Congress did something unprecedented this week in terms of direct financial assistance for small and medium-sized businesses. There’s very little paperwork involved, the upside is impressive, and this article will tell you how to take advantage.
Specifically, under the new CARES (Coronavirus Aid, Relief and Economic Security) Act, your business may be eligible for two separate loans. One of these loans is 100% forgivable if used for its intended purpose, and the other loan includes a component that’s intended to be forgivable in full. These programs are designed for businesses with fewer than 500 employees, although in a carve-out for the hard-hit hospitality industry, hotel chains to have up to this number of employees per location.
Four updates/clarifications, in answer to questions that have come in since I posted this article:
1. Good news for sole proprietors: Most everything mentioned in the article appears to apply to sole proprietors, even if you don't formally pay yourself through payroll.
2. Bad news for VC-backed companies: There are limitations that make this money hard for venture-based startups to qualify for. Specifically, if the VC owns more than 20% of the enterprise, it may lead to “affiliation” concerns that may disqualify the business.
3. The EIDL (the second of the two loans covered in this article) is proving to be less than Congress intended, according to the latest guidance from the SBA. The loans to be granted are much smaller than was initially promised, and the forgivable part has now been reduced to $1,000. So most small businesses will want to focus on the first of the two loans discussed below, the PPP.
4. You can now apply directly for the PPP with fintechs such as PayPal and Quicken loans. See my new article here.
WASHINGTON, DC - MARCH 13: U.S. Speaker of the House Rep. Nancy Pelosi (D-CA) is followed by ... [+]
These loans are very easy to apply for, as I’ll explain later in the article. You will want to act right away as the demand is expected to be unprecedented.
As I’m not a tax lawyer (or accountant) and don’t even play one on Zoom, I’ve brought in one of the most expert people I know on the subject, Attorney Mark W. Mark W. Schweighofer, attorney at law at Stein, Sperling, Bennett, DeJong, Driscoll, PC, a long-established law firm in Rockville, Maryland.
Micah Solomon, Senior Contributor, Forbes.com: Can you give me an overview of the CARES (Coronavirus Aid, Relief and Economic Security) Act that Congress has just passed, particularly as it may be helpful to my readers? Let’s start with the Paycheck Protection Program (PPP):
Mark W. Schweighofer, Attorney at Law, Stein, Sperling, Bennett, DeJong, Driscoll, PC: The Paycheck Protection Program (PPP) provides businesses with a loan–up to 100% forgivable, if used in particular ways–to cover short term payroll obligations and other approved expenses. Borrowers apply through designated commercial lenders, and the loan is 100% guaranteed by the Small Business Administration (“SBA”). The loan is intended to provide businesses that have 500 or fewer employees (subject to certain exceptions) with a loan equal to 2.5 times each business’ average total monthly payroll costs, based on the business’ historical payroll obligations (inclusive of benefits) during the one-year period before the loan is made. Compensation (inclusive of benefits) paid by the business to each employee in excess of $100,000 are disregarded for the purpose of determining the borrowing base and the total amount of the PPP loan is capped at $10 million.
Based on existing guidance, the loan requires only limited documentation beyond that needed to substantiate historical payroll, no collateral and no personal guarantees of the business owners. The current interest stated by the SBA is 1.0% with a repayment term of 2 years (unless forgiven).
The legislation provides that loan proceeds can only be used for certain purposes, such as paying rent, paying utilities and paying down existing debt. Businesses are eligible for forgiveness of the loan, but only in an amount equal to the permissible expenditures noted above that are made during the 8-week period following the date of the loan and provided that 75% of such expenses are used to fund payroll costs, and businesses are not required to pay income taxes on the forgiven amount, which is not the case in most loan forgiveness situations.
Small businesses other than sole proprietors became eligible to apply for the PPP loan this past Friday, April 3; sole proprietors are eligible to submit applications on April 10. At present, many SBA-approved lenders are scrambling to prepare their application package. Demand is expected to be extremely high for these loans and, with only $349 billion dollars allocated to the program, there is concern that demand will availability.
I’d like to offer one practical tip, if you choose to apply: Because forgiveness of the PPP loan, if granted, will be subject to strict substantiation requirement, I am recommending to all my clients that they establish a separate bank account to hold and administer any PPP loan proceeds. That way they are in to clearly establish that the loan proceeds were used for a permissible purpose. This sounds like an incredibly basic strategy, but given that we do not have current guidance on how strict the SBA will be with respect to tracing the use of loan proceeds, I think it is a low-cost solution that can save a lot of headaches for business owners in the future.
