The PPP and EIDL: How to Spend COVID-19 Funding
The flagship provision for small businesses in the CARES Act (HR 748), passed by congress and signed into law by the President on March 27th, 2020, is the Paycheck Protection Program (PPP). The PPP was authorized for $349 billion in funds, intended to be infused into small businesses across the US. As the name implies, the heart of this program is providing small businesses with the means to continue paying employees (protecting paychecks). The PPP is even more exciting, because Congress included provisions to make some, or all, of the loan forgiven, if the borrower can meet certain spending requirements. Imagine, money to pay your employees, cover some rent and utilities, and have it all forgiven afterwards? No other legislation, on this scale, has ever before been rolled out.
As of April 16, 2020, Alaska small businesses had been approved for 4,842 loans totaling $921,927,504 (https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses).
The first round of the program was exhausted in just two weeks. The second round of funding, which is expected to be signed into law this week, will add additional funding of another $310 billion with certain amounts specifically earmarked for small business lenders, rural areas, and minority owned businesses.
Business owners hopeful about getting into the second round of funding should be reaching out to their lender as soon as possible if they have not already. The application, which is available on the Treasury website, is identical for all institutions. Having the application completed and ready, even if funding is not appropriated yet, is the best way to get in quickly.
For those who received funding in the first round, the gold rush has passed, and now comes the surprisingly hard part: spending it, and spending it wisely, so that the loan forgiveness provisions can be maximized to their fullest extent.
The PPP has not been perfect. There are still many questions about how to use the loan proceeds and the nuances of forgiveness. One of the major clarifications that was released as part of the Interim Final Rule is the requirement that no more than 25 percent of the total forgiven amount may be for non-payroll costs (rents, utilities, mortgage interest). This means that borrowers who are wanting to maximize forgiveness on the loan should plan to spend no more than 25 percent for the specified non-payroll items. This coincides with the intent of Congress that the loan should be primarily used for paying employees. Planning for this needs to be done before and during the eight-week spending period. The Treasury, working with the Small Business Administration (SBA), has been releasing guidance every few days, so a period check of any updates will be important during the eight-week spending period.
So, how do small business owners navigate the eight weeks post loan origination? They have the money; they have the go ahead from the bank. Most will work with their accountants, bookkeepers, maybe their lenders; likely a combination of all three. Meticulous record keeping and following best practices will be vital to substantiating the expenses when it comes time to apply for forgiveness. Business owners that are unsure should keep in close contact with their accountant or CPA and continue to watch for additional guidance released by the Treasury and SBA.
What about business owners that cannot get, or do not want, the PPP loan? For some business owners, it just does not make sense. Maybe the majority of their operating cost is not employee driven. With the PPP provisions requiring 75 percent or more of the total loan to be spent on employee payroll, it may not work for some – their largest cost could be rent and utilities. If the loan is not forgiven, it defaults to a 2-year loan, at 1 percent. Some business owners will need longer than two years to repay any funds they receive.
For these business owners, there are other programs available to help. The SBA’s Economic Injury Disaster Loan (EIDL) is one such program. It ran out of funds in the first round, just like the PPP, but it is on the list to get additional funding in the second round. This loan has a higher interest rate, but longer repayment terms and does not contain the same limitations as the PPP regarding spending. The SBA EIDL loan is administered directly by the SBA, so applicants do not need to work with their local lender.
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Local, community, and regional banks are available options for short term loans or lines of credit as well.
Another loan program that has taken a backseat during the PPP gold rush is the Federal Reserve Main Street Lending Program. This program does not contain the same limitations and provisions as the PPP. The Main Street Lending Program has some stricter qualifications, operating much like a traditional loan, with some financial requirements. Unlike some other traditional loans, it does have favorable low rates and a four-year repayment term.
Besides these loan programs, there are some credits available to business owners. Both the Employee Retention Credit and the Family First Coronavirus Response Act (FFCRA) Paid Leave Credit allow small businesses to take a credit against payroll tax deposits for qualified payments to employees. By taking the credit against payroll tax deposits, the small business frees up cash immediately.
Both programs have different rules and apply in different situations. The FFCRA Paid Leave Credit is for required wages paid under the new sick and paid leave provisions of the FFCRA. The credit is equal to 100 percent of the qualified leave wages (subject to a maximum), plus additions for employer Medicare and qualifying health plans. If your small business is required to comply with the sick and paid leave requirement under the FFCRA and you have qualifying expenses, check with your accountant or CPA on how to take advantage of this credit. It is effective from April 1–December 31, 2020.
The Employee Retention Credit is available to business owners that are experiencing an economic downturn due to COVID but have continued to pay employees. This credit, which was created under the CARES Act, allows for a credit of 50 percent of eligible wages, with a maximum credit of $5,000 per eligible employee. The credit is effective from March 12th, 2020 through December 31st, 2020. The credit is taken immediately by reducing payroll tax deposits. In addition, there is a new IRS form that can be filed with the IRS to receive advance payment of the credits.
The Paid Leave Credit can be used in conjunction with the PPP; however, the Employee Retention Credit is not available to small businesses that already have, or will receive, a PPP loan.
In addition to the credits and loans available, small business owners should visit with their accountants or CPAs to review their 2018 and 2019 tax returns. Many of the changes in the CARES Act rolled back some of the less favorable limitations imposed on business owners under the Tax Cuts and Jobs Act effective for the 2018 and 2019 tax years. One of the biggest changes includes a technical correction to the Qualified Leasehold Improvement property, allowing for a shorter life and bonus depreciation. This may allow businesses to accelerate depreciation and free up tax by reducing taxable income.
Things are changing daily. Business owners should keep in touch with their trusted advisors and continue watching as developments come through both nationally and locally. All the options available take careful thought and planning to get the best possible result. If a business owner does not have a CPA or accountant, now is the time to find one and start these discussions.
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