For those just joining us for this three-part series, in part one, we discussed a general overview of how almost every small business qualifies for a CARES Act payroll protection loan. In part two, we did a deep dive into the details of the payroll protection loans section of the CARES Act.
In part three, I will cover frequently asked questions about the CARES Act payroll protection loans that were submitted to me via email and Facebook.
As a refresher, the process for getting a forgivable payroll protection loan is below.
Small Business Payroll Protection Steps for Success
1. Determine your average monthly payroll cost and what the period of time is that you are averaging. Multiply that number times 2.5 to get your loan amount.
2. Gather documents to support your average monthly payroll costs.
3. Apply for loan.
4. Plan a budget for how you will spend all of the funds during the first 8 weeks on payroll, rent, mortgage insurance, or utilities.
5. Gather documents to support covered expenditures.
6. Apply for loan forgiveness.
Ok, let’s get this FAQ party started!
GENERAL LOAN QUESTIONS
What are the timelines for getting money through the payroll protection loans under the CARES Act?
The timelines are dictated by the SBA at this point. I have been told by a knowledgeable source that the SBA has instructed banks to have online applications portals live as soon as this Friday. The timeline for application availability will be dependent on your bank.
On that note, you should contact your business banker to find out the status for your bank. The rules vary by bank, but many banks will be requiring the business to have an account at the bank to get a loan. Some banks are requiring that the account existed as of February 15, 2020.
Another point on timing: you need to act fast! There are two factors pushing your need for speed. First, the law requires that the 8 week covered period for spending the loan proceeds on forgivable expenses must end by June 30. That basically means that the latest you could start the covered period and receive your loan proceeds would be the first week of May. Second, the pool of $349 Billion that pays for the program not endless. Loans are granted on a first-come, first-served basis. Under the Act, snoozers are losers.
How do the CARES Act payroll protection loans relate to the SBA Covid-19 Economic Injury Disaster Loans?
The CARES Act payroll protection loans are focused on payroll with a very transparent calculation on the loan funds: everyone who is eligible gets 2.5 times average monthly payroll. The payroll protection loans are fully forgivable if the rules are followed.
The Covid-19 Economic Injury Disaster Loans are not forgivable, but they are available for any kind of working capital expense – as opposed to just payroll. The interest rate is locked in at 3.75% if you are offered a loan. The repayment period varies but could be over as long as 30 years. Anyone can apply for a Covid-19 Economic Injury Disaster Loan if you are in a geographic area that has been declared a disaster area. (The entire state of Ohio has.)
You ARE allowed to apply for both. However, if you get an economic disaster loan and a payroll protection loan, only the payroll protection loan may be spent on payroll. The economic disaster loans are strictly for working capital to cover overhead expenses – not expansion. Also, the economic disaster loans require a physical location in an affected area (which means you are not eligible if you are a virtual business.)
My advice to small businesses is that everyone should apply for payroll protection loans because it is essentially free money if you plan wisely. If your business really needs the money to make ends meet beyond the payroll protection loan funds, apply for the disaster loan.
To apply for the Covid-19 Economic Injury Disaster Loans, just fill out the application online here - https://covid19relief.sba.gov/#/. You will be asked for your gross receipts and cost of goods sold over the last 12 months. The SBA will then process your application and request additional documents if they determine that you are eligible.
If you already applied for an economic injury loan and that loan has been approved, you can roll that loan into the payroll protection loan and refinance it.
LOAN ELIGIBILITY UNDER THE CARES ACT
I have a business that pays myself and one instructor who is defined as a contractor. Is his pay eligible for the CARES Act forgivable loans?
Yes, as long as you can prove it to your bank with documentation. Payroll costs are defined to include payments to independent contractors. The specific language is that payroll includes “the sum of 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 in an amount that is not more than $100,000 in 1 year, as pro-rated for the covered period. Section 1102(a)(1)(A)(viii)(bb).
Does "payroll” include Federal and State payroll taxes?
Payroll includes state and local payroll taxes, but not federal payroll taxes.
LOAN FORGIVABILITY UNDER THE CARES ACT
Can I get a payroll protection loan and not lose any loan forgiveness under the "same amount of FTEs rule" if I have the same number of FTEs, but they are different employees?
Yes. The Act requires that the business must have the same number of FTEs to get loan forgiveness. It does not require that the same people are hired to be employees. In theory, you could have an entirely new staff and still qualify for full loan forgiveness so long as FTEs are the same in the 8 week covered period and in the measurement period you choose (February 15, 2019-June 30, 2019 or January 1, 2020-February 29, 2020) and no one employee has more than a 25% pay reduction.
Is the rule that the employee pay rate cannot be less than 25% of prior employee pay or that the total amount of pay cannot be less than 25% of prior pay?
The rule is concerned with the total salary and wages paid to an employee. The pay rate of the employee is not relevant (except to the extent that it affects total wages).
This particular provision is rather complex because you are comparing the total number from incongruous periods of time (employee’s last full quarter of pay versus covered eight weeks of pay). You have to normalize the time period of the prior quarter to an eight week period so that you are comparing apples to apples.
