Come on!  I can’t be all pandemic, all the time.   Oh, wait, this is kind of about the pandemic situation.  So, I guess -even in the height of (a now extended) tax season, the Covid-19 situation compels a lot of my attention.

As part of the CARES (Coronavirus Aid, Relief, and Economic Security Act) package, that $ 2 trillion new program passed unanimously by Congress, the biggest “small business” portion is the Paycheck Protection Program.  In particular, this loan program is meant for those who need help meeting payroll, rent, mortgage interest, or utilities, because of the economic shutdown.  (The US Treasury has just released a fact sheet, the first page of which is shown below.)

And, before we discuss the program, let’s consider another truth that was missed- or ignored- by our Congressional delegations.  Most small business entities try to ensure that their taxable compensation is as low as legally possible.   More of them take the funds they save on social security and Medicare (remember- these folks pay BOTH halves- the employer and employee portions- some 15.3% of compensation) and place them in pension/IRA/profit sharing plans.

Which means a program based upon salary or Schedule C net profits does not truly benefit the business owners.  The risk in engaging with this program is, therefore, to keep their employees on board with very little personal benefit, hoping that after the end of June, business returns to as it was before Covid-19.  (Now, if the program included the compensation recorded as salary and K-1 attributions, it may benefit the employer.  But, that’s not how the powers-that-be so defined the program.)

For Small Business- but not necessarily affected by the shutdown

If you are a small (I know, the US government believes that only those with 501 or more employees is not small) or non-profit business entity, this program affects you.  If you have more than one location- and are not in the hospitality or food industry- your total employment can’t exceed the threshold.

And what really makes this an interesting program is the loan forgiveness factor.

Should you play by the rules (finally a program that stresses no cheating allowed), the loan will be forgiven.  What are the rules?

You must use at least 75% of the loan for payroll costs, with the other 25% allowed to cover mortgage interest, rent, and/or utilities.  You must maintain- or quickly rehire (by 20 June 2020)- your employees at their historical salary/wage levels.  If your headcount declines or wages/salary rate decreases, the forgiveness factor decreases too.

The maximum loan we can get is 250% of our average monthly payroll for the 12 month period before the loan initiates.  (Seasonal businesses operating from 15 February to 30 June [2020] can use this period as the payroll base.  If the seasonality is different, then the base period is 1 January to 29 February 2020.)

Payroll costs are defined as direct compensation; vacation pay;  parental, family, medical, or sick leave;  as well as  group healthcare benefits and  retirement benefits- plus any state or local taxes that are assessed based upon employee compensation (such as unemployment taxes).

Moreover, this program defers all loan payments for 6 months, to give us a chance to get back on our feet.  The loan matures after 2 years and has an interest rate of 1%.  If folks are maintained on payroll for 8 weeks from loan inception, the loan is forgiven.  (Otherwise, the loan repayment begins after 6 months and shall be repaid within 2 years; interest is 1% per annum.)

Let’s give a few (real life, but couched) examples.

Half-Dozen

Bob has a professional services firm with five additional staff members.  Total payroll has averaged $ 50,000 a month in 2019 (2020 payroll does not count in this calculation, since his operation is not seasonal), but he’s petrified that his business is going to evaporate during the self-quarantine period.  It took him four years to find the best staff to provide the services that makes him proud to offer clients and he doesn’t want to lose them.

According to the program rules, Bob is eligible to borrow $ 125K.  (2.5X payroll).  [I should explain that the average annualized payroll turns out to be $ 100K, which is the maximum allowed.] None of the owners are under indictment or been convicted of a crime, to have defaulted on SBA loans (or received an SBA disaster loan in 2020), and all employees located in the USA, so Bob’s company meets the loan criteria.

Bob is banking on the fact that his clients (and new ones) will still need his firms services after the self-isolation period ends.  Otherwise, his company is dead in the water.  But, he’s optimistic and proceeds with the loan application.

