 months of 2020.
The purpose of these SBA loans is for employers to retain, hire or rehire employees at rates or amounts in effect from last year, during the 8 week post loan period of time. We are not aware of any reductions in debt forgiveness for reductions in employee levels or reductions in wage amounts after the end of the 8 week post loan closing period of time. The calculation of the precise amount of debt forgiveness will be made with your SBA loan processor after the completion of the 8 week period of time.
Any amount of the SBA loan remaining after the reduction based on debt forgiveness will continue for up to 10 years at no more than a 4% interest rate.
DISADVANTAGES OF SBA SECTION 7(a) LOANS
An employer who receives a SBA emergency CARES Act loan is not eligible to claim the employee retention tax credit or the postponement/deferral of employer FICA taxes—which are other important provisions of the CARES Act pertaining to payroll. A SBA loan borrower can still claim the payroll tax credits associated with federally mandated wages paid to employees who are off for sickness or family leave, such as staying home to care for children, which result from the Coronavirus pandemic (HR 6201 mandated paid leave requirements will be covered in a future PayDay specific to those provisions of the Families First legislation enacted March 18, 2020).
HOW ACCUPAY CAN HELP—ALONG WITH YOUR ACCOUNTANT AND BANKER
AccuPay is studying many aspects of the CARES Act, as it pertains to SBA loans, payroll tax credits, unemployment benefits and the Families First legislation. Our goal is to educate small to medium sized employers (those with less than 500 employers or who qualify as a small employer based on industry type) on how to comply with and take advantage of these new laws. We will answer your specific questions as best we can—-due to short staffing in the office, as well as many working remotely at AccuPay, your quickest way to get questions answered is to email your questions to larry@accupay.com, who is our “point person” for learning most of this legislation. For payroll reports/information you need to provide your banker as to your “payroll costs” for a SBA loan application, please email your payroll specialist or “payroll@accupay.com” AFTER you have talked to your banker/SBA lender who will provide you with the date range of “payroll costs” they are using for the loan applications (we have seen this vary based on the lender).
AccuPay will also calculate all available tax credits and reductions in tax deposits, as permitted by law. ALL CLIENTS need to let us know IF you are applying for a SBA loan (remember, some of the tax credits and tax deferrals are not permitted IF you receive a SBA loan). You also need to advise us of any employees who are on leave starting April 1, 2020, due to Coronavirus sickness or loss of childcare issues—-we will need to know the amount of wages by employee who you are mandated to pay wages to due to the Families First legislation. Tax credits will be applied against your IRS 941 tax deposits for the amounts you are mandated to pay for sick/family leave time.
ALSO ADVISE ACCUPAY IF you believe you qualify for employee retention tax credits, which are permitted IF you are an employer with less than 500 employees who was either completely or partially “shut-down” due to the Coronavirus, on or after February 15, 2020 OR if not shut down, that your quarterly gross receipts for the quarter beginning February 15, 2020 have been reduced by over 50% as compared to the same quarter last year.
IN CONCLUSION
AccuPay prides itself on being a “boutique” payroll/HR services firm which always strives to provide exceptional, knowledge and software based payroll/HR services to our small to medium sized employer-clients. We pride ourselves on being accessible and responsive to our clients—-which is much more difficult now as we too balance the safety of our awesome employees with the ability to continue to serve our employer-clients with excellent services. With this in mind, we will continue to serve you, and help you with knowledge to restore your small business or church/non-profit during this extraordinary time. We encourage you to also work with your SBA lender and your accountant/HR director for questions and analysis since these new laws are complex and “2 or 3 heads are better than 1”. And please remember to email your questions on SBA loans and payroll tax credits/tax deferrals to Larry Shaub at larry@accupay.com. I, Larry, am writing this PayDay and am in the best position at AccuPay to answer your specific questions since I do not process payrolls as our processing staff all do—–so I am trying to use my time to support you and our payroll specialists so you and they can do “normal day to day work.”