A Guide to the CARES Act As I Understand It

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I preface this article with the ascertain that I am not an expert.  At this point there aren’t any; not even the people putting the process together.  HR 748  aka the CARES Act was signed Friday and the powers that be are still writing, planning, and deciding the specifics.  Keeping that in mind, I have spent the better part of the last two days attending webinars through the SBDC, reading, listening to industry experts, so on and so forth.  The following is my take on things.  Do with it what you will.

For the first time ever, there may actually be free money for Joe the Junk Removal Specialist.  Assuming you act appropriately with the aid of your accounting/tax professional and bank

I would go to the SBA website and apply for an Economic Income Disaster Relief Loan GRANT or EIDL Grant (7B2 loan).  You will have to answer a couple of questions about your business including your GROSS income and Cost of Goods Sold for the last 12 months. On the last page before it requests your bank account information, I would absolutely check the box asking for an advance.

Your next step should be to reach out to your banker and ask about the Paycheck Protection Program (part of the 7A loan) or PPP.  If your banker is not taking any more PPP applications, you can visit the SBA Lender Website and find one.   The intention of this loan is to enable businesses to continue paying employees, whether or not they have work, to alleviate the pressure being put on the unemployment system.  There is some guidance indicating you could qualify if you bring back to work employees previously laid off due to COVID-19.  Currently applications are being accepted for small businesses and sole proprietors.  The application process opens for independent contractors and self-employed individuals on April 10.

Why would I do this?  Why, when my income has dropped would I want to take out one or even two loans?  Because both COULD be forgiven.

  1. There are limited funds available for the Emergency Economic Injury Disaster Loan & Grant which are being distributed on a first come first served basis.
  2. The Emergency Economic Injury Disaster Loan (7B2 loan) is not forgivable on its own; nor can you spend it on payroll then spend funds from the Paycheck Protection Program or PPP (7a Loan) to cover the same payroll period. However, you can roll these funds into the Paycheck Protection Program or PPP (7a Loan), which if spent appropriately is.  That means you may not have to pay it back either.

 Specifics of the Economic Income Disaster Relief Loan or EIDL (7B2 loan) & GRANT

  1. The Economic Income Disaster Relief Loan or EIDL (7B2 loan) is not new but the GRANT portion is. It was added under Section 1110 of HR 748 CARES Act.
  2. You can only receive the grant if you apply for the loan and if denied a loan, the grant money is still yours.
  3. Covered periods are from February 15, 2020-December 31, 2020.
  4. You apply directly through the SBA
  5. There is no requirement that you must have been in business for one (1) year but, you must have been in business on January 1, 2020. That means you must have been operational and have had business income and expenses.
  6. Grant awards appear to be awarded at $1000 per employee, up to $10,000 are supposed to be deposited into your bank account within 3 days of your application. However, to date this has not been the case.
  7. You must not have more than 500 employees
  8. Eligible businesses include:
    1. Sole proprietors (with or without employees)
    2. Independent contractors
    3. Cooperatives, ESOPs, Tribal small businesses, Private nonprofits & Small agricultural cooperatives.
  9. Beyond the advance, loan terms are favorable, at 3.75% over 10 years with no payments due for 6-12 months (to be determined by SBA).
  10. There is no guarantee required for loans up to $200,000
  11. Loans may be approved by credit score alone – no tax return submission required.
  12. You will not qualify if you are in arrears on child support
  13. Funds must be used for the following business purposes
    1. Employee sick leave due to COVID-19
    2. Payroll
    3. Increased materials costs as a result of COVID-19
    4. Business rent/mortgage
    5. Repaying obligations (i.e. any other business-related expense)
  14. In the case of independent contractors and self-employed individuals, you would count yourself as an employee.
  15. You do not get to request a loan amount and I have no idea what formula the SBA will use.
  16. There is not forgiveness of loan funds under the Economic Income Disaster Relief Loan or EIDL (7B2 loan) on its own.
  17. HOWEVER, if you are eligible to apply for the Paycheck Protection Program 7(a) program, the loan amount of the EIDL can be refinanced into the Paycheck Protection Program 7(a) program and possibly be forgiven minus any grant money. Let’s say you received $10,000 from the grant, another $50,000 in loans from the 7B2 application (Economic Injury Disaster Loan), and a $50,000 loan from the Paycheck Protection Program 7(a) program. In all you have received $110,000.  You refinance all of it under the Paycheck Protection Program 7(a) program, spend the money on qualified expenses, you may be forgiven up to $100,000.   (I hope that makes sense)
  18. That said you can’t duplicate expenses. If you use funds from EIDL to cover payroll for the month of April, you can’t then claim that you used PPP funds to cover the same payroll period.

