SBA Loans Under the CARES Act Summary

The Keeping American Workers Paid and Employed Act, under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) provides for $350 billion in SBA loans to small businesses.  Much of these loans will be forgiven such that taxpayers will not be required to repay the loan provided the loan is used for qualified purposes.  This is a summary of of the CARES Act as it relates to these loans.

Title I of the CARES Act deals with certain Small Business Administration (“SBA”) programs. Much of this summary is excerpted from the Senate Staff summary of the CARES Act.  This summary is focused on issues related to potential borrowers and does not provide a summary on provisions related to lenders.

Title I of the CARES Act addresses the following SBA Programs:

Economic Injury Disaster Loan Program.  The Economic Injury Disaster Loans (“EIDL”) are part of an SBA loan program to provide working capital to small businesses after a disaster.  EIDLs will provide small businesses with working capital loans of up to $2 million to help overcome the temporary loss of revenue they are experiencing from a disaster.

SBA Express Bridge Loan Program.  The SBA Express Loans (“Express Loans”) allows small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 with less paperwork. These loans can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing and can be a term loan or used to bridge the gap while applying for a direct EIDL. If used as a bridge, the Express Loan will be repaid in full or in part with proceeds from the EIDL.

Paycheck Protection Loan Program (PPP).  Section 1102 of the CARES Act creates a new loan program under Section 7(a) of Small Business Act (the “Paycheck Protection Loans”).  An eligible borrower can receive a Paycheck Protection Loan for up to $10 million to fund certain payroll costs, mortgage payments, rent payments and utility payments as long at the borrowers maintain their payroll.

TITLE I—KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT

Section 1102. Paycheck Protection Program and SBA Express Loans
Provides the authority for the Small Business Administration (“SBA”) to make loans under the Paycheck Protection Program through authorized lenders.

Paycheck Protection Program (PPP)

SBA Guarantee – Increases the government guarantee for Paycheck Protection Loans to 100% through December 31, 2020.

Eligible Borrowers – The following entities/individuals are eligible to receive a Paycheck Protection Loan:

  • Small business concerns as defined by the SBA:
  • Business concerns, non-profit (501(c)(3)) organizations, veteran’s (501(c)(19)) organizations or tribal business concerns that do not have more than 500 employees, or the applicable size standard for the industry (NAICS) as provided by SBA, if higher;
  • Sole-proprietors, independent contractors, and other self-employed individuals;
  • Businesses with more than one physical location that employs no more than 500 employees per physical location in industries under an NAICS Code starting with 72 (Accommodation and Food Services).

SBA Affiliation Rules

  • Waives affiliation rules for businesses in industries under an NAICS Code starting with 72,   franchises that are approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company (SBIC) program.
  • Applies current SBA affiliation rules to eligible nonprofits and veteran’s organizations.

Covered Period – Defines the “covered period” for the Paycheck Protection Program as beginning on February 15, 2020 and ending on June 30, 2020.

Loan Amount – During the “covered period” the maximum loan amount for a Paycheck Protection Loan is the lesser of: (a) $10 million; or (b) the amount determined by a formula that is based on the loan applicant’s Payroll Costs.  Payroll costs are the sum of: (a) the product obtained by multiplying (i) the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made, except that, in the case of an applicant that is seasonal employer, the average total monthly payments for payroll shall be for the 12-month period beginning February 15, 2019, or at the election of the eligible recipient, March 1, 2019, and ending June 30, 2019; by (ii) 2.5; and (b) the outstanding amount of a loan under subsection (b)(2) that was made during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available to be refinanced under the covered loan; or the Act provides for other allowable loan calculations for businesses not operating during the 12 month period beginning February 15, 2019.

Allowable Uses of Loan Proceeds – In addition to the allowable uses for loan proceeds for loans under the SBA’s Section 7(a) program, a borrower may use the loan proceeds during the “covered period” from a Paycheck Protection Loan for Payroll Costs (such as employee salaries, healthcare benefits, paid sick or medical leave), interest payments on mortgages, interest payments on debt obligations entered into prior to the “covered period”, rent, and utility payments.

Lender Considerations on Eligibility – To determine the eligibility of an applicant for a Paycheck Protection Loan, requires lenders to, instead of determining repayment ability, which is not possible during this crisis, to determine whether a business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or it paid independent contractors.

