Helping You Navigate the CARES Act

George “Chip” Van Dusen IVPresident

Diversified Brokerage Services, Inc.

Featuring

Ken KiesManaging Director

Federal Policy Group

Armstrong RobinsonVP of Legislative Affairs

AALU/GAMA

Suzy JacobsSVP of Business Development

AALU/GAMA

Christie CoradoGeneral Counsel

Crump

C19 – Relief Resources for Small Businesses

• “Phase 3 Bill” = $ 2.2 Trillion Bridge Loan to the American Economy• Creates multiple avenues for relief to businesses, individuals, and families• Details and updates from the government daily – stay tuned to the Covid-19 Action Center

OVERVIEW: Relief for Employers

1. Delay Employer Payroll Taxes2. SBA Loans for Small Business3. Employee Retention Credit4. Short-term comp