Nancy Bush, CFO Consultant, Kranz
Kranz receives frequent updates on the CARES Act and how businesses are responding to impacts of the COVID-19 through communications with our consultants, valued clients, partner banks, and legal and tax service providers. In our commitment to keeping you informed, we will be sharing this information on a regular basis. Check our blog here for current updates. Please contact us if you’re interested in a complimentary one hour CFO consultation on any of these issues.
CARES Act – What Just Happened?
Week of April 6, 2020
The CARES Act intended that SBA approved lenders begin providing Payroll Protection Program (PPP) loans as of April 3. Bank of America and JP Morgan Chase met this objective and other lenders began providing loans earlier this week. For the most part, lenders appear to be accepting applications only from their own current banking clients. Non-bank clients will be considered for loans once their client applications begin to diminish. As this is being written April 8, 3,200 banks have provided $70B of loans to over 250,000 businesses. Legislation requesting an increase in funding for PPP loans by $250B is expected to be approved by the House and Senate within the next week.
Interim final rule PPP Interim Final Rule released on April 3 by the Treasury in which several enhancements and clarifications were made to the application process as follows:
- Payments to independent contractors are not considered payroll costs for the purpose of computing the average monthly payroll cost used to determine the maximum loan amount. Only compensation to employees should be taken into account. (Independent contractors are entitled under the Act to submit their own PPP loan application.)
- 100% of the loan proceeds used in the eight-week period following the date of the loan are eligible for forgiveness however any amount of non-payroll costs (i.e. interest on mortgage obligations, rent/lease payments, utility payments) exceeding 25% of costs during the eight weeks will not be forgiven.
- The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest.
- The interest rate on the unforgiven portion (if any) will be 1%, with a maturity date of two years. This compares to it being a maximum of 4% and maximum maturity of 10 years in the original text of the bill.
- The interim final rule mentions that the SBA intends to promptly issue additional guidance with regards to the applicability of affiliation rules. (A Wall Street Journal article April 4 references a representative from the VC/PE industry as saying there are 15,000 VC backed and 12,000 PE backed small business in the U.S., and that the affiliation waiver for these firms could be in place before April 11th.)
- Electronic signatures and consents are allowed.
New PPP application form released by the Treasury on April 3rd: PPP Application Form (04032020) Changes between this version and the initial one include the following:
- The specification of the applicant’s business status is expanded to include sole proprietor, independent contractor, partnership, C-Corp, and LLC.
- Calculation of the loan amount now includes the addition of any EIDL loan less any advances made ($10,000). This is further clarified in the instructions by indicating that only EIDL loans made between January 31, 2020 and April 3, 2020 are to be included.
- The request for number of jobs has been changed to number of employees.
- The term “owner” has been changed to “applicant” throughout.
- The question on whether the applicant is a U.S. citizen or lawful permanent resident has been removed.
- A question has been added asking if the principal place of residence is the U.S. for all of the applicant’s employees included in the payroll calculation.
- A question has been added asking if the applicant is a franchise listed in the SBA Franchise Directory.
- Added is a certification by the applicant that they are eligible to receive a loan as eligibility is defined in the CARES Act.
- Added is a certification by the applicant that they are an independent contractor, eligible self-employed individual or sole proprietor, or employs fewer than 500 people.
- Added is a certification by the applicant that he/she was in operation on February 15, 2020 and had employees for whom they paid salaries and payroll taxes, or paid independent 1099 contractors.
- A very detailed description is newly provided in the instructions (page 3 of the application instructions) with respect to what payroll related expenses can paid for from the loan.
Currently, Kranz is assisting many of our clients with strategic thinking about the various benefits contained in the CARES Act and analysis of their loan options. Banks are most likely to have their own online loan application forms mirroring the one issued by the Treasury April 3. PPP Loans will be accepted through June 30, 2020.
We recommend that Founders have a conversation with all board members to ensure agreement on filing of a PPP loan application. There has been some discussion around whether companies in industries other than retail, food service, and hospitality should be applying for these loans. In particular, companies with a strong balance sheet (due to a recent financing.) Recall that this loan will effectively be discoverable via a FOIA (Freedon of Information Act) request. The board should be considering media and public relations repercussions. Also, begin crafting a narrative around the “economic necessity” for this loan as it will become helpful at least to the loan forgiveness request after 60 days (eight weeks.)
Recently Received Questions
If you have an employee with a compensation of $200K and they join halfway through the year, should you include them?
Yes, based on the application form and SBA guidance, an annualized compensation for all employees should be included for payroll cost calculations. However, the maximum annual compensation you can use for any one employee is $100K.
Guidance on the payroll calculation was to use a salary cap of $100K versus the cost of $100K noted in the application. Which one should I use?
While this is still not 100% clear based on the various guidance and rules that have come out, the latest interim final rule from the Treasury suggests that the $100K cap applies to salaries/commissions only and does not cap benefits.
Under the Paycheck Protection Program there appears to be a $100k payroll cost limit. Is that intended to be a $100K cap per employee/contractor, or limit eligibility to only those employees/contractors under $100K in salary?
This is a $100K limit for each and every employee included in the calculation of average monthly payroll cost. Remember that independent contractors are not to be included in your calculation of average monthly payroll cost because they were given the opportunity to apply separately for a PPP.
Does the $100K cap per employee for PPP include all forms of compensation to the employee (wages, taxes, healthcare benefits etc.)?
The interim final rule from the Treasury suggests that the $100K cap applies to salaries/commissions only and does not cap benefits.
Does payroll costs for PPP include employer share of social security and Medicare?
Social security and Medicare comprise FICA taxes, which are excluded from payroll costs.
Recommended websites for additional information and guidance:
National Venture Capital Association (nvca.org)
U.S. Department of the Treasury (www.treasury.gov)