Currently, there are two primary sources of help available to small business owners and the self employed. The first is the new Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The second is you may have benefits under an insurance policy you have for your business. This article will deal with the Paycheck Protection Program:

Eligible business and individuals can borrow 2.5 x prior average payroll (up to $10 million)

No loan payments are due for six months

If you maintain your workforce, the SBA will forgive 8 weeks of payroll plus certain other expenses

Paycheck Protection Program (The Program)

The Program is a federally guaranteed loan for small businesses, nonprofits, self-employed, and independent contractors and may be forgiven if the business owner follows specific rules and qualifies. The Program is designed to help keep people employed or to help the self-employed pay for living expenses while businesses are shut down.

Eligibility

Eligibility for the program is very broad and includes small businesses, nonprofits, and even individual people running their own business or working as independent contractors. There are size limitations to ensure the money goes to small businesses who are likely in greater need.

Your business also must certify:

that the money is needed to support ongoing operations

you will use the money to keep workers employed or make mortgage, lease, or utility payments

you have not applied for or received other loans which fulfill the same purpose. Emergency loans already taken may be folded into the new loan under the Program to avoid this issue.



Small Businesses

Generally, the Program is available to small businesses with fewer than 500 employees, although there are additional SBA size standards which may make businesses with more than 500 employees eligible. Employees include full-time, part-time, and any other status but franchises and accommodation & food service sector businesses are counted on a per-location basis. Tribal business concerns may also qualify for the Program.

Nonprofits

Nonprofits include 501(c)(3) organizations and 501(c)(19) organizations. Churches and other religious organizations which are not 501(c)(3) may also qualify depending on the interpretation of the law. (Currently the application has faith-based organizations as an option for describing your business). Nonprofits have similar size restrictions as described above for small businesses.

Individuals

Individuals who work as a sole proprietor or independent contractor will also qualify for this program. If you own a small business you are eligible, even if you have no other employees. Similarly, if you earned money as a 1099 employee (review your tax forms to see if you were issued 1099 wages) you are eligible for the Program.

How Much Is Available

Loans can be for up to 2.5 times the businesses average monthly payroll costs. Payroll costs include all forms of employee compensation (including tips), retirement and insurance benefits, accrual expenses for paid leaves and other allowances, and payment of state or local taxes.

The calculation excludes:

compensation above $100,000 annually prorated* between February 15 and June 30, 2020

income earned by employees whose principal place of residence is outside the U.S.

payroll taxes and other federal taxes

sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act

Individuals: Sole Proprietors, Independent Contractors, and Self-Employed

For individuals, “payroll costs” are defined as total income and compensation of the sole proprietor or independent contractor including net self-employment earnings (profits), wages, commissions, income, or similar compensation. The amount is also limited to $100,000 in annual income pro-rated* for the covered period.

*Excluded income being pro-rated means the $100,000 ‘cap’ is divided by 52 weeks and then that weekly number is applied for the covered period. Which would be approximately $1,900 per week — [$100,000/52]

Forgiveness of the Loan

The loans may be forgiven by the Federal Government for amounts the business spent on the following expenses during the 8-weeks after the loan origination date:

Payroll costs - defined the same way as above

Interest on mortgage obligations incurred by the business

Rent or leasing costs

Utility payments including telephone, transportation, and internet

Additional wages paid to tipped employees

The amount forgiven is reduced if the business eliminates employees or reduces employee pay by more than 25%. Forgiveness for employers of highly compensated employees may not be impacted by a 25% reduction in employee wages as the reduction does not fully apply for employees who earned more than $100,000 annualized in 2019.

What If I Already Laid Off Employees or Cut Hours?

If you’ve already laid off employees or cut hours, the reduction in forgiveness does not apply if the business reverses the layoffs or wage reduction by June 30, 2020.

How to Apply

Businesses apply to the program through a qualified SBA Lender, which is usually a local bank or potentially a credit union. You can begin the process and get an advance on the loan up to $10,000 through the SBA’s Disaster Loan Assistance application.

Sources: CARES Act, SBA.gov, USChamber.org

Pro Bono Financial & Business Advising

I am one of many financial advisors in XYPN and NAPFA who are offering pro-bono financial planning for those who are impacted by the pandemic. If you and your family have been impacted by the pandemic and would like advice on your situation, you can schedule a 1-hour financial planning session with no charge or obligation.