CARES Act Interpretation

We are all still anxiously awaiting the passage of the CARES Act into law, this legislation is not complete.  Therefore, there are no specific actions that you need to take immediately.  It appears that this law, if passed, will provide some much needed relief to business owner’s but the details on how the bill will work are tedious.  They are starting to come in to focus and there will no doubt be questions on how the specifics to your situation.  As a starting point we have listed some items below for your consideration.

The CARES Act (Act) provides for a loan program referred to as the Paycheck Protection Program (PPP) under SBA 7(a) and possibly SBA Express loans.  The loan amount will be the average monthly payroll costs including payroll taxes and health insurance prior to loan closure times 2.5 (Doctor compensation appears to be included in this up to $100,000, spousal and child payroll appears to be included as well).  This loan can be used for business expenses and will be eligible for forgiveness if used to pay the following:

• Interest on mortgages

• Payroll costs

• Rent

• Utilities

Loan forgiveness applies to the 8-week period after loan closing and only applies to the obligations/expenses listed above that were in place prior to February 15, 2020. 

Loan forgiveness is based on employee compensation and retention.  If you have reduced staff hours or total wages between February 15, 2020 and 30 days post law enactment you are still eligible for loan forgiveness (i.e. if you have laid off employees or instructed them to file for unemployment).   In order for 100% loan forgiveness to apply, you must then bring your staffing levels back to the 2019 average or the Jan to Feb 2020 level by the earlier of June 30, 2020 or the closing of your PPP loan.  Reductions in staff number or compensation as compared to the periods referenced will result in a proportionate reduction in loan forgiveness.

The Act also provides for grants up to $10,000 under a separate program Economic Injury Disaster Loans through the SBA Disaster Loan Program.  However, it is our interpretation that the PPP loan program and forgiveness will be the most efficient way to obtain forgivable government proceeds as the EIDL program is capped at $10,000 of grant money.  Therefore, for the time being we recommend you forego benefits under the Disaster Loan program and instead pursue benefits under the PPP.  

Here is an example you may find useful.

• A business collecting $1,500,000 per year has employee wages of $330,000 per year or $27,500 per month

• The business does not provide health insurance

• Average monthly payroll including payroll tax is $29,700

• The owner pays themself $285,000 per year – Wages for the owner can then be considered up to $100,000 per year

• Owner wages considered would then be $9,000 per month including payroll taxes

• The owner pays family members (spouse and two kids) $50,000 per year or $4,167 including payroll taxes

• Total amount of PPP loan available would be $107,167 (29,700 + 9,000 + 4,167 = 42,867 x 2.5 = 107,167)

• The amount of the loan available does not equal the amount forgiven. The amount forgiven would be determined by payments made for eligible expenses over the eligible 8 week period after loan closing.

• Expenses not forgiven would be repaid based upon loan terms.

Recommendations:

• Continue to pursue a business or home equity line of credit if available. The PPP loan program will not help you with expenses prior to loan closing. You will need to cash flow those items separately.

• Staff members do not have to be on payroll now in order for you to receive loan forgiveness. They will need to be on payroll prior to PPP loan closing. Therefore, our recommendation remains to terminate staff as necessary allowing them to file for unemployment. When your business reopens or if you are approved for a PPP loan, you can bring all staff back to their previous levels and seek loan forgiveness.

• This bill will take time to become law. The banks will need time to implement the new program. So, be prepared for this to take some time and have proper reserves available.

• Get a contact at your bank who will guide you through this.

Once the bill becomes law and we have further direction, we will keep you informed.  In the meantime, we are here for you.