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Cares Act

DISCLAIMER: I am not a loan officer, lender, employee of the government, or the state. I am a CPA that cares for her clients that are struggling with all of information regarding the CARES Act and SBA Loans. The opinions are an interpretation of the CARES Act and not to be used as support or guidance for applying for a loan or any other financial related advice.

Dear Clients and Friends,

I am a CPA, not an SBA loan officer or representative of a government agency. The CARES Act is only days old and implementation rules have been rapidly changing.   I have been reviewing and studying these subjects for days since they became available.  These are uncertain times where everyone is asking questions and not knowing where to turn for answers.  This content is to assist small business owners and identify available options based on the latest information.  We are still waiting on guidance on much of it.  As additional information becomes available, I will provide updates on this site.  The following is a summary of the tax related subjects surrounding Covid-19 

 

OVERALL THOUGHTS ON THESE LOANS

 

These loans are SBA loans.  It is likely that business owners who have NEVER been able to qualify for SBA loans in the past, are now able to qualify because of reduced qualification requirements.  These SBA Loans have low interest rates, no prepayment penalties, no loan fees, long terms etc. Do not make the mistake that just because you didn’t previously qualify, that none of this applies.   It may well apply to you, even if you are a sole proprietor. 

We do not know how long we will be in this emergency state, consequently anyone who says they know exactly how much their business will lose from the impact Covid-19 is likely misrepresenting their position. 

This is my opinion only, and I cannot advise you on how to manage debt:

 

SBA interest rates are shockingly low, so these SBA loans would HANDS DOWN be less expensive than any credit card debt you may build up over the next few months. If you have existing credit card debt, you may consider consolidating into these low interest SBA loans.

 

No collateral, 100% backed by the SBA and you are still qualified if you’ve previously been turned down for a loan previously.

 

There are no prepayment penalties on these loans, which means if you end up not needing the $$ you can prepay and potentially pay only a small amount of interest. 

If you are faced with alternatives that would cost you MORE than the small interest these loans offer (credit card interest, penalties, late fees, eviction), I would seriously consider applying for enough money to cover your operations for several months. 

Worst case, you don’t need the loan and you pay it back early with a small amount of interest. A small amount of interest is not a bad price to pay for a world of peace that a back up plan could give you in these difficult times.

 

THERE ARE TWO MAJOR TYPES OF LOANS

 

First, there is the Economic Injury Disaster Loans (EIDL), which has always been around but due to recent events has significantly lowered requirements to be more available to all business owners including the self-employed. This loan is not forgivable but it does come with a potential up to $10k grant.

Second, there is the Paycheck Protection Program (PPP) which was created as a direct incentive for small businesses to keep their employees on payroll. Up to 100% of the loan is forgivable.

The PPP loan starts today Friday, April 3, 2020. There will be a ton of people running to apply at once and I’m not seeing the insane urgency to apply on Friday…I think it will be a slower process.

 

Economic Injury Disaster Loans (EIDL) Emergency Advance

This relief is meant to provide emergency cash injections into small businesses who are negatively impacted by the Coronavirus.

The grant portion provides an emergency advance of up to $10,000 almost immediately to small businesses harmed by COVID-19 within 3 days of applying for an SBA Economic Injury Disaster Loan.

This is a direct SBA loan so you must apply here (not through a lender) and make sure to check the box to request the $10k advance if you want it.

According to sba.gov and many other sources, these $10k advances are going to be forgiven or “granted”. In other words, you don’t have to pay it back! Even if you don’t end up qualifying for the loan, it states that the 10k will not have to be repaid.

WHO IS ELIGIBLE?

This program is for any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by coronavirus/COVID-19.

Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries.

Funds will be made available within three days of a successful application, and this loan will not have to be repaid. Lenders may begin processing loan applications as soon as April 3, 2020

You must have been in business since January 31, 2020.

What is the loan process like?

1.      It takes about 5-10 minutes to apply and the only financial thing they ask for is your gross sales, and cost of goods sold. These numbers come from:

a.      If you are a sole prop or single member LLC - Sch C Part 1 line 1 & line 4

b.      If you are a C Corp, S Corp or Partnership - Form 1120/1120S/1065 line 1a & 2

2.      The process is super simple so that people can get that $10k advance that is supposedly coming within 3 days. But there will be a follow up to further qualify you for the loan. This is the part where you should have your ducks in a row.

a.      Get your YTD profit and loss ready – contact your bookkeeper or accountant

b.      Get 3 years of returns gathered

HOW LONG UNTIL THE LOAN IS FUNDED?

This is unknown. With this many people applying at the same time, the limited relief, and the state the entire world is in – my only recommendation is to apply ASAP.

PAYCHECK PROTECTION PROGRAM (PPP) 

These are 100% federally guaranteed loans to small businesses that can be up to 100% forgivable.

Loan Information

The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll.

SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.

You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating in the program.

Lenders may begin processing loan applications as soon as April 3, 2020. The Paycheck Protection Program will be available through June 30, 2020

Who is eligible?

This program is for any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by coronavirus/COVID-19.

Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries.