Limitations Related to EIDL – Provides a limitation on a borrower from receiving a Paycheck Protection Loan and an EIDL for the same purpose. However, it allows a borrower who has an EIDL unrelated to COVID-19 to apply for a Paycheck Protection Loan, with an option to refinance that loan into the Paycheck Protection Loan. In addition, any emergency grant from an EIDL (grants are available up to $10,000) would be subtracted from any amount forgiven under the Paycheck Protection Program under the loan forgiveness provisions.

Borrower Certification – Requires eligible borrowers to make a good faith certification that: (a) the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; (b) loan proceeds will be used to retain workers and maintain payroll, and make lease, mortgage and utility payments; and (c) are not receiving duplicative funds for the same uses from another SBA program.

Waiver of Fees – During the “covered period”, SBA is waiving both borrower and lender fees for participation in the Paycheck Protection Program.

Waiver of Unavailability of Credit Requirement – During the “covered period”, SBA is waiving the no credit availability elsewhere test for small business concerns applying for a Payment Protection Loan.

Collateral and Personal Guarantees – During the “covered period”, SBA is waiving both the collateral and personal guarantee requirements for Paycheck Protection Loans.

Loan Term, Interest Rate, Deferment and Prepayment –

  • Any portion of a Paycheck Protection Loan that is not forgiven (See Section 1106 below) will have a maturity of not more than 10 years, and the guarantee for that portion of the loan will remain intact.
  • Maximum interest rate is 4%.
  • During the “covered period”, lenders are required to defer all payments (principal, interest and fees) on Paycheck Protection Loans for at least six months and not more than a year. The SBA will disseminate guidance to lenders on this deferment process within 30 days.
  • Lenders cannot charge prepayment penalties for Paycheck Protection Loans.

SBA Express Loans
Increases the maximum loan for an Express Loan from $350,000 to $1 million through December 31, 2020.

Section 1106. Loan Forgiveness under the Paycheck Protection Program

How to calculate Loan Forgiveness Amount – Establishes that the borrower who received a Paycheck Protection Loan are eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on: (a) Payroll Costs,; (b) interest payments on any mortgage incurred prior to February 15, 2020 (excluding any prepayments); (c) rent payments on any lease in force prior to February 15, 2020; and (d) payment on any utilities (including internet) for which service began before February 15, 2020 (collectively, the “Eligible Loan Forgiveness Amount”). Eligible payroll costs do not include compensation above $100,000 (annualized) in wages.

Maximum Forgiveness Amount – Amounts forgiven may not exceed the principal amount of the Paycheck Protection Loan.

Reductions in Loan Forgiveness Amount –
The Eligible Forgiveness Amount can be reduced for several reasons.

First, the Eligible Loan Forgiveness Amount is reduced if the borrower lowers the number of Full Time Equivalents (FTE’s) below a base period or reduces by more than 25% the total salary or wage of any employee.

Borrower Verification – Borrowers are required to verify through documentation to lenders their payments during the 8-week period that qualify for loan forgiveness.  The borrower is required to submit documentation and a certification from a representative of the eligible recipient authorized to make such certifications must accompany the documentation.  NOTE – Randazzo, Eschenburg & Associaties, PLLC is eligible to make the certification for your company.

Loan Forgiveness Not Taxable Income – Canceled indebtedness through the loan forgiveness program will not be treated as taxable income for federal income taxes.

Section 1110. Emergency EIDL Grants

Expansion of Eligible Participants – Expands eligibility during the covered period for access to Economic Injury Disaster Loans (EIDL) to include: (a) any business (including small tribal business concerns, cooperatives, and ESOPs) with fewer than 500 employees; and (b) any individual operating as a sole proprietor or an independent contractor.  Under the EIDL program small business concerns, private non-profit organizations and small agricultural cooperatives were eligible participants.  The “covered period” under the EIDL program is January 31, 2020 to December 31, 2020, which is slightly different from the covered period under the PPP.   During the “covered period”, the SBA will waive any personal guarantee on advances and loans below $200,000, the requirement that an applicant needs to have been in business for the 1-year period before the disaster, and the unavailability of credit elsewhere requirement.

If you have questions, your REA contact is awaiting your call or contact Gregory J. Randazzo, CPA at g.randazzo@reacpas.com. In the meantime, we’ll keep our COVID-19 business insights here.

