Facebook Live with Brad McConnell: SBA Loans
Brad and Samantha will be going Live on the public Flushing It Out Facebook page on Tuesday, March 31 to discuss all of this.
You can watch their first FB Live here.
Brad McConnell is an attorney is Northern Virginia Business Law. You can learn more at his website.
Small Business Loans Available through the Payroll Protection Program of the CARES Act
The Coronavirus Aid, Relief, and Economic Security Act – the $2+billion aid package passed by Congress and signed by the President on March 27, 2020 - includes a $349 million forgivable loan program to help small businesses avoid layoffs due to the COVID-19 crisis.
THE BASICS
The Payroll Protection Program is complicated, and the regulations and details about how SBA will administer the rules don’t yet exist, but the basics are as follows:
An eligible small business may apply to the Small Business Administration for a loan in an amount equal to 2.5 times their average monthly payroll costs. Loans are generally unsecured and without personal guarantees and borrowers are not required to have been unable to find credit elsewhere. Loan repayment is deferred for from 6 months to a year. Loans will be forgiven (on a tax-free basis) to the extent the money is used for “allowable uses” (including salaries, interest on mortgage, rent and utilities). Loan forgiveness will be reduced to the extent that the business reduces average payroll during the “covered period” unless employees are rehired.
THE DETAILS
We don’t have all the information yet, but here is what we know (or believe we know based on reading the text of the CARES Act) as of today:
What kinds of businesses are eligible to participate?
Most small business with up to 500 employees can qualify for one of these loans. Businesses can be for-profit or 501(c)(3) non-profits.
For purpose of determining the number of employees, the employee count includes individuals employed on a full-time, part-time, or “other” basis. This may or may not include independent contractors – that is a big hole in the Act, as written.
What if my business isn’t incorporated?
Unlike most other SBA programs, eligible businesses don’t have to be corporations or LLC. Eligible borrowers also include:
· sole proprietorships,
· independent contractors and
· “eligible self-employed individuals.”
For sole proprietorships, independent contractors and self-employed, the SBA is going to require documentation to demonstrate qualification under the program. The regulations will likely be more specific, but the law states as follows that the documentation to be submitted will include items such as:
· payroll tax filings reported to the Internal Revenue Service,
· Forms 1099–MISC, and
· income and expenses from the sole proprietorship, as determined by the Administrator and the Secretary.
Most of my “employees” are independent contractors. Am I eligible for assistance?
Borrowers are eligible if they had either employees (for whom they paid salaries and payroll taxes) OR independent contractors (as reported on 1099-MISC).
There is, however, a big question, as of today, how independent contractors will be treated. The “payroll costs” formula that determines how much a borrower qualifies for under the program does NOT appear to specifically include amounts paid to 1099 independent contractors. This may be an oversight that will be corrected by the time the program goes live, or it may be that these amounts aren’t included. Independent contractors can certainly apply on their own, so that may be how they will have access to funds under the Act.
What is the role of the Small Business Administration?
The SBA will be administering this program. This program is different and distinct from the SBA Disaster Assistance Program (the Economic Injury Disaster Loans). That program (which is available in Virginia since the disaster was declared) allows for loans of up to $2 million for eligible businesses. Loans are capped at 3.75% (2.75% for non-profits) and payable over a period of up to 30 years. Those loans may be another alternative for many businesses, but they are NOT forgivable, so they will have to be repaid in full. The SBA will also generally look for collateral to secure those loans, if possible (although that requirement has been waived for loans up to $200,000 under the CARES Act). This program also has other changes under the Act, but is not the focus of this paper
Do I have to be in a designated disaster area to qualify for PPP loans?
Unlike the SBA’s Disaster Assistance Program, a borrower does NOT have to be in a designated disaster area as requested by a state’s governor.
Can I get both a Payroll Protection Program loan and a Disaster Loans?
Apparently, yes. BUT you can’t use the proceeds “for the same purpose.” If a borrower has multiple SBA loans, they will want to set up controls to ensure that multiple applications don’t cover the same expenses, and that loan proceeds are used properly according to the approvals.
What other conditions are there for a borrower to be eligible?
Borrowers will also have to meet 4 basic requirements for a loan:
1. Borrower must have been negatively impacted by the COVID-19 crisis and need funding to “support ongoing operations.
2. Borrower will use the funds to retain workers and maintain payroll or make mortgage, lease or utility payments.
3. Borrower can’t have another SBA loan application that is “duplicative of amounts applied for or received” under this loan. (See more below.)
4. Borrower can’t receive other SBA loans that are duplicative.
How will borrower prove their eligibility?
Borrower will only have to make a “good faith certification.” In other words, this part won’t require a lot of documentation, but the borrower will be allowed to self-certify. Self-certification does NOT, however, mean no repercussions for untruthful applicants. It is streamlining getting money into borrower’s hands, not removing the requirements entirely.
My business is brand new. Can I still qualify?
A borrower must have been in business as of February 15, 2020. New businesses have special rules for determining average payroll (which will become important for determining how much they can borrow).
What is special for restaurants and franchises?
For this program, the SBA has relaxed a number of their size-determination rules, including:
- For the RESTAURANT and HOTEL industry (specifically, any business with a NAICS code beginning with a 72) the 500-employee limit is PER LOCATION.
- The “affiliation rules” (which effectively combine related entities based on control and ownership) are generally waived for restaurant/hotel industry, franchises, nonprofits, veterans’ organizations, and some others.
In general, this opens the program up to some businesses that might not have qualified under other SBA programs because they are affiliated with a larger organization with more than 500 employees.
How much money does a business qualify for under this program?
The maximum loan amount that a business can borrow is equal to its “average payroll costs” multiplied by 2.5. (This amount is capped at $10 million, which seems irrelevant for most small businesses.)
