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.
The Senate approved $310B of additional funding for PPP loans Tuesday afternoon. With approval in the House expected Wednesday banks should be in a position on Thursday to finalize the processing of applications received but not yet approved and to accept new loan applications. $310B consists of the initial plan for an additional $250B of PPP loan funding along with $60B for rural businesses who likely did not have arrangements in place with SBA approved lenders when the CARES Act was passed March 27.
PPP Loan Update
PPP Loan Applications due by June 30, 2020
PPP loan applications need to be submitted prior to June 30, 2020, but as it’s not certain that the additional funding will be sufficient to meet the demand we recommend submitting your application as quickly as possible. If your bank has given you a loan number you’re in good shape and should expect to see funds in your account within a short time.
PPP Loan Recommendations
During the application and approval process we also suggest the following:
- Remember that your bank is your best friend and that although they are dealing with new processes and huge workloads they will be in the best position to see that your loan is approved. Ask them for advice on how your application can be made stronger or better documented.
- Stay in contact with your bank, be persistent, and don’t give up. Don’t seek the assistance of a second bank as that will set you back in the queue of applications.
- Don’t seek the assistance of a second bank as that will set you back in the queue of applications.
- If you haven’t already done so we highly recommend a client’s discussion with their board of directors and legal counsel around the objectives and benefits of applying for a PPP loan. In that regard, having a good corporate process around your decision-making process is key:
- Counsel or corporate secretary should be documenting the entire process with minutes
- Develop documentation of the necessity for the loan as well as what makes you eligible
- Develop basic financial information for supporting your eligibility
- Begin implementing structure and process around your record-keeping to be used for requesting loan forgiveness.
PPP Loan Forgiveness
At this time we know that PPP loan forgiveness can be requested until the middle of December 2020. Loan amounts spent for payroll (salaries, wages, vacation, parental, family, and medical and sick leave, and health benefits), interest on mortgages signed before February 15, 2020, rent for lease agreements signed before February 15, 2020, and utilities for service begun before February 15, 2020, are eligible for forgiveness. 75% of your PPP loan must be used for payroll costs. Requests for loan forgiveness should be submitted to your lender who will have 60 days to evaluate and reply to your request. Calculate your forgiveness amount as follows:
- Eligible expenses: Eligible expenses are those incurred over eight weeks starting from the date on which you received the first payment from your lender.
- Staffing Requirement: Determine the average number of employees you had on payroll during the eight week assessment period (A) and divide it by the average number of employees you had on payroll between February 15, 2019, and June 30, 2019. If your result is equal to or larger than one you’ve met the employee headcount requirement. At the borrower’s discretion, the value of “A” can also be divided by the average number of employees you had on payroll between January 1, 2020, and February 29, 2020. If your result is equal to or greater than one you’ve met the employee headcount requirement. If neither of the calculations is greater than one your forgivable expenses will be reduced proportionately. Not yet clarified is whether the reduction will apply to all expenses paid during the eight week period or just payroll expenses.
- Compensation Requirement: Borrowers must ensure that employees’ pay is not less than 75% of the pay they received during the most recent quarter in which they were employed. Assessed individually for every employee that did not receive more than $100,000 in annualized pay in 2019 the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay. Individuals with 2019 annualized pay above $100,000 are not a part of these calculations.
- Rehiring Grace Period: To meet the Staffing and Compensation requirements above borrowers have until June 30, 2020, to rehire any laid off or furloughed employee and reinstate any pay reduction greater than 25%.
SBA’s Economic Injury Disaster Loan (EIDL)
Congress will also be approving additional funding for SBA’s Economic Injury Disaster Loan (EIDL) program which had also lapsed due to a lack of funding. This new funding will enable the SBA to provide up to $300B of new loans. Key elements of EIDL include:
- Loan amounts up to $2 million. Applications are submitted through the SBA and borrowers can obtain both a PPP and EIDL loan provided they are not used for the same purpose. Since at least 75% of a PPP, the loan should be used to cover payroll expenses in order to have the loan fully forgiven and EIDL loan would be best used for non-payroll related costs.
- An emergency grant of $1,000 per employee (up to a maximum of $10,000) is available to borrowers within three days of their application and is forgiven even if the EIDL loan is not approved.
