by Gregory S. Dowell
March 31, 2020
Important Information for Business Owners and Nonprofits
The Coronavirus Aid, Relief, and Economic Security Act (CARES) that was passed into law over the past weekend contains provisions that affect income taxes for individuals and businesses, as well as paid leave and unemployment benefits. CARES also included $350 billion to help small businesses (including self-employed persons and nonprofits) maintain their payrolls. Known as the Paycheck Protection Program, these loans are backed by the Federal government and may be forgiven if the borrowers maintain their payrolls and meet other criteria. This update is going to address only the loan provision under the Paycheck Protection Program.
Key attributes of the Paycheck Protection Program are:
- Small business or nonprofit (501 (c)(3)) with fewer than 500 employees (500 employees includes full-time and part-time); includes all affiliates, subsidiaries, and businesses under common control; exceptions apply for businesses in the food service sector, franchises, and SBIC-financed businesses
- Self-employed individual carrying on a trade or business
- These loans go up to 10 years, with up to 6 to 12 months of forbearance at the outset
- Maximum loan amounts are the lesser of $10 million or 2.5 times the average monthly payroll for the 12 months preceding the loan funding
- Payroll compensation includes tips, medical insurance costs, paid leave, severance, retirement plan contributions, and state and local employment taxes
- Payroll calculations can include leased employees
- Individual employee compensation is limited to $100,000 per year
- All payment obligations must have been in existence prior to 2-15-20
- No personal guarantees required for these loans
Loan forgiveness is also included:
- Amounts eligible to be forgiven are amounts spent on payroll, mortgage interest, rent, utilities, and interest on other debt obligations.
- Loan will be fully forgiven to the extent it is expended during the first 8 weeks following funding (but cannot go beyond 6-30-20), if average number of employees is not changed from the average number of employees from 2-15-19 to 6-30-19 or from 1-1-20 to 2-29-20.
- No employee may have their compensation reduced during the period by more than 25%
- Violations of either of the above will result in a proportionate amount of the loan remaining outstanding and the remainder being forgiven. If employees separated between 2-15-20 and 4-27-20 but are rehired by 6-30-20, they will be treated as having been employed throughout the period.
- Forgiven loan is not taxable for Federal income tax purposes.
- If any part of the loan is forgiven, employer is not eligible for 2-year deferral of employer’s share of Social Security taxes.
The portion not forgiven will be repayable over a maximum of 10 years, with interest capped at 4%.
Paycheck Protection loans are administered by the Small Business Administration (SBA). The applications for these loans have not been finalized; the expected date of the application’s availability is April 10th or slightly sooner. The loans may be applied for directly through a bank qualified as an SBA lender or through the SBA.
We have been advised that, due to the expected volume of applications, banks may likely only process loans of existing customers at first. We further hear that banks may limit the initial loan to just the forgivable amounts for each borrower, and presumably will circle back around to address other borrowing needs as soon thereafter as possible.
While the applications are not available yet, we advise businesses and nonprofits to begin compiling all of the necessary documents that the SBA will require as soon as possible, which would include documents to verify:
- Number of employees as of 2/15/2020.
- Payroll information from 2019 and projected May 2020 and June 2020 (more guidance to come on acceptable formats)
- Documentation on leases, mortgages, and utilities:
- Copies of lease agreements
- Copies of mortgages
- Evidence of payment amounts and balances due on mortgages and leases
- Utility bills for 2019 to present (electric, gas, water, transportation, telephone, internet)
- Certification from a representative of the business or organization who is authorized to certify that the document provided is true and correct and that the amount being forgiven was used in accordance with the program’s guidelines for use.
- Current 2020 financial statements
- 2019 financial statements
- 2019 (if filed), 2018, 2017, and 2016 tax returns
- Proof of liability insurance
- Copies of organizational documents, including:
- Bylaws (for a Corporation); Operating Agreement (for an LLC)
- Articles of Incorporation (for a Corporation); Articles of Organization (for an LLC)
The situation is fluid and it is important to act quickly. The best thing that can be done at this time is to gather documents.