Bob will begin repaying the loan (assuming it’s received on 15 April) on 15 October, at the rate of about $ 5670 a month. Assuming his staff was maintained for the 6 months period (this is where the ruling is a little squishy), on 15 April 2020, the loan will be forgiven, since Bob used the proceeds for payroll exclusively.  But the key factor is if Bob has maintained his people for 8 weeks or more (and as long as they were rehired by 20 June 2020), the loan will be forgiven even before the payback period begins in six months.

This is another real firm.

(I have deliberately obfuscated the true numbers.  And, in this example kept the compensation under the required $ 100K annual figure.)

Robert and Steven each receive salaries of $ 25,000. And, have five staff earning $ 75,000.   All receive profit sharing via a 401(k), to the tune of about $50,000 apiece. And, Robert and Steven  (among three other entities) each get K-1’s depicting $ 50,000 in profits for which they owe income tax.

Under the program, the maximum loan their firm can obtain is $ 88,541.  The staff have to stay employed at their current compensation which will use up $ 67,300  (including the employer portion of payroll taxes and state unemployment).  That leave a drop more than $ 21000 to cover phones, rent, utilities, office supplies- and compensation for the two owners.

That’s the trade-off these folks need to make.  Except to preserve their staff, there’s not a great benefit to Robert and Steven.

Real Estate Sales

Tom owns a real estate company.  His salary has been $ 30,000 a year.   With a K-1 compensation of about $ 75,000.  He has three contractors, with the American citizen earning about $ 30,000 in 1099 compensation.  Since the K-1 is not included in determining the loan maximum, the maximum loan his firm can obtain is $12,500.

Keeping on his American contractor (and letting the two foreigners wait for a turnaround- which means he may lose them to others)- and paying his salary requires  about $ 10, 400 (with employer taxes and unemployment included).  That’s probably enough of a cushion (the $ 2100) to let him keep operating during the quarantine.  And, he’s positive that real estate will rebound after the pandemic alleviates.

Kosher Dining

Sarah has been running a small kosher establishment for about 7 months.  Up until the middle of February, she was thrilled to have turned the corner and was clearing $6000 a month.  Her 9 staff members were great- the food was great- the reviews were great… And, then, the restaurants were ordered closed.  After all that investment and time and effort.  But, then she heard about this program.

Her payroll for the 9 staff members comes to $ 40,000 a month.  So, like Bob, her annualized payroll doesn’t exceed $ 100,000 for anyone.

Yet, this loan doesn’t really make sense.   After all, the loan is limited to $ 100,000 (2.5X payroll).  And, it’s not clear if there will be an all-clear by August.  Moreover, it’s not clear that her customers will return- or if she will need to have social distancing (a six foot distance between customer parties) in effect, limiting her ability to stay busy.  If she needs to keep her restaurant running, she will need to use at least $ 50,000 of her own money to keep the place functional through September.  In the meantime, she still has to keep her staff on payroll to obtain loan forgiveness.

Here’s where a game has to be played.  Can we expect the funds for this program to still be there in June?  If so, that’s when Sarah should apply.  She can (hopefully) rehire her staff, and ‘tough it out’ in July, August, and September.  Hoping that the Jewish New Year will bring the return of her business.

But, what happens if this self-isolation changes consumer behavior forever?  Where folks are afraid to go to public places.  (Covid-19 will not go away- unless and until we have a preventive vaccination program or an active antibody treatment regimen.  That won’t happen until 2021.)  Then, she’s back to keeping the restaurant afloat.

Even with gaming the system, this is a risk.

Now that you’ve seen some real scenarios- what would you do?

 

 

Please note- this is but ONE of the programs available to small businesses since America has been overcome by the Covid-19 pandemic.

Another avenue available to small businesses is the Economic Injury Disaster Loans (EIDL).  Interest rates are 3.75% for small businesses and 2.75% for non-profit entities. These loans afford up to $ 2 million in funds for payroll, accounts payable, fixed debts and other bills.  In addition, a forgiveable $ 10,000 advance is part of this package- with that advance available within 3 days of applying due to economic harm.  The application can be found here.  NOTE:  This program will not exist after 30 September 2020.

This video provides a more complete synopsis of the programs and regulations.

The Cares Act- for Individuals and Businesses