On March 27, 2020, Congress passed, and the President signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). This legislation includes several elements designed to provide assistance to both businesses and individual taxpayers affected by the economic impact of COVID-19. The key provision that immediately impacts businesses struggling to generate cash needed to pay wages, rent, utilities and debt obligations is known as the Paycheck Protection Program. This program is designed to augment existing financing options available from the Small Business Administration.
We evaluated the provisions of this bill to present you with options that not only provide you the quickest short-term options but also provide you with longer-term options for relief in the event this event continues longer than expected.
Generally, as businesses are seeking funding during this time, most are evaluating three options:
- Traditional bank financing with a business line of credit
- A disaster assistance loan under the Small Business Administration
- The Paycheck Protection Program created under the CARES Act
It is important to remember that each business situation is unique, and solutions should always be tailored for each situation. The needs for each business will differ based on projected decline in revenues, expected levels of payroll, debt and rent obligations and other expenses. We are still awaiting guidance from the SBA regarding existing and new SBA programs; as more is known, we will update our analysis.
Moreover, the loan decision directly impacts the ability of the company to utilize some of the payroll tax relief provisions found in the CARES Act. An employer is precluded from receiving tax credits for payroll if the employer receives a Paycheck Protection Program loan. In addition, the forgiveness provisions of the Paycheck Protection Program do not apply for employers which defer payment of employer-side Social Security taxes.
We recommend businesses first seek traditional bank financing utilizing a line of credit since those funds can generally be accessed quickly. Most businesses have existing banking relationships which could speed the process of establishing borrowing lines of credit. Others have established lines of credit in place, even if the balance has never been utilized. This helps to reduce the time needed to access cash needed for things such as payroll, rent, etc.
For most businesses, we next recommend seeking funding under the Paycheck Protection Program. This Program was created to provide relatively quick funding to assist companies with expenses such as payroll, rent, utilities and interest payments. These loans are unsecured and without recourse if the proceeds are used for purposes outlined in the act. In addition, this loan is eligible for cancellation, income tax free, and deferral of payments may be available under the Program. While the disaster assistance loan remains an option (particularly for businesses not eligible for the Paycheck Protection Program), we believe the Paycheck Protection Program is the best option for most businesses with payroll due to the ease of application, the expected speed of processing and the loan forgiveness provision.
The amount available under this Program is formula driven and is generally based on their “payroll costs” as defined in the CARES Act. The formula requires analysis of payroll components and will require some analysis to obtain the information required for the calculation. We believe it is imperative that qualifying companies apply as soon as the program is available. To that end, we recommend you immediately gather the information needed to complete the calculation required for the loan application.
You will need the following items needed for each month from April 1, 2019 throughout March 31, 2020 if the application is submitted in April 2020:
- Net payments for salary, wage, commission or similar compensation
- Net payments for cash tips or equivalent
- Net payments for vacation, parental, family, medical or sick leave
- Net allowances for dismissal or separation
- Payments required for the provisions of group health care benefits, including insurance premiums
- Payments of any retirement benefit
- Payment of State or Local taxes assessed on the compensation of employees
- Payments 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 an amount that is not more than $100,000 in a 1 year, as prorated for the period
- Net compensation of an individual employee in excess of an annual salary of $100,000 as prorated in covered period
- Taxes imposed or withheld under chapters 21, 22 or 24 of Internal Revenue Code of 1986 during the covered period (Generally Social Security, Medicare and Federal Withholding Taxes)
- Any compensation of an employee whose principal place of residence is outside of the United States
- Net payments for qualified sick leave wages for which a credit is allowed under section 7001 of Families First Coronavirus Response Act (Public Law 116-127)
- Net payments for qualified family leave wages for which a credit is allowed under section 7003 of Families First Coronavirus Response Act (Public Law 116-127)
Much of this information will be available directly from your payroll service provider or from reports from your payroll software.
In many instances, the disaster assistance loan from the Small Business Administration could still be a concurrent option for businesses. This loan provides up to $2 million of financial assistance for small business or private, non-profit organizations that suffer substantial economic injury as a result of a declared disaster, regardless of whether the applicable sustained physical damage. This loan is based on expected declines in revenue rather than levels of payroll which might make it a better option for employers with little or no payroll (real estate management and rental companies, companies with low W-2 employee head count, etc.). It is important to remember that while a company that applies under the Paycheck Protection Program is not expressly precluded from utilizing both programs, companies are not allowed to use funds from both programs to fund the same expenses.
We stand ready to assist with loan application calculations and applications and are available to assist with this process. Don’t hesitate to contact us if we can help in any way.