*****
Author’s Note: How to Apply
If your existing bank is an SBA-approved lender, start there. Here in the Pacific Northwest, Umpqua Bank, which my company uses, has done yeoman work in the past few days to get their online application up and running in time for yesterday’s opening. Michele Livingston, Umpqua Bank SVP and Director of Lending and Small Business Solutions, tells me that it’s an all-hands-on-deck situation right now, as they work through the weekend to process the applications that have come in so far.
A community ’ done customer service consulting work for back East, Robert Flanyak, President and CEO of CHROME FCU in southwestern Pennsylvania, the late-evening oil when I caught up with him, getting CHROME’s version of the application online and processing the resulting applications. the level of interest in these loans is “unprecedented in recent memory.”
UPDATE, as of April 14, 2020: You can now apply directly for the PPP with fintechs such as PayPal and Quicken loans. See my new article here.
*****
Solomon: Next, could you describe the relevant parts of the Economic Injury Disaster Loan (EIDL) Program?
Schweighofer: The Economic Injury Disaster Loan (EIDL) I the second major lending component of the CARES Act that’s aimed at smaller businesses (again, generally those with fewer than 500 employees). It’s an expansion of the SBA’s existing disaster loan program. This loan allows borrowers to borrow up to $2 million dollars at an interest rate not to exceed $3.75%. For loans of less than $200,000, the borrower is not required to submit personal guarantees. The SBA will request collateral if the loan exceeds $25,000, but the failure to provide collateral does not disqualify the application. Unlike the PPP loan, the EIDL loan is obtained directly through the SBA, rather than through an approved lender.
One of the most attractive features of the EIDL is that borrowers are eligible to request an emergency advance of up to $10,000 [UPDATE, April 14, 2020: This has since been reduced to $1,000] that does not have to be repaid even if the application is ultimately denied. Furthermore, the SBA is expected to provide the advance within three days of receipt of a borrower’s application.
*****
Author’s Note: How to Apply
The EIDL is very fast and easy to apply for and you can do it right online. I guesstimate it will take all of eight minutes of your time. Here is the link.
Pro tip: Be sure to write down or screenshot the application number that you see on the screen after you complete the application; you won’t receive a confirmation email until your application has been reviewed.
*****
Solomon: Would you spend a minute going over the tax relief provisions of the CARES Act as well?
Schweighofer: Beyond the loan provisions, the CARES Act provided many tax benefits to businesses. For example, there is a 50% refundable tax credit for wages paid by businesses to employees, subject to a cap of $10,000 per employee. To qualify, the business must have been fully or partially shut down by a government authority as a result of COVID-19 or otherwise see a sharp decrease in gross receipts. For businesses with more than 100 employees, the credit is only available with respect to wages paid to employees who are no longer providing active service. For businesses with 100 or fewer employees, the credit is generally available with respect to all employees as long as they remain on payroll.
In addition, the CARES Act allows employers to defer payment of the employer portion of social security taxes (self-employed individuals are allowed to defer ½ of self-employment taxes) through the end of 2020; 50% of the deferred amounts would be due 12/31/2021 and the other 50% would be due on 12/31/2022.
The CARES Act also made a technical correction to the 2017 Tax Cuts and Jobs the treatment of leasehold improvements to commercial property made by landlords or tenants as 15-year property (versus 39-year property), allowing an immediate write off through bonus depreciation.
Outside of the CARES Act, the Internal Revenue Service has extended the due date for the filing and payment of many 2019 income tax returns to July 15. This includes first quarter estimated tax payments.
Solomon: I know you’ve assisted clients who are businesspeople through multiple downturns. Can you share any philosophical or practical points that you would help guide others with for whom this is their first?
Schweighofer: Take a deep breath, organize your thoughts and develop a plan. Unlike many downturns, which tend to impact one business sector disproportionately to others, the COVID-19 pandemic has reset the board for almost everyone and done so nearly overnight. Lean on your network; the people that helped you succeed will likely be the same people who help you survive and recover. Reciprocate to the extent you can, even if it does not lead to immediate revenue to your business.
In addition, each downturn offers an opportunity to take inventory—of personnel, processes, technology and opportunities. Take advantage of the time to improve and modernize your approach and position your business to emerge stronger when the tide turns.
________________
Micah Solomon is a customer service and customer experience consultant, keynote speaker and trainer. He also works as a content creator and ghostwriter and as a customer service expert witness. Micah was recently named “the World’s #1 Customer Service Turnaround Expert” by Inc. Magazine. Reach him directly at micah@micahsolomon.com, visit his website, or check out his new bestseller: Ignore Your Customers (and They’ll Go Away) (HarperCollins Leadership).
HCL
