CARES update… what to do now!

Justin Goodbread, CFP®, CVGA®, CEPA®HeritageInvestor.com/ FinanciallySimple.com

SBA’s 7a and 7b loan update

This information is for educational purposes only. Please speak with your advisors, (CPA, Attorney, CFP, Banker, etc.) or conduct your own due diligence.

Economic Injury Disaster Loans

“The SBA offers Economic Injury Disaster Loans to help small businesses meet working capital needs caused by a natural disaster. The loans may be used to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred.” – SBA.gov

Section 1110

Eligible Borrowers:

Small Businesses <500 employees

Private non-profits (something to sell)

Substantial economic injury means the business can not meet its obligations or pay normal operating expenses

Amounts Available:

can provide up to $2 million of financial assistance (actual loan amounts are based on amount of economic injury)

up to one half of the prior year’s gross profit not to exceed $500,000

historically 95% have been under $500,000

Permissible Uses of EIDL:

Fixed debt

paymentsPayroll

Accounts payable

and other bills that can not be paid

The GRANT

Act provides for a $10,000 emergency advance (within three days of submitting the

application) while an applicant’s loan application

is pending, which SBA will not require to be repaid.

Act addresses applicant may receive this advance

while still applying for a Section 7(a) loan (described

below)

If the applicant later receives a 7(a) loan, the amount of

the advance will “be reduced from the loan

forgiveness amount for a loan for payroll costs.”

Terms of Loans

Interest: 3.75% Duration: up to 30 years

The Act waves personal guaranty and the requirement for applicants to demonstrate that they are unable to obtain credit from another source.

First year principle and interest may be deferred

Information needed for EIDL

COMPLETED SBA LOAN APPLICATION (SBA FORM 5)

TAX INFORMATION AUTHORIZATION (IRS FORM

4506T) FOR THE APPLICANT, PRINCIPALS

AND AFFILIATES

COMPLETE COPIES OF THE MOST RECENT FEDERAL INCOME TAX RETURN

SCHEDULE OF LIABILITIES (SBA FORM 2202)

PERSONAL FINANCIAL STATEMENT

(SBA FORM 413)

Where to apply:

• https://covid19relief.sba.gov/• There is no fee to apply• No obligation to accept funds• The goal is to process the application

in 3-5 days• The goal is to have the fund available

within 30 days via lump sum deposit• SBA has 15 days from Friday’s signing to

have the loans ready..

7A –Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) appropriated $350 billion for “Paycheck Protection Loans” for small businesses.

SBA 7A is where the Paycheck Protection Loan will be issued.

Eligible Borrowers

Operational on February 15, 2020, and

had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors, and

is substantially impacted by public health restrictions related to COVID-19.

Eligible borrowers would be required to make good faith certification that they have been affected by COVID-19 and will use funds to retain workers and maintain payroll and other debt obligations.

There is no requirement to evaluate the borrowers’ ability to repay the covered loan or that the borrower not be able to find credit elsewhere, unlike the normal 7(a) requirements.

Borrow must certify

(i) “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;

(ii) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments”;

(iii) that there is no pending application for a 7(a) loan for the same purpose and amounts and no proceeds have or will be received from such a loan.

Amount available:

• 2.5 times average monthly payroll costs (less than $100,000) based on the prior year’s payroll costs – up to 10 Million• Salary, wage, commissions, or

similar compensation• Payment of cash tip• Payment of vacation, parental,

family, medical, or sick leave, • Payment of required provisions of

group health care benefits, including premiums

• Payment of any retirement benefit• Payment of state or local tax

assesses on the compensation

Amount available -continued

• It is 2.5 times the average monthly amount from “ the 1-year period before the date on which the loan is made”

(This appears to be a moving target… Just my opinion!)

• “the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period”

Example of a Payroll Calculation:

•Company payroll $50,000.00•Owner compensation $8,333.00•Multiple by 2.5 $145,833.33

NOTE: There are things that you can use the loan for besides “payroll costs”, but the maximum loan computation is based solely on “payroll costs”.

What Can You Use the Loan For?

• “(I) payroll;• (II) costs related to the continuation of group

health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;

• (III) employee salaries, commissions, or similar compensations;

• (IV) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);

• (V) rent (including rent under a lease agreement);

• (VI) utilities; and• (VII) interest on any other debt obligations that

were incurred before the covered period.”