- Applicants must have been in business for one year and have incurred a “substantial economic injury” to qualify.
- Loans can be used for working capital, fixed debt, payroll, accounts payable and other bills that would have been paid had the disaster not occurred. Loans are not intended to replace lost sales or enable business expansion.
- The application process will likely entail submission of a hardship letter, three most recent tax returns, or year-end financial statements (unless the loan is less than $500 K), bank statements for the prior three months, AP/AR aging reports. Forms 2202, 413, and 4506-T are required.
- Loan approval is based on credit history and repayment ability.
- Collateral is not required for loans less than $25K although a lack of adequate collateral does not mean that a loan will not be approved. A personal guarantee will likely be required.
- Affiliation rules apply.
- Terms are 3.75% (2.75% for non-profits) for 15 or 30 years depending on the borrower’s ability to repay. No loan forgiveness. Interest can be deferred for the first year and there is no pre-payment penalty.
- No cost to apply.
Transition Back to Work
On April 16 the Whitehouse released guidelines for a gradual transition back to work across the country. Opening up America Again establishes three phases of expansion with movement from each phase to the next predicated on two weeks of expanded testing, sufficient hospital capacity to meet critical care needs, and a reduction in coronavirus cases and symptoms. Discretion is left to governors to develop their own return to work plan based on these guidelines as they believe are appropriate on a county by county basis or for their states as a whole.
PE/VC Backed Firms – Main Street Loan Program
No developments have occurred around waiving affiliation rules for PE/VC backed firms as it pertains to their eligibility for PPP loan. This article from April 10 provides good information on this topic. Clarification of Affiliation Issues. However, details are now available on the Treasury’s new $600B Main Street Lending (MSL) program, also authorized by the CARES Act, which can be of benefit to PE/VC backed companies.
Main Street Loan Program
The MSL program provides loans under two scenarios to companies with up to 10,000 employees and $2.5B in 2019 revenues. 1) A borrower is considered “new” if they’ll be applying to the MSL loan after April 8th, or 2) a borrower who has taken a secured or unsecured bank loan prior to April 8th and now apply through the MSL to add an additional tranche of funding. Currently, the minimum loan amount in each case is $1M but banks are requesting a reduction of this to $100,000 to benefit smaller businesses. The maximum loan amount, subject to certain provisions, is $25M for new applicants and $150M in the second scenario. All other eligibility requirements and loan terms are the same between the two including the deferral of payments for the first year. MSL loans are not forgivable but can be prepaid without penalty. Eligible applicants can receive both PPP and MSL loans. MSL loans are applied for directly through lenders and are on a first-come-first-served basis until the $600B is utilized. MSL loan rates are the SOFR (Secured Overnight Financing Rate) plus 250 to 400 basis points (.03% + 2.5 to 4.0% as of April 20th), with payments made for four years. MSL loans can be repaid early with no penalty but are not forgivable as a PPP loan is. MSL program applicants must comply with the following:
Attestations under Main Street Loan Program
- The lender must attest that the proceeds of the loan will not be used to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower.
- The borrower must commit to refrain from using the proceeds of the loan to repay other loan balances. The borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the borrower has first repaid the MSL loan in full.
- The lender must attest that it will not cancel or reduce any existing lines of credit outstanding to the borrower.
- The borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender.
- The borrower must attest that it requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and that, using the proceeds of the loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan.
- The borrower must attest that the loan does not exceed an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, would cause the total amount to exceed four times the borrower’s 2019 EBITDA.
- The borrower must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act.
- The lender and borrower will each be required to certify that each entity is eligible to participate in the facility, including in light of the prohibition against conflicts of interest in section 4019(b) of the CARES Act.
Restrictions under the CARES Act
The borrower must agree:
- That for 12 months after the loan is no longer outstanding, the borrower will not repurchase equity security of the borrower, or any parent company of the borrower, if said equity security was listed on a national stock exchange while the loan was outstanding, except to the extent required by a contractual obligation in effect prior to March 27, 2020;
- That for 12 months after the loan is no longer outstanding, the borrower will not pay dividends or make other capital distributions with respect to the common stock of the borrower;
- That it will comply with the following compensation restrictions, as set forth in Section 4004:
- Two tiers of executive compensation (including salary, stock, and bonuses) restrictions for a period of time that extends one year beyond the term of the loan.