This is the calculation per the statute:
1. Find the total salary of every employee for the most recent full quarter where that employee was employed. Most businesses will be looking at January-March as the relevant quarter here. However, because the language requires you to look at “the most recent full quarter in which the employee was employed,” if you laid someone off in March 2020 and they worked a full quarter from October 2019-December 2019, you would have to look at that period. Because you are comparing a quarter (3 months, 12 or so weeks) to an 8 week period, you must calculate the average weekly pay for the employee of the prior quarter and then multiply that number by 8 weeks. This is the normalized 8 week last quarter average wages number.
2. Calculate the wages you will pay the same employee during the 8 week covered period.
3. Normalized 8 week last quarter average wages MINUS the employee’s total wages during the 8 week covered period. (Step 1 minus Step 2).
4. Take the result from step 3 divided by step 1 (the normalized 8 week last quarter average wages). If this number is above 25%, the loan is not forgivable on a pro-rata basis for that employee or for other employees.
If I apply for the CARES Act payroll protection loan this week, am accepted, and receive the funds later this month, can I use the funds to pay rent that was due on April 1st?
No. The funds must be used only for expenses during the covered 8 week period. To be clear, we are just talking about moving money around from one allocation to another. So, as a practical matter, you can use the money that you would have had to use to pay payroll in April and May to pay your April rent (that was due before the Covered Period). But, the bank is going to ask you how you used the loan disbursement. If you say it was for anything that is not in the 8 week period after the loan is issued, then that expense will not be forgivable.
Can we use the CARES Act payroll protection loan to pay for cost of goods sold and inventory?
No. Cost of goods sold and inventory are not covered expenses under the CARES Act. You must spend the money on payroll, rent, mortgage interest or utilities. But, as a practical matter you are going to have extra funds available now that you don’t have to cover payroll for 8 weeks. So, just use the money you already had or the cash flow from the business to cover any item that is not a covered expense. (If you don't have other funds available from savings or business cash flow, apply for an economic injury disaster loan.)
We are considering closing our business permanently in June or July. If we take the loan, operate for 8 weeks and follow the guidelines precisely as written, then permanently close our doors and "go out of business," will we be able to get loan forgiveness?
Yes. Under the CARES Act, you will get loan forgiveness if you follow the rules and then immediately shut down. There is no requirement to stay in business after the 8 week period is over to qualify for loan forgiveness.
Can the business pay its owners during the covered 8 week period? What if the owners were not previously on payroll?
Yes. The business can pay owners during the covered 8 week period and have those payroll payments count toward loan forgiveness. This is true even if the owners were not previously on payroll. The only things to watch out for are 1) keeping the same number of full-time equivalents and 2) making sure you are not cutting the overall pay of a specific employee by 25% from the previous quarter.
Are you able to spell out any advice for business owners who have already made layoffs and want to rehire?
Section 1102(d)(5) specifically covers the situation of rehiring laid off employees. It provides that the IRS will not count rehired employees against the FTE ratio. So, yes, once you get the payroll protection loan, go ahead and rehire your employees. That is what the law wants you to do.
How can hard hit retail/restaurant businesses figure out how to bring back 75% or more of the workforce with no customers to serve?
You have identified a core problem with the CARES Act. It provides only enough money to cover payroll for two and a half months. But, the reality is that businesses still have other expenses to cover. If a business cannot cover its other expenses and generate cash, it cannot stay open - even if its payroll is totally covered.
Congress knows that. The government is hoping that each business will take out payroll protection loans and pay their employees even if the business does not ultimately survive. To that end, the law does not require that the payroll you spend on your employees in the covered period actually go to them doing work. You can pay them for staying home and the pay is still forgivable.
The CARES Act is not a panacea. Personally, I think it should have gone much farther. Initially, it was set to cover 4 months of payroll and rent (instead of just 2.5 months of payroll). It is not intended to save any business. It is intended to maintain employee incomes so that there are not mass riots in the streets.
My advice to any struggling business is to apply for the CARES Act loans and the Economic Injury Disaster Loans. There is a minimum 6 month forbearance on the first payments for the disaster loans (no payments for CARES Act loan if you plan it right). Take out a low interest loan, keep expenses tight, and plan for when we are allowed to be within six feet of one another again. That's the move.
Can we hire a full-time marketing person to reach the fte requirement even if we have never had a marketing person before?
Yes. You can hire anyone for any position or job and not risk your loan forgiveness. All that matters is that you maintain the number of total FTEs as noted above and that you don’t decrease any specific employee's total pay by more than 25%.
Can a small business owner qualify for unemployment if they are still getting some business?
This is a little outside of my wheelhouse because it deals with Ohio unemployment law, which varies from state to state. In Ohio, from what I can gather, self-employed unemployment is traditionally not available. However, it is going to be available soon in Ohio and back-dated to January 27, 2020. The application is not currently available per news reports. I would recommend checking out the Ohio Department of Job and Family Services Covid-19 website and asking them about next steps.