In 1859, Charles Dickins wrote “It was the best of times. It was the worst of times”. Could he have possibly been talking about the year 2020? How could our world change so quickly – from a booming, thriving economy with a record high stock market and low unemployment rate, to a weakened state of job loss and business closures. And as bad as this is, it pales in comparison to the severe health issues and loss of life we are experiencing caused by the horrific Coronavirus.
To help all of us through this crisis, Congress passed and the President signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act on March 27, 2020. This Act gives relief to nearly everyone in some way, such as expanding unemployment benefits, issuing one-time stimulus checks to most individuals, deferring payments for taxes and student loans, and providing credits and loans to businesses to keep their employees paid. In this blog, I will share information about the Paycheck Protection Program, one of the most talked about pieces of this legislation in the business world.
- What is the Paycheck Protection Program (PPP)? This is a federally guaranteed loan program for small businesses to be used for payroll and other limited expenses such as rent, mortgage interest and utilities. If the proceeds are used for the qualified expenses, the loan could be partially or totally forgiven.
- Who is eligible? A small business with fewer than 500 employees is eligible for the PPP. It also includes 501c3 non-profit organizations and self-employed individuals.
- How much can be borrowed? There is a formula to determine the amount that can be borrowed. The formula is 2.5 times the average monthly payroll costs, not to exceed $10 million.
- What is included in payroll costs? Monthly payroll costs include gross wages, commissions, cash tips, vacation and sick leave, health insurance benefits, retirement benefits and any local and state taxes the employer pays on behalf of the employee. Employee compensation exceeding $100,000 per year is not included in these costs. Self-employed individuals would include net earnings from self-employment or similar compensation and cannot exceed the $100,000 annual cap.
- How do I calculate average monthly payroll costs? This is where it gets a bit unclear. We know it is based on a 12-month period if you have been in business for at least a year, but it is not clear if the 12 months are defined by the calendar year of 2019 or by the time period of April 2019 to March 2020. You need to ask your bank what they require.
- Did I mention the loan could be forgiven? What will be forgiven? During the eight weeks after receiving the loan, if you use 75% of the proceeds to pay for payroll costs and the remaining 25% for other costs such as rent, mortgage interest, and utilities, your loan could be forgiven. You will need to submit documentation to the bank to prove these expenditures. Again, it is important to ask your bank what they will require. Should your workforce decrease during the 12-month look-back period you used in calculating your monthly average, the forgiveness amount of the loan will be reduced accordingly. In addition, your loan will also be reduced if the wages paid to your employees are reduced by more than 25% from what they were paid in the prior year. When you apply for the loan, you will be required to submit the number of employees that you had during the previous 12-month period. This number will be compared to the number of employees you had during the eight weeks after the loan was received. As you can see from this requirement, they want you to use this loan for payroll expense, and to help retain employees.
- What if I already furloughed my employees prior to this time? If you bring your employees back to work by June 30, 2020, this reduction in the loan forgiveness can be removed.
- What if the loan isn’t forgiven? If the loan is only partially forgiven or not forgiven at all, you will have two years to repay the loan. No payment will be required for 6 to 12 months, even though interest will accrue during this time period. The interest rate on the loan will be at a rate of 1%.
- Where and when can I apply for this program? You can apply to any existing SBA lender. Check with your bank first. Going through a bank or credit union that you already do business with will make it easier and quicker. Most banks started taking applications on April 3rd for businesses. Beginning April 10th, independent contractors and self-employed individuals can start applying. There is a funding cap so apply as soon as possible!
As I mentioned above, there are still many parts of this program that are not clear on how it will be handled and what substantiation will be required. It is important that you ask your banker what will be needed when you apply as well as what will be needed for substantiation at the end to determine the amount of the forgiveness.
This is a very unique situation that none of us have been through before so we need to continue to ask questions and share information as we go. Reach out to the financial people in your life such as your CPA, banker, and financial planner. We are all in this together and together we can get through it. We will emerge stronger and better than before – and declare once again it is the “Best of Times.” Stay well, stay healthy, stay home.
A little more about us:
Located in West Des Moines, Iowa with a branch office in Winterset, Iowa, McGowen Hurst Clark Smith (MHCS) celebrates 70 years of extending excellent service to our clients, providing them with accounting, auditing, consulting and financial planning expertise.
Established in 1946, our staff has grown from 3 to 60 employees, making us large enough to provide our clients with a broad base of experience and resources, yet small enough to offer very personalized service—which we feel makes us stand apart from other CPA firms. In addition to the traditional services of Accounting, Tax Preparation, Audit and Business Consulting, MHC&S offers our clients specialized services including Estate Planning, Business Valuations, Cost Segregation Studies, Retirement Planning, QuickBooks Training, Financial Advisory Services, Fraud Detection and Deterrence, Business Succession Planning, Litigation Support and more.
MHCS is a member of CPAmerica International, Inc., a national association of accounting firms offering membership to only 90 firms throughout the United States. This association offers a wide pool of additional technical expertise to the members firms, as well as continuing professional education necessary to maintain the degree of excellence which MHCS feels is vital in today’s business environment.