By James B. Runey III, CFA®
In this post we will cover the basics of the Paycheck Protection Program and how it could help you. With that being said, as financial advisors, we are uniquely positioned to help clients – almost all of whom are under an unusually high amount of stress at the moment – by making mid-course adjustments to their plans, helping them stay focused on the bigger picture, creating contingency plans, and generally providing them with some peace of mind in these highly uncertain times.
It is likely that many of your friends are not getting the direction they need during this time. If you know of someone who is struggling or not getting the same type of service as we are delivering to you, please feel free to let us know. We will be happy to reach out to them to see if we can help.
Recap of Recent Topics Covered
Over the last several weeks, Congress passed groundbreaking legislation with the CARES Act (click here to read our previous blog post on this topic); one of the main provisions being the Paycheck Protection Program (PPP). The uncertainty of the current coronavirus situation and the resulting actions by our government have raised myriad questions from a general understanding of the new initiatives to more specific inquiries regarding your personal finances such as “Should I Move to All Cash?” (click here to read our previous blog post on this topic). We have covered these topics in our blog posts to help you have a better understanding of how they may benefit you.
Overview of the Paycheck Protection Program (PPP)
The CARES Act authorizes up to $349 billion in forgivable loans through the Paycheck Protection Program, allowing small business owners who have 500 or fewer employees to pay their employees during the crisis by requesting loans for up to 2.5 times the average monthly payroll expense over the previous year (with total loan amount capped at $10M). Self-employed individuals may also be able to benefit from the program.
What Are the Terms?
Loans will have a maturity period of 2 years and a fixed interest rate of 1.00%. Notably, any amounts spent on certain items during the first 8 weeks after the loan is made may be eligible for forgiveness. As an added benefit, amounts that are forgiven will even be excluded from taxable income for the year.
While loan payments will be deferred for a period of six months, interest on outstanding amounts will accrue during this time. Loans are provided by lenders approved by the Small Business
Administration (SBA) and will be guaranteed by the SBA.
When Can You Apply?
For small businesses and sole proprietorships, applications will be accepted beginning on April 3, 2020, and for independent contractors and self-employed individuals, applications will be accepted beginning on April 10, 2020.
Do You Qualify?
In order to qualify for forgiveness of these expenses, the business must maintain the same number of employees in the 8 weeks following the date of loan origination that it had from either February 15, 2019, through June 30, 2019, or from January 1, 2020, through February 29, 2020. However, business owners have the opportunity to restore employment and salary levels until June 30, 2020, for any changes that occurred between February 15, 2020, and April 26, 2020. Additionally, compensation for employees who receive less than $100,000 annually cannot be reduced by more than 25% relative to the most recent quarter. To the extent these requirements are not met, the amount eligible for forgiveness will be reduced.
How to Use the Loan?
Loans issued under the Paycheck Protection Program can be used for payroll costs, interest on mortgages, rent, and utilities. However, the loan may be forgivable if the majority of the funds—at least 75%—are used for eligible payroll costs, among other criteria.
Eligible Payroll Costs May Include:
- Employee salaries, wages, or commissions that don’t exceed $100,000 per year.
- Payment of cash tips or equivalent.
- Paid parental, family, medical, or sick leave.
- Paid time off.
- Allowance for dismissal.
- Group healthcare benefits and insurance premiums.
- Retirement benefits.
- State and local taxes.
- Gross Payroll (including federal withholding and employee FICA)*.
* Neither the CARES Act nor recent guidance instructs the PPP applicant to exclude federal withholding and employee FICA for the period.
Excluded Payroll Costs May Include:
- Income over $100,000 per year for sole proprietors, independent contractors, and self-employed workers.
- Individual employee compensation over $100,000 per year.
- Compensation for employees who live outside the U.S.
- Qualified sick leave under the Families First Coronavirus Response Act.
- Excluded costs may not count towards the 75% of funds that may qualify for loan forgiveness.
Materials to Prepare for Application:
We would recommend contacting your accountant to help you complete the loan application. Gathering the following materials will aid you in the process:
- Articles of incorporation for each borrowing entity and by-laws or operating agreement for each borrowing entity.
- A list of owners who hold at least a 20% stake in your company and copies of their drivers licenses.
- Payroll expense verification documents.
- IRS forms 940 and 941.
- Payroll summary report with corresponding bank statements.
- Form 1099-MISC (if you are an independent contractor).
- Breakdown of payroll benefits (vacation, allowance for dismissal, group healthcare benefits, retirement benefits, etc.)
- Certification that all employees live within the United States and a list of employees who do not live in the U.S. and their salaries.
- Trailing 12-month profit and loss statement (as of the date of application) for all applicants.
- Most recent mortgage or rent statement and utility bills.
Help Someone in Need
We certainly hope that you find this information helpful and valuable. Once again, we recognize there are many questions out there so please feel free to contact us if you still have a question. If someone you care about is not getting good, sound guidance during these times, please let us contact them. We would be happy to help!