Terms of Loan:

• No personal guarantees• No recourse (collateral) unless misuse

of proceeds• Unforgiven Portion –

• Maximum 10-year duration• 4% interest rate

• Complete Payment Deferrals are available for 6 months – 1 years per SBA guidance (coming soon)

• Loan is available until June 30th, 2020

Loan Forgiveness

• “Forgiveness.—An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:• (1) Payroll costs.• (2) Any payment of interest on any covered mortgage obligation (which shall

not include any prepayment of or payment of principal on a covered mortgage obligation). – incurred Prior to Feb 15th

• (3) Any payment on any covered rent obligation. – incurred Prior to Feb 15th• (4) Any covered utility payment.” – in use prior to Feb 15th

Loan Forgiveness - Continued

Amounts in excess of the principal on the loan will not be forgiven.

Forgiveness will be reduced proportionately by any reduction in employees retained compared to either:

(i) the prior year, or (ii) the period of January 1, 2020, thru February 29, 2020 (measured based on average employees per month).

Forgiveness will be reduced proportionately by any reduction in pay of any employee beyond 25% of their prior year compensation (measured from the most recent full quarter prior to the origination date of the loan).

Payroll costs eligible for forgiveness do not include compensation paid to employees in excess of $100,000 annually.

Loan Forgiveness - Continued

Borrowers that re-hire workers previously laid off from February 15 through April 1, 2020 shall not have those numbers counted against them during such period for loan forgiveness purposes, so long as they are rehired by June 30, 2020.

Forgiveness will not be included in gross income of the borrower as cancellation of debt income for federal income tax purposes.

Documentation Required for Forgiveness:

• (A) payroll tax filings reported to the IRS• State income, payroll, and unemployment insurance filings

(1) documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods described in subsection (d), including:

• cancelled checks• payment receipts• account statements

(2) documentation to prove your mortgage, lease, or utility payments

• (A) the documentation presented is true and correct; and• (B) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and

(3) a certification from a representative of the eligible recipient authorized to make such certifications that:

(4) any other documentation the Administrator determines necessary.

Where to apply:

My research suggest that SBA has less than 3300 employees

and approves a total of 58,000 loans last year.

1,800 banks in their program.

Many more banks coming online to help in this process.

Strategies for planning:

• Employees laid off from February 15 through April 1, 2020 shall not have those numbers counted against them during such period for loan forgiveness purposes, so long as they are rehired by June 30, 2020.• In constrained by government,

consider a layoff of employees by tomorrow

• Rehire after when work resumes

Strategies for planning:

• Loan is available until June 30th, 2020. • Consider delay of 7a application

as soon monies are received - the 8-week forgiveness time clock starts.

Employee Retention Credit

Section 2301 of the CARES Act introduces a new payroll tax credit (provided they are not receiving a covered loan under section 7(a)(36) of the Small Business Act).

a refundable tax credit against Social Security taxes imposed under section 3111(a) of the Internal Revenue Code

Qualifying for the Employee Retention Credit

• Qualifier to begin to qualify for the employee retention credit is that operations of the company have been fully or partially suspended during a quarter either as a result of a :

1. governmental authority or in which revenue in 2020 has less than 50% of the revenue from the same quarter in 2019.

2. a business which is not at least partially suspended because of government restriction, and which never sees its year-over-year quarterly revenues plummet below the 50% mark, will not be eligible for the credit.

Calculating the Employee

Retention Credit

• Basically, the credit is equal to 50% of wages paid to each employee, up to a maximum of $10,000 of wages per employee (i.e. $5,000 per employee)

Justin GoodbreadCEPA®, CFP®, CVGA®

Heritage Investors, LLCwww.HeritageInvestor.comwww.HeritageBusinessAdvisors.comwww.FinanciallySimple.com

Connect with me in social media:LinkedIn: @justingoodbreadFacebook: @financiallysimpleTwitter: @justingoodbreadYouTube: FinanciallySimple

Disclosures:This information is for educational purposes only. Please speak with your advisors, (CPA, Attorney, CFP, Banker, etc.) or conduct your own due diligence.

Justin Goodbread, Certified Financial Planner, Certified Exit Planning Advisor, Certified Value Growth Advisor. He is a serial entrepreneur, author, speaker, educator, Investopedia Top 100 advisor, and business strategist with over 20 years of experience. Justin owns Heritage Investors LLC, a registered investment adviser with the State of Tennessee. Heritage Investors only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. This material is for general information only and is not intended to provide specific advice or recommendations for individuals. To determine what is appropriate for you, please consult a qualified professional. The Financially Simple podcast provides information, guidance, and support to Small Businesses in the United States.