Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”): Paycheck Protection Program.

As of Friday, April 3, 2020, small businesses and sole proprietors are able to apply for the CARES Act’s “Paycheck Protection Program,” (the “Program”) a potentially forgivable loan. Beginning April 10, 2020, independent contractors and self-employed taxpayers may apply. This brief post will discuss the Program–what it is and how to apply.

Paycheck Protection Program
Per the CARES Act, Title I, §1102, the Program is a loan of 2.5x the previous years’ average monthly payroll costs for payroll costs incurred for all employees, up to $100k per employee, during the one year period before the date on which the loan is made. A maximum of $10MM is available to any business with fewer than 500 employees, and restaurant and hotel locations with fewer than 500 employees per location. The Program loan is offered through commercial lenders and fully guaranteed by the Small Business Administration. The loan application must be submitted to your lender before June 30, 2020. And the application and request must be made in good faith–that the loan is needed due to economic uncertainty caused by COVID-19. Loans will have a maturity period of two years and a fixed interest rate of 1%. Initial payments are deferred for six months, but interest will accrue during this time.

Up to 100% of loan proceeds spent on qualifying expenses (payroll, rent, utilities, mortgage interest) during the first eight weeks after loan origination may be forgiven and non-taxable to the business. To qualify for loan forgiveness, the firm must maintain the same number of employees between February 15, 2020 and June 30, 2020 as it had during the same period in 2019; alternatively, the business must maintain the same number of employees through June 30, 2020, as it had between January 1, 2020 through February 29, 2020. For companies that have already laid employees off, so long as they restore employee and salary numbers by June 30, 2020, they may qualify for loan forgiveness. As for the payroll component, at least 75% of the loan proceeds must be used for payroll purposes and no more than 25% of loan proceeds may be used for other qualifying expenses like rent, utilities, or mortgage interest. Also, those employees who earn less than $100k per year must not have their wages reduced by more than 25% as compared to the fourth quarter of 2019. If any of these criteria are not met, the amount forgiven will be reduced.

How to Apply for the Paycheck Protection Program
Lenders did not receive final guidance on the Program’s implementation until late on the eve of accepting applications for small business owners and sole proprietors. Due to the low interest rate, late guidance, procedural hurdles surrounding on-boarding new clients, and a limited pool of $349B (as of this writing), banks are serving established clients on a first-come-first-serve basis. To apply, contact your lender and request that lender’s requirements. In addition to the application, your banker may require the following supporting documentation:

• Spreadsheet showing number of employees and average monthly payroll supporting amount requested (2.5x the avg monthly payroll);
• Payroll reports for 2019 that show gross pay, PTO, Family Medical Leave, and state and local taxes paid;
• Documents showing premiums paid for group health;
• Docs showing total amount of employer contributions to retirement plans (company match)
• 1099s for any 1099 employees – they must apply on their own;
• 2019 IRS Form 940 showing quarterly payroll tax; and/or
• Have the business owner execute an Attestation and Release.

If your firm uses a payroll service like ADP, that service may be prepared to assist in collecting reports and other supporting documents. Your banker will run your request through an internal calculator and underwriting. Once approved, loan proceeds should be issued within a few days. After June 30, 2020, documentation verifying the number of employees on payroll as well as payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following loan origination will be provided to the lender. Feel free to contact us here at Ackerman Capital Management for more information on this program and our comprehensive wealth management services. 

Economic Injury Disaster Loan
An additional $10B has been appropriated for the existing Economic Injury Disaster Loan (“EIDL”) program under Section 7(b) of the Small Business Act. Per the CARES Act, Title I, §1110, disaster loans are available until December 31, 2020. EIDL’s are non-forgivable but low interest (~3.75%) loans to small businesses located in areas declared a disaster zone. They are alos long term, as long as 30 yearsTexas was declared a disaster zone due to COVID-19 on March 25, 2020. No personal guaranty is required and a $10k advance is available within three days of application, which will not need to be repaid. That said, if the business is also applying for the PPP loan above, EIDL advance will be reduced accordingly. Eligibility for an EIDL loan hinges around the following:

• Acceptable credit rating and history,
• Located in a declared a disaster area, and
• Has suffered losses due to the declared disaster and not merely due to a downturn in the economy.

How to Apply for an Economic Injury Disaster Loan
To apply, contact your lender and request that lender’s requirements. In addition to the application, your banker may require the following supporting documentation:

• Tax Information Authorization (IRS Form 4506T) for the applicant, principals and affiliates,
• Complete copies of the most recent Federal Income Tax Return,
• Schedule of Liabilities (SBA Form 2202), and
• Personal Financial Statement (SBA Form 413).

For questions or comments reach out to me by email.

Keith A. Pillers, JD, CFP^®, CIMA^®, CPWA^®
Director of Wealth Management
keith@ackermancapital.com

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