The much-needed support for small businesses and non-profit organizations has been realized by the passage and signing on Friday March 27, 2020 by the President of The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which introduces the Paycheck Protection Program as a key provision in Title I — the Keeping American Workers Paid and Employed Act. In an effort to get our clients and friends information quickly, there may be revisions to the below as we take a deeper look into the law.
What is it?
The Paycheck Protection Program provides $349 billion in 100% federally guaranteed loans to small businesses and 501(c)(3) nonprofit organizations. Because many businesses have already laid off workers as a response to the pandemic, the program can be retroactive, with the covered loan period running from Feb. 15 to June 30, 2020, which allows previously laid off or furloughed employees to be returned to payrolls.
Who is eligible?
Any business or non-profit organization with not more than 500 employees is eligible, or otherwise qualifies as a “small business” under SBA size standards published in 13 part 121 of the CFR. More importantly, small business includes within its definition sole proprietorships, independent contractors and self-employed individuals.
How are the number of employees determined?
Generally speaking, the normal rules of attribution apply. Meaning any business that is controlled through voting, managerial, economic or influence would be counted toward the 500-employee cut-off for this program. The only exception is for hotels and restaurants as long as the number of employees is less than 500 per physical location.
How is the loan amount determined?
The loan amount is determined by reference to monthly payroll costs for the one year period prior to the loan. Payroll costs include:
1. Salaries, wages, commissions or similar compensation, up to $100,000 per employee
2. Cash tips
3. Payment for vacation, parental, family, medical or sick leave
4. Healthcare and retirement benefits
5. State and local taxes on wages
6. Payments of any compensation to or income of a sole proprietor or independent contractor that is wage, commission, income, net earnings from self-employment or similar that is not more than $100,000 in 1 year, as prorated for the covered period
Any compensation paid to employees outside the U.S. is excluded.
Once the monthly average of the above is determined, it is multiplied by 2.5. The business receives the lesser of 2.5x the monthly average payroll or $10,000,000.
I’m self-employed or an independent contractor and have no employees. How do I compute the loan amount?
If you are self-employed, or an independent contractor the rules above apply to you, except you will use your first $100,000 of self-employed income to determine the average monthly payroll. The law specifically states “the sum of payments to 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 pro-rated for the covered period.”
Although not clear, we imagine your self-employed health insurance can also be included in the computation. In addition, self-employed and independent contractors will be required to submit documentation substantiating such classification such as payroll tax filings, 1099-MISC and other information.
What expenses can I pay?
The money received can be used to pay the following:
1. Payroll costs
2. Payments for the continuation of group health care benefits, which includes paid sick, medical and family leave and insurance premiums
3. Employee salaries, commissions or similar compensations
4. Payments of interest on any mortgage obligation. However, the payment cannot be used for prepayment of or payments for principal.
7. Interest on any other debt obligations that were incurred before the covered period.
How do I apply and what are terms?
Application for the loan will be made with your local banker who is an authorized SBA lender. The federal government is pushing for rapid adoption and expects to have numerous additional lenders in place in the weeks to come. We still don’t have clarity as to how the application process will work or when an application can be submitted. However, the normal requirements of the SBA will not be enforced such as personal guarantees, collateral, and unable to obtain credit elsewhere. Normal fees of the SBA will also be waived.
What we do know is there is a loan forgiveness provision, provided the funds are used as follows:
1. Payroll costs
2. Interest on certain mortgage obligations
3. Rent and utilities
In addition to using the funds on the costs above, there are provisions to maintain the ratio of employees during February 15, 2020 through June 30, 2020 to the number of employees for the same period in 2019, or for the period January 1, 2020 to February 29, 2020. The amount of forgiveness is also reduced by the amount that total salary or wages of any employee is reduced by more than 25 percent. However, anyone who makes more than $100,000 is not subject to this limitation as the wages above $100,000 were not included in the computation.
The amounts forgiven are excluded from gross income for federal income tax purposes.
To the extent the funds remain or are not used for the expenses above, the funds are required to be repaid over a maximum maturity of 10 years with an interest rate not to exceed 4%.
We have received many calls from our clients and colleagues regarding paying employees who are paid by person seen (in the case of non-profit organizations in behavior health) or commission. The question is how is the rate of pay determined? Our recommendation is to set the rate of pay based on a historical average of commission or persons usually seen based on prior year records for the employee. Remember, the funding is to allow a business or non-profit organization to retain their employees.
We understand these are uncertain times and we are committed to keeping our clients and friends informed as information becomes available.