- Officers or employees who received more than $425,000 in total compensation in 2019 cannot receive a pay raise in 2020, and cannot receive severance pay or other benefits that are more than twice their 2019 compensation.
- Officers or employees who received more than $3 million in total compensation in 2019 cannot receive total compensation in 2020 in excess of (i) $3 million-plus (ii) 50% of the excess over $3 million said officer or employee received in 2019.
Certifications under the CARES Act
The borrower must make a good-faith certification that:
- The uncertainty of economic conditions as of the date of the application makes necessary the loan request to support the ongoing operations of the borrower.
- Proceeds of the loan will be used to retain at least 90 percent of the borrower’s workforce, at full compensation and benefits, until September 30, 2020.
- Borrower intends to restore not less than 90 percent of the workforce of the borrower that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the borrower no later than four months after termination of emergency declaration for COVID–19.
- The borrower is an entity or business that is domiciled in the United States with significant operations and employees located in the United States.
- The borrower is not a debtor in a bankruptcy proceeding.
- The borrower is created or organized in the United States or under the laws of the United States and has significant operations in and a majority of its employees based in the United States.
- The borrower will not pay dividends with respect to the common stock of the borrower or repurchase equity security that is listed on a national securities exchange of the borrower or any parent company of the borrower while the loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of this Act.
- The borrower will not outsource or offshore jobs for the term of the loan and for two (2) years after completing repayment of the loan.
- The borrower will not abrogate existing collective bargaining agreements for the term of the loan and for two (2) years after completing repayment of the loan.
- The borrower will remain neutral in any union organizing effort for the term of the loan.
Deferral of Employment Taxes
Aside from the PPP loan option the CARES Act provides additional cost-saving opportunities for small businesses. One in particular Deferral of Employment Taxes is explained in this IRS document. (See associated question below.) Also of note, there has been recent discussion in Washington about suspending the payment of employer and employee payroll taxes (Social Security and Medicare) from May 1 through the end of the year.
R&D Tax Credit
The R&D tax credit is an expeditious method for businesses to obtain cash by providing a dollar-for-dollar reduction in their tax liability. The credit is both a federal and state incentive. When combined, the federal and state benefit can be up to $.15 of every dollar spent on qualifying research. The statute of limitations for securing the credit is generally three years from a federal perspective and four years for many states. Taxpayers that have been performing qualified research but did not secure the credits on previous tax returns will want to investigate this option thoroughly. Engaging in a research and development tax credit analysis that includes one or multiple years (e.g. tax years 2017, 2018, and 2019) can result in a refund of overpaid taxes and an influx of much-needed cash to a business.
Recently Received Questions
Can I continue to defer the payment of payroll taxes after I’ve received a PPP loan?
A business can’t take advantage of both a PPP loan and the employee retention credit but the payroll tax deferral can be taken with a PPP loan. The caveat is that once the PPP lender confirms with the applicant that their loan is forgiven (in whole or in part) deferral of the payroll taxes has to be ended. The CARES Act stipulates that all forgiveness decisions need to be made by the end of the year so deferral of payroll taxes could extend that long. 50% of the deferred payroll tax amount has to be paid by 12.31.2021 and the other 50% by 12.31.2022.
Although I believed my company could get through a few months until the economy returned to normal I’m now seeing the possibility of my clients ratcheting back their business and spending levels and I think I should apply for financial assistance. Can I do that and still qualify on the basis that my business was impacted by the coronavirus?
In applying for the PPP loan the only certification a borrower needs to make is that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” More generally, this is a good reminder to develop or review general business plans, revenue, and expense forecasts, and cash runway to be prepared if market conditions don’t improve in the near term. Kranz can assist with all of these tasks.
Can I prepay rent or mortgage interest?
Recommended websites for additional information and guidance:
For You – The Treasury department is to launch a web-based application at IRS.gov enabling individuals to expedite receipt of individual stimulus payments. While all payment recipients can expedite receipt of their payments through this site, it is in particular designed to enable those who have not filed tax returns in prior years to enter information enabling a direct deposit of their payment to their bank account. Go to Get My Payment for more information.