When is the date range for determining “average payroll costs”?
The average is generally calculated by looking at payroll costs in the year leading up to the loan date.
“Season employers” look at a 12-week range from February-June of 2019.
New businesses (that were in business by February 15, 2020, but were NOT in business between February 15, 2019 and June 30, 2019), will look to the average payroll costs in January and February of 2020.
How do they calculate “Average Monthly Payroll Costs?
Payroll Costs include salary, wage, commissions, tips, leave (vacation, parental, family, medical, sick), severance payments, health benefit payments (including insurance premiums), retirement benefit payments, state or local employment taxes. As of right now, there does not appear to be an allowance for amounts paid to a business’s independent contractors. It is possible that “employees”, as used in this program, will include wage-type payments made to independent contractor “employees”, but that does not appear to be specifically addressed in the language. We shall see if this is addressed by the time the program goes live.
What about salaries for employees making more than $100,000?
Salaries/wages of more than $100,000 per year seem to be treated differently under this program.
For sole proprietors and independent contractors filing on their own behalf, it appears that only compensation up to $100,000/year is eligible for calculating loans.
In addition, “payroll costs” specifically does not include compensation of an employee in excess of $100,000/year. It is unclear from this section whether a business can include only the salary below $100,000/year, or if the salary of those employees is excluded entirely. It would be consistent with the other sections if the sub-$100,000 portion was included, but we will have to await final implementation of the plan to be sure.
How do I calculate “payroll costs” if I’m a sole proprietorship or independent contractor?
This is a bit complicated. The Act basically looks to wage-type compensation.
The specific language is “the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period.”
In order to prove these amounts, the sole proprietor or independent contractor will have to show “such documentation as is necessary to establish such individual as eligible, including payroll tax filings reported to the Internal Revenue Service, Forms 1099–MISC, and income and expenses from the sole proprietorship, as determined by the Administrator and the Secretary.”
Once the application process goes live, there may be more specifics, but a borrower should be gathering this information as soon as possible.
What are the terms of the loans?
Loans have a maximum maturity of 10 years and a maximum interest rate of 4%.
Repayment is generally deferred for at least 6 months and up to a year.
Is the SBA relaxing any of their standard requirements for the loans under this program?
In a word - Yes.
For these loans, the SBA is waiving its standard requirements (a) Collateral for the loan and (b) personal guarantees from owners of at least 20% of a borrower for these loans.
Also, so long as the loans are used for a permitted purpose, there will be no recourse against the borrower’s shareholder/members/partners.
Does a borrower have to exhaust other options before applying for this loan?
No. Unlike some other SBA programs, the SBA isn’t the lender of last resort – i.e. the no “credit elsewhere” requirement is waived.
Do I have to repay these loans?
Unlike other SBA loans, these loans may be forgiven so long as the funds are used for qualified purposes and the borrower maintains (or returns to original) staffing levels.
How much of the loan can be forgiven?
The formula the SBA will use allows forgiveness for of up to 100% of the loan. The total amount of forgiveness equals the amount of the loan used for “allowable uses” multiplied by a fraction based on the staffing levels during the “covered period” – which if the period from February 15, 2020-June 30,2020.
What are “Allowable uses”?
Allowable uses are
1. Payroll costs
2. Interest on mortgages
3. Rent
4. Utilities
Those are the general “buckets” of allowable expenses. There are specific requirements for each of these categories (such as what kinds of payroll costs and that you cannot make payments on a new mortgage you took out after February 15, 2020) .
How is the amount of forgiveness calculated?
The amount of the loan used for “allowable uses” is potentially forgivable, but this amount will be reduced to the extent that the borrower’s payroll is reduced. The multiplier is a bit complicated. It is calculated by dividing:
(i) the average number of “full-time equivalent employees” (FTE) per month during the 8-week period after the loan is issued.
By
(i) the average number of FTE during one several periods (at the borrower’s choice). Those periods are (i) Feb 15, 2019-June30, 2019 or (ii) January 1, 2020-February 29, 2020. For seasonal employers the date range is Feb 15-June 30 of 2019.
Staffing averages are calculated using average FTE in each pay period during each month.
What if I have already terminated or reduced hours for employees?
Employees that have already been terminated won’t generally be counted against the borrower so long as they are rehired by June 30, 2020.
Specifically - employees who are removed between February 15 and approximately April 26, 2020 (30 days after passage of this Act is the specific language) or have their salary reduced during that same time will NOT be counted against forgiveness so long as they are rehired or restored to full salary by June 30, 2020.
What if I lower the compensation for my employees?
Forgiveness will also be reduced by reduction in total salary/wages for employees during the “covered period” if their total salary/wages is reduced by more than 25% from the prior quarter.
In addition, for employees making more than $100,000/year, reductions are allowable (presumably down to the $100,000/year level) without be counted for non-forgiveness.
Will loan amounts forgiven be treated as income to the borrower?
Forgiven amounts will NOT be treated as income to the recipient (as a normal loan forgiveness would be).
Are there other programs that overlap with these forgivable loans?
Yes. In addition to the disaster relief loans, the CARES Act includes a payroll tax credit that allows “eligible employers” hurt by this crisis to defer paying the employer portion of social security taxes through the end of the year into future years (50% by the end of 2021, and 50% to the end of 2022).
NOTE – you can’t use the tax deferment if you take a loan under the CARES Act.
There are also a number of changes that impact how businesses can use net-operating losses (NOLs) and business interest deduction. You will want to consult with your accountants for more on these aspects.
Disclaimer: The information in this summary is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this piece should be construed as legal advice from Northern Virginia Business Law, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this handout should act or refrain from acting on the basis of any information included in, or accessible through, this handout without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