Now, for the Paycheck Protection Program 7(a) program

The 7(a) loan program is not new, but the Paycheck Protection Program is a new addition to it under Section 1102 of the CARES Act.

You must apply through an SBA approved lender.  Check with your bank first then go from there but do so now.

Unlike any other time that I am aware, of these loans are backed by the SBA 100% instead of 50%.  This means if you can’t pay your loan back, the bank will still get their money, making them are more likely to lend.  (Not that I am encouraging anybody to do this.)

Here are the specifics as I read them:

  1. The covered period is from February 15, 2020 – June 30, 2020. This means you must have been in operation on February 15 and the funds will no longer be available after June 30.  Again, I anticipate they will be gone well before then.
  2. You MUST have had employees with payroll and taxes OR have paid 1099 contractors
  3. Who may qualify:
    1. Small businesses with 500 or fewer employees
    2. Sole proprietors
    3. 1099 Contractors
    4. “Eligible Self-employed Individuals”
    5. Nonprofits, Veteran’s Organizations, and Tribal Organizations

Some of these terms are vague.  Apply and let the experts tell you.  The worst they can do is say no.

  1. Currently the guidance is unclear whether the basis for “payroll costs” for self-employed individuals is going to be gross receipts or net income. Some banks are asking for the latter while others are asking for the former.
  2. The program defines an employee as someone who works full-time, part0time, and/or on another basis. Again, there is no clear definition so apply and deal with the rejection if that is what happens.
  3. The maximum loan amount is the lesser of $10,000,000 or 2.5 times your payroll costs for the previous year plus any EIDL funds that are refinanced.
  4. 75% of funds given are to be used for payroll expenses and 25% can be used on other qualified expenses.
  5. Eligible payroll costs include
    1. Salaries, wages, commissions, tips up to $100,000 limit
    2. Vacation, sick, and severance pay
    3. Group health insurance premiums
    4. Retirement plan matches
    5. State and local payroll taxes
    6. DO NOT INCLUDE payments made to 1099 contractors or for federal taxes in your calculations.

Looking at #4 & #5 let’s calculate your loan.

$30,000 Wages

$2,000      Vacation time

$4,000      Health insurance

$4,000      State & local taxes

$40,000 x 2.5 = $100,000 PLUS $50,000 from your EIDL loan = Total 7(a) loan is $150,000

  1. Terms
    1. Interest is 1% over 2 years on unforgiven amounts
    2. No payments for 6-12 months; to be determined by the SBA
    3. No prepayment penalties
    4. “Credit elsewhere” provision does not apply, meaning you don’t have to exhaust all other funding sources first
  2. Click here to assess a payroll calculation worksheet that has been helpful in estimating loan amounts.
  3. 7(a) Loan Forgiveness
    1. This applies to 7(a) loans made prior to and after February 15, 2020
    2. Used in conjunction with the Paycheck Protection Program which we covered in # 1-7 above
    3. Forgiveness is given for:
      1. Payroll costs as defined above in section 1102
      2. Payments of interest on any covered mortgage obligation that was incurred prior to February 15, 2020 (must be business related, not personal)
  • Rent if the lease was executed prior to February 15, 2020
  1. Utilities: electricity, gas, water, transportation, telephone, and internet access
  1. Forgiveness is NOT TAXABLE which is not normally the case
  2. CAUTION: forgiveness is reduced or eliminated for borrower’s who reduce their workforce within 8 weeks from the date of your loan origination.
  3. You will have to report exactly how this money is spent so recordkeeping is extremely important. If you use QuickBooks Online this would be a great time to start using the new tags feature.

If There Were Ever A Time, It is Now

If you aren’t confused enough, you must consider how accepting loan funds would affect your ability to qualify for various tax incentives and which would be best for your situation.    Another wrench is that many states are offering their own relief options.  This is why I highly recommend you work closely with your accountant/tax professional right now.   Choosing to participate in one relief program may preclude you from participating in others.  Worse, choosing the wrong one(s) could leave you open to carrying a loan or paying additional taxes.   Unless you plan on spending hours (and hours) reading the entire HR 748 CARES Act document yourself,  you will need help devising a strategy that is best suited to your situation.  And, as I stated at the beginning of this article, the ink is barely dry on HR 748.  This means that the understanding and implementation of it is a fluid situation What I understand to be the case today is likely to be different tomorrow and next week.   So, as tight as money is, having a professional guide you through the process may be a life saver; or in this case a business saver

#unitedwestandtogetherwerise #bettertogether #financialjunk

Written March 31, 2020; Updated April 8, 2020


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