April 3rd update –
Major clarification in the new regs were issued late last night. https://home.treasury.gov/system/files/136/PPP–IFRN%20FINAL.pdf
1099’d independent contractors are NOT includable in the calculation for maximum loan or in the forgiveness. Independent contractors will have the ability to apply individually. For example, if you are a broker/dealer, and your reps are independent contractors, you cannot include them in your calculation. Only W-2 employees. See section 2 h. on page 11, and 2p on page 15.
- While it seems as if the new regs are unclear on independent contractors (as there are references that you can and cannot include), any reference that 1099’s are included refers to sole proprietors and independent contractors that are individually applying (and each of those will max at $20,833). For example, registered reps of a B/D that are I/C’s and receive 1099’s, can file individually (beginning on 4/10), but are not included in the loan calc or forgiveness for the B/D.
Further, the interest rate was changed from .5% to 1% per annum. Term is still 2 years.
Additionally, most bank/lender systems will not be up and running immediately (although B of A is now accepting apps for existing customers, however be careful…they are including 1099’s in their computation, which is inconsistent with the latest Regs). Keep checking their websites for availability.
There is a new loan application available! https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf
The new regs refer to the payroll lookback period for purposes of calculating the loan amount as “the last 12 months”, but the new application form refers “average monthly payroll for 2019”. Hopefully their will be further guidance on this, but be prepared with both periods (Jan – Dec 2019, and April 19 – Mar 20).
On page 11 of the Regs, as it relates to “anything expressly excluded from the definition of payroll costs”. It refers to “the employee’s share of FICA…for the period 2/15/2020 – 6/30/2020, which would mean that you can include in the loan calc formula, but that portion wouldn’t be forgiven (6.2% of the per employee loan amount). Again, this is very confusing. For purposes of the loan calc, if you are using calendar year 2019, this wouldn’t impact the loan amount calc, but when you calc the forgiveness it would.
April 2nd update (specifically for Broker/Dealers) – per small firm FINRA call today, FINRA assessment payments will be deferred and broker/dealers can add back any accrued expense relating to the assessment, thru September 1st, 2020.
Additionally, CARES Act loans taken by broker/dealers do not have to be included in Aggregate Indebtedness as part of the Firm’s FOCUS filing and related net capital computation.
Further, as qualified expenses are paid from the loan proceeds, those expenses can be added back to net capital. Firms must maintain a physical record of these expenses, and they must be in compliance with the requirements of the loan in order to take this preferential treatment.
Prior to any loan forgiveness, the loan liability should be included on FOCUS line 1385 (A/P, accrued expenses, and other – Non-AI). Any add-back of qualifying expenses incurred should be reflected on line 3525 – Other (deductions) or allowable credits (List).
April 1st update – The Treasury Department has release some clarification on PPP! Starting April 3rd, 2020, small businesses (independent contractors and self-employed individuals will start April 10th) will be able to start applying for loans under PPP. However, many lenders will only accept applications thru their portals, and some of those are not yet available for use. Check with your SBA qualified financial institution for further details, and when you will be able to apply. Sooner is better than later!
As we experience unprecedented times resulting from the COVID-19 global pandemic, many small businesses are in dire need for financial assistance to meet their basic needs. Some form of this relief is on the horizon with the recent enactment of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Specifically, Title I of the Act will provide qualifying (less than 500 employees or as defined by the SBA) small businesses with access to loans of up to $10 million. This $350 billion fund within the Act is know as the Payroll Protection Program (“PPP). There is currently a lot of confusion about PPP, so I am going to attempt clarify some things…
1) As of this moment, you cannot apply for a loan under PPP; it is not up and running yet. The expectation is it will still be “a couple of weeks” before you can apply (see April 1st update above). The SBA will continue to put out info on the details and when you will be able to apply. https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources.
2) This program is different than the existing SBA Economic Injury Disaster Loans (“EIDL’s”). The big recent positive revelation about EIDL’s, is that COVID-19 has been included in the definition of a qualifying disaster. As such, if your business is impacted by COVID-19, you can apply for an EIDL. Here’s the good news/bad news about EIDL’s. It is a true SBA LOAN! If approved, you can borrow up to $2mm at 3.75% for a term of up to 30 years, and the first repayment will be deferred for 1 year. You have to go thru the application process (2-3 week process, plus an additional 5 days to fund), provide personal guarantees for any amount over $200,000, possibly provide collateral, and while there is a deferment of repayment period, there is NO FORGIVENESS!
3) If you borrow via EIDL, you cannot also take a PPP loan (note – there is a mechanism to refinance your EIDL into a PPL). One important thing to note about EIDL’s. When applying (directly through the SBA website), you will be asked if you want an advance of up to $10,000, which will be distributed within 3 days. If you are not approved for the loan, you are not required to repay the $10,000, so this is essentially a grant. If you eventually take a PPP loan, any forgiven amount is reduced by the $10,000 you received.
Now for the PPP loan…again, as of today, this is not yet available. However, the expectation, once it is made available, is as follows:
1) You will apply through your bank (if they are an approved lender/facilitator) or a non-bank SBA lender, not directly with the SBA.
2) The amount you can borrow is based on 2.5x your average monthly “payroll” costs measured over the 12 month period preceding the loan origination date (per April 1st update, this will be based on calendar year 2019). Payroll costs include salaries, commissions (important for broker-dealers!), tips, health insurance, and more…but do not include FICA and federal income tax withholdings, and does not include compensation per employee in excess of $100,000 per year.
3) The loan term is 2 years, and the interest rate is .5% (yes, 1/2 of 1%). Further, the first repayment is deferred for 6 months.
4) No collateral, no personal guarantees!
5) This is the big one…if you are in compliance with the certain terms of the loan, all or a portion of your loan will be forgiven! The forgivable portion is calculated as the amount you spend during an 8 week period after the loan date, on payroll costs, rent and utilities, and certain other expenses (per April 1st update, payroll costs during the 8-week period must make up at least 75% of your qualified spend for forgiveness). The forgivable portion will be reduced if you do not maintain the average number of full-time employees during the covered period, as you had prior to the covered period. Additionally, if you reduce any individual employee’s comp by more than 25% measured against the most recent full quarter, there will be a reduction in forgiveness. Interest on the loan is not forgiven (but hey, if you borrow $100,000 and you pay $4k in interest, you are still way ahead of the game).
Clearly, both EIDL and PPP are designed to assist small businesses during this difficult time, but PPP has one huge distinct advantage, there is a forgiveness component, that may ultimately convert the loan into the equivalent of a grant.
So…most importantly, be aware that there is a lot of info flying around about what types of loans are available to small businesses relating to the impact of COVID-19. Be sure to ask a professional (tax accountant, a MAVEN, or other trusted advisor) for assistance with navigating through the info that is out there. Don’t make any assumptions (i.e. if you borrow, it is forgivable; if anything assume it is not, until you are absolutely sure). Again, you cannot yet apply for a PPP loan, but now is a good time to get all your ducks in a row, so that when the time comes, you have all the info you need to apply. At a minimum, this will include 2019 and YTD 2020 payroll and employee benefits reports, and possibly income tax returns, W-2’s, etc.
These vehicles will hopefully assist us in keeping our employees employed, and keeping us going long enough to get through this, and get us back on our feet before too long…stay safe and well, and let us know if you have any questions, and how we can help!