Coronavirus (COVID-19) Business Emergency Funding Package Summary
We hope you and all with whom you work and love are well. The financial landscape is rapidly changing as the government rolls out, at lightning speed, the $2 trillion financial rescue package called the CARES Act. Our business attorneys are helping some clients with navigating some government funding amid the Coronavirus Pandemic.
Our goal with this message is to get information to a broad audience of business owners and nonprofits.
If you know someone who is personally concerned about defending against a bank or credit card company we suggest contacting Attorney Sarah Poriss as this is a subject she works on regularly.
Right now the government is rolling out two loan programs, both administered by the SBA:
- SMALL BUSINESS PAYCHECK PROTECTION PROGRAM (PPP)
- ECONOMIC INJURY DISASTER LOANS AND EMERGENCY ECONOMIC INJURY GRANTS (EIDL)
Other SBA loan programs remain and may become available later.
What is the Small Business Paycheck Protection Program (PPP)?
PPP provides funds for up to 8 weeks of payroll costs.
Funds can also be used to pay interest on mortgages, rent, and utilities. Up to two months of average monthly payroll costs from last year, plus an additional 25% may be borrowed.
Loans will be fully forgiven if used for payroll costs, interest on mortgages, rent, and utilities. However, it is our understanding that the formula for calculating the amount that can be forgiven will mandate that you spend at least 75% of the forgiven amount for payroll.
The Treasury Dept. has issued Guidance on the PPP. You can find that information, and an application here. A caveat: the application previously found on this link is not final.
We think supplemental information and documentation will be required at the time of application by the lending bank.
Although the program is supposed to open for application at midnight Thursday night, banks are scrambling, as are their customers, to understand the requirements.
What is the Economic Injury Disaster Loan (EIDL) Program?
The EIDL program will provide lower interest loans of up to $2 million for expenses, including payroll and other business obligations.
The funding available now is a $10,000 grant, as an advance against the EIDL. Small businesses, sole proprietorships, independent contractors and many, but not all, 501(c)(3) organizations, among others are eligible.
The grant will not need to be repaid in many circumstances.
The grant must be disbursed by the SBA within 3 days of a successful application.
You can apply by filling out the COVID-19 Economic Injury Disaster Loan Application from the official U.S. Small Business Administration (SBA) website.
An existing SBA Express Loan lender can also make a rapid loan of up to $25,000. Guidance is expected from the SBA Thursday night.
This communication was prepared Thursday, April 2 at mid-day – so as they say, things may have, and indeed have, changed.
Anything we say here could change, and nothing we say here is definite. We are not giving advice about anything discussed here at this point. Throughout this letter we say “we understand” or “we have heard” you should assume that language applies to everything. We don’t know for sure that the information is entirely accurate, and if it is accurate now, whether it will be accurate tomorrow, or even an hour from now.
For example, the interest rate for repayment after forgiveness for PPP went from 4% to .5% to 1% in the last few days and the period for repayment was reduced from 10 years to 2 years.
The most important part of the process will be the loan documents which will likely vary depending on the lending bank and will define the terms for the PPP.
Decide for yourself, but we think the forgiveness is the best opportunity for small businesses if used carefully.
Issues of Interest for Nonprofits
- Review your governance process to make sure the organization complies with its by-laws in taking the loan. Don’t forget to involve your Board of Directors! Board members can be helpful in many ways and have a fiduciary duty to steward the finances of the organization. Very generally, the Board, or at least the Executive Committee, should authorize the borrowing, or at least ratify the loans before funds are distributed, but this depends on the specific structure of your organization. The larger EIDL program will likely require a Board resolution.
- Endowments may seem like a tempting and easily accessible source of cash, even in this down market. Talk to a nonprofit attorney before treating your endowments differently than you have in the past.
- The stimulus package includes a small ($300) above-the-line charitable deduction through 2020.
CARES Act: Employee Retention Tax Credit
Another benefit created under the CARES Act is a tax credit against employment taxes that “eligible employers” can claim with respect to “qualified wages” by filing a new Form 7200.