Gregory J. Randazzo, CPA, Managing Member

Economic Relief Plan – Payments to Taxpayers

Congress is ready to approve an economic relief plan that includes one-time direct payments to families. Here is what it means for you:

Each adult is going to receive $1,200 and each family will receive $500 for each child under age 17. Adults will also receive the payments for the children in their household. Most people will receive the money in a payment from the IRS soon.
The payments will go to almost all adults with a Social Security number. Adults who are claimed as dependents will not receive the payment.

The payments will start phasing out for single individuals with adjusted gross income above $75,000; and those filing as head of household with adjusted gross income above $112,500; and for married couples filing jointly it will start phasing out for couples with adjusted gross income above $150,000. For those with no children the payments are totally phased out for single individual with adjusted gross income of $99,000 and $198,000 for couples filing jointly.

The IRS could start issuing payments within three weeks, although they have not yet announced a schedule. The payments will be faster for people who have filed their 2019 tax returns with direct deposit information.

The government will use 2019 tax returns to set the payment amounts and 2018 tax returns if 2019 is not available. People who have not filed their 2019 tax returns can still file to make sure the government has their updated income and bank account information, as well as recent births, deaths, marriages, divorces and moves.

The final amounts will be based on 2020 income and will be settled on 2020 income tax returns. People who are not eligible because their 2018/2019 income is too high and have lower income in 2020, which makes them eligible for the payment (or a higher payment), will receive the benefit when they file their 2020 tax return.

There is good news for people who owe back taxes to the IRS. The IRS will not reduce the payments to cover other amounts owed to the IRS, even if you owe back taxes.

If you have questions, your REA contact is awaiting your call or contact Monica Hayman, CPA at m.hayman@reacpas.com. In the meantime, we’ll keep our COVID-19 business insights here.
Monica Hayman, CPA, Tax Accountant

New Office Hours

Amid the outbreak of COVID-19, we’re taking serious measures to maintain the highest possible level of client service while protecting our people. Everything we do starts with putting people first. That’s why we’re taking serious precautionary measures to protect the health and well-being of our clients, staff, families, and community. Out of an abundance of caution we have closed our office to visitors.  Many of us are working remotely from our homes. While our staff and our clients take shelter from COVID-19, our team at Randazzo, Eschenburg & Associates remain available to our clients at our normal phone numbers, emails, and by fax. We will be able to process your tax returns, year-end, and other engagements as we have in the past and are continuing to do. The IRS has extended the due date for individual income tax returns and the Treasury also announced a 90-day waiver of penalties and interest on tax payments.

At the same time a large part of our capacity has been prioritized to focus on your urgent needs created by the COVID-19 disaster.  And a significant portion of time is being dedicated by our firm partners monitoring new developments including those in tax, employee benefits, and more. We’re keeping a close eye on tax-related regulations like extended deadlines and other matters that may impact the needs of our clients.

If you have questions, your REA contact is awaiting your call. In the meantime, we’ll keep our COVID-19 business insights here.

How to start a small business

How to start a small business

You’ve made the decision to start your own small business. You may be an expert if your field but you know very little about how to handle record keeping, payroll reporting, income tax returns, tax filing, or sales taxes. These can be further complicated if you plan on operating in more than one state. Even starting the small business can seem a daunting task if you’ve no experience. This is part one of my two part series on starting your own small business. While the information here is specific to single member LLCs formed in Michigan, many of the concepts are applicable in all states and the process is quite similar state to state.

1. Seek Legal Counsel

While not strictly required, I recommend all new business owners consult with an attorney. Why?

2. Go with an LLC

There are other options available but, in most cases, LLC is preferred. why?

3. LARA

LARA, The Michigan Department of Licensing and Regulatory Affairs, is the department responsible for business entities. The forms needed to organize or incorporate a new business can be found here: LARA Forms

4. No, not that kind of ELF

To form an LLC in Michigan start by creating a Michigan ELF account. With a Michigan ELF account you can file forms electronically and have the needed Articles and other forms faxed to you within one business day. To create a Michigan ELF account complete the MICH-ELF APPLICATION which can be found here: ELF Form . This is a one-time application and once received your Michigan ELF account can be used to file any documents with LARA and can be updated if addresses and other information should change. You have to wait for your Michigan ELF number.  Once you have received your number visit the LLC forms page and prepare the Limited Liability Articles of Organization.  Fax the Articles of Organization along with a Michigan ELF cover sheet to the number provided.

What does ELF stand for? Add a link for the LLC form

 

Part two of this form will follow soon and will cover the specifics of filling out your ELF form, your articles of organization, and your EIN.