Small businesses in the hospitality and food industry with more than one location could also be eligible if their individual locations employ less than 500 workers.

How much can I get?

You can borrow up to 2.5x of your average monthly payroll expenses up to $10MIL. The usage of this amount is to cover 8 weeks of payroll expenses and any additional amounts for making payments towards debt obligations. The covered period can apply to any time frame between February 15, 2020 to June 30, 2020.

Which expense types are forgivable?

The amount that is fully forgivable is equal to the sum of expenses for payroll, interest payments on mortgage, rent lease and utility expense. If you want to use the loan for other purposes you can, but that portion will not be forgivable.

How much of the loan will be forgiven?

The point is to retain employees, if you retain 100% then all of it will be forgiven (assuming you used funds for the types outlined above). However, non-payroll expenses are limited to 25% of the total forgivable portion. If you lay off employees, the forgiveness will be reduced by the percent decrease in the number of employees.

What if I’ve already laid off employees?

If you’ve already laid off employees – you can rehire them and still do this program.

When is the loan forgiven?

At the end of the 8-week period after you take out the loan.

How to apply

Please use updated link to find Eligible Lenders

https://www.sba.gov/paycheckprotection/find?fbclid=IwAR1rND5H6joGmK7MaQ9qHWN61NShPXiZrX07yv6Pyymzpbb-i3Kca4_yFHo&address=30080&pageNumber=1

These loans must be applied for through SBA loan officers, and they are getting guidance THIS WEEK on how to process these loans.

Many banks (who didn’t previously deal with SBA) are going to be able to handle these because of the mass amount of volume of businesses in need. Start with your own bank, then reach out to other local banks. If you need help contact small business development centers or women business centers.

Here is a sample application posted by the US Department of the Treasury.

Here are the items I think you should have ready for this application:

1.      Forms 941 – to prove out payroll expenses

2.      Get your YTD profit and loss ready

3.      Get 3 years of returns gathered

Other things to note on PPP:

It appears that these loans are made specifically for employers who want to retain their employees and keep them off unemployment. Especially with the added forgiveness of rent, utilities and or mortgage interest – this sounds ideal for a business owner with employees and a brick and mortar.

I am certainly not saying that it’s only for those types of businesses, but it appears that it’s what they are designed for.

FAQ’s

So you are planning on applying, what do you do now?

First get your Financials in Order. 

There will be chaos once the SBA starts auditing or going through the approval process. The main thing getting in your way is not having your financials organized. This could result in losing the forgiveness portion of your loan. 

Bookkeepers and Accountants: be prepared to create separate classes, categories, or liabilities to support the applications of these loan proceeds.

 

Second - Preserve your cash because these loans are not going to get your cash quick (outside of the disaster grant).

 

What if you haven’t filed for 2019 yet?

I would imagine they’d let you use past returns and YTD financials for the approval process, but ask your lender.

What’s the harm in applying to both?

I’m currently not really seeing one. There will be hoops to jump through once you get to the loan officer but getting in the queue for the EIDL ASAP seems like a no-brainer. You could always turn down the loan based on the professionals whom I’ve spoken with.

So to do this, you would apply for EIDL now, and then get in contact with a SBA lender so you can start the PPP process as soon as you can.

A loan officer should potentially take everything from there on and walk you through your best options.

Can you get forgiveness from both loans?

You can have BOTH loans but you can’t overlap the expenses between them. Don’t use the EIDL for payroll if you are using PPP for payroll.

If you get the $10k grant and the PPP loan, this will lessen the forgivable amount of the PPP loan.

Once you receive the PPP you can roll the EIDL into and have one consolidated loan. I believe you can’t have BOTH at the same time, the EIDL will need to be rolled into the PPP.

Okay, but if I HAD to choose one loan…

To decide, I suppose I would consider my main problems/expenses.

If payroll is your largest expense and keeping employees and the lights on is your main objective, it appears the PPP is best.

If your main fear is cash flow, then the long term of 30 years for the EIDL is incredibly attractive. Lower payments over a long period of time.

If urgency in funds is the main problem, EIDL seems like the way to go.

Can I apply for Unemployment AND these loans?

PPP - It’s relatively clear you cannot benefit from unemployment while participating in the covered portion of the PPP. Since it’s based on active wages, and unemployment doesn’t allow active wages. Could you do unemployment until you get the PPP loan? Again, I don’t know sorry.  

EIDL - it’s unclear. I haven’t read anything showing that you can’t do both unemployment and an EIDL, however this is just a completely unknown area. I have read that some are taking advantage of unemployment until the EIDL funds – but cannot speak on whether that is okay to do.

You can call your local unemployment office and ask. This will vary by state.

Are these forgiven portions going to be taxable?

PPP – It’s stated that the forgiven portions are NOT taxable.

EIDL – It is not yet stated…I would be shocked if they were taxable but since it’s not clear I would set aside 30% in case it turns out to be taxable.

What about these loans and the payroll tax credits?

PPP – It is stated that you can’t take the credits along with the loan.

EIDL – Unclear

Here are some other SBA relief options:

SBA Debt Relief Program

SBA Express Bridge Loans

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