While describing the tax credit is beyond the terms of this communication, you should know that the IRS has stated the following in response to a question about the Employee Retention Credit:
May an Eligible Employer receive both the Employee Retention Credit and a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act?
No. An Eligible Employer may not receive the Employee Retention Credit if the Eligible Employer receives a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act (“Paycheck Protection Loan”). An Eligible Employer that receives a paycheck protection loan should not claim Employee Retention Credits.
Consult your tax professionals if you need help determining if your business or nonprofit is an “eligible employer,” and do the math to figure out which program helps your business more.
One strategy might be to take the time between when you apply for a PPP loan and when funds are disbursed to figure this out (although we can’t say if being approved for the PPP loan and not taking it will disqualify a business from taking the tax credit.)
The IRS has also stated that self-employed individuals are not eligible for this credit for their self-employment services or earnings.
Additional Information About the Paycheck Protection Program (PPP)
- Each business or independent contractor has a different situation regarding its payroll or compensation. This summary is general. Some have said that specific calculations may vary regarding the amount that can be borrowed and the interplay of the borrowed amount with the calculation of the amount that can be forgiven. Some of this detail can be found in the links to government publications provided here. But, even those publications don’t deal with every situation. We hope that the nuances will be addressed by the regulatory authorities and the banks as the program unfolds and before the loan documents are signed. This means that some questions can’t be answered now.
- Generally, forgiveness is based on the borrower maintaining or quickly rehiring employees and maintaining salary levels and headcount for 8 weeks. The good news is partial forgiveness should be available for many even if you don’t hit the goals. Our understanding is that you should stick to these guidelines, and not try to get cute, as we’ve been told that the simpler applications are likely to be funded first. In addition, the detail regarding the criteria for forgiveness is likely changing as well.
- Amounts not forgiven are loans. Loan payments will be deferred for six months. Loans will carry interest at 0.50% or possibly 1% as announced tonight and will be payable over two years. No collateral or personal guarantees are required.
- Businesses with 500 or fewer employees – including nonprofits, self-employed individuals, sole proprietorships, and independent contractors – are eligible.
- Advice has changed three times in the past three days about whether businesses can include payments to independent contractors in their payroll. The latest we have heard is they should not be included, because independent contractors can apply for themselves, but this could change again. It is clear that independent contractors should not be able to “double-dip.”
- We understand that a business owner may also include his/her own compensation or draw up to $100,000.
- Starting April 3, 2020, small businesses and sole proprietorships can apply. Starting April 10, 2020, independent contractors and self-employed individuals can apply. Some advisors are encouraging applicants to apply as quickly as possible as there is a funding cap, money may run out, and bank lending will be limited by the bank’s own balance sheet. But, those in direct contact with the government advise that the Treasury Department is already working on extending the program so that funds don’t run out. In any event, we have been told that that funds will not be disbursed for several weeks; and that an employer can wait to hire back employees already laid off until just before it receives funding.
- Apply for the loan at your own bank, assuming it is participating in the program. Many banks may be taking applications, but it isn’t clear what they will do with them, how long the process will take, or whether they will require additional information and documentation from applicants. We understand that this is not a profitable program for banks. Therefore, it is our understanding that banks will participate to help out their own customers (and to jump-start the economy), but may deal only with their existing customers, and will have discretion in deciding whether or not to make a loan. We have also been told that some banks will extend loans to nonprofits that are not customers based on service to the community.
- Contact your banker to discuss the application and to get in the queue. You may be required to preregister with your bank to get access to your bank’s online portal. Smaller banks may not be ready to take applications until next week, but those in communication with the government have stated that these banks will not be disadvantaged when it comes to access to this money from the SBA. In any event, start completing the application and assembling documentation so that you are ready to submit it on April 3 or 10, as applicable.
- Later, you will also apply to your bank for forgiveness of the loan. It is our understanding that the amount for forgiveness will be the bank’s decision, based on government guidance.
- The requirements for forgiveness, beyond the basics described in the government publications linked here, are expected to be in guidance issued later by the government. Therefore, if you take a PPP loan, be aware that you will bear the risk of not knowing exactly how much will be forgiven.
- Applying quickly will require that you tolerate some chaos in the application process and uncertainty for the time being about exactly how much will be forgiven. We’ve heard that banks and the government are focusing on getting applications in and money out the door first. Later, they will hammer out the detail of the loan forgiveness portion of the program as it might apply in specific situations. One strategy we’ve heard is that that you borrow based on last year’s payroll + 25%, and if you are unsure of exactly how much will be forgiven, wait to spend the portion about which you are unsure until there is more clarity around forgiveness (while still spending 75% of the loan on payroll.) It is our understanding that the worst-case scenario is a 0.50% – 1.0% loan that can be prepaid.
- It is likely that applicants whose banks choose not to participate in the PPP program are at a disadvantage. We have heard that some banks may make a PPP loan to a new customer, requiring that the banking relationship be transferred to the PPP lending bank. We’ve also heard that some banks may be willing to work to accommodate nonprofit organizations that serve the community.
Additional Economic Injury Disaster Loan (EIDL) Resources
Our Thoughts About Some of the Open Questions
Must the EIDL grant be repaid if the recipient decides not to pursue an EIDL, or a PPP loan?
The thinking here is that it may make sense to take the grant of $10,000, but not spend it all until this is clarified. Some have said this $10,000 may have to be rolled into the PPP, or deducted from the amount that is forgiven under the PPP.
Do home office expenses qualify under the EIDL grant or the PPP?
It is hoped that guidance will clarify this.
Under the PPP, exactly what period should be used to measure average monthly payroll & what are the exact 8 weeks during which employees must be paid?
We’ve heard that banks are providing different answers.
EIDLs over $200,000 will likely require a personal guaranty. Will there be an exception for nonprofits, since nonprofits don’t have owners willing to take this financial risk?
Some organizations are already getting larger loans without the guaranty. We cannot explain this yet.
An unrelated open question is whether unemployment claims, including the additional $600/week that laid-off employees can collect, will impact an employer’s future rating. FAQ’s on the Connecticut Department of Labor’s website state: “You will be liable in the same way you would be for a layoff or a shut down If the President declares a disaster that includes Connecticut and your company, it is possible you may not be liable.” ‘
This is about as vague as it gets.
We hope that these programs and the many questions the programs generate will become clearer, if not crystal clear, as the program progress. In the meantime, contact us if you need assistance from a business lawyer; we are here for you.
Valuable Resource For Updates On These Programs
The resource we’ve found most useful is a daily webinar briefing for which you can register: https://769yv3el.pages.infuionsoft.net/.
We listen daily because new information, as well as changes from the day before, come out every day about the details of these programs, and the questions and answers change daily too.
However, this excellent source does not agree with others we’ve been following on every issue and repeatedly says this is our understanding at the moment or something to that affect.
Many industry associations are disseminating information unique to that industry, so connect with your industry association if you can.
NOTE: *The Treasury and the SBA issued additional guidance and a revised application overnight between Thursday night and Friday morning. This communication may not include some of that guidance. As of Friday morning, the PPP Application Form linked here is titled “Final Borrower Application Form.”
Disclaimer: Neither this email nor communication with our firm or any individual attorney establishes an attorney-client relationship. This message is for informational purposes only and is not intended to be, and should not be construed as legal advice. You should not rely on anything contained in this post in acting or refraining from acting and should consult your professional advisors who can relate the law and the facts in your particular situation. We have not read the entire CARE Act legislation and are relying on summaries issued by the regulatory authorities linked here. Furthermore, this post was written before the issuance of regulations and rules by the relevant government authorities.
We hope that this summary has been helpful and wish you the best,
Bruce Stanger from StangerLaw LLC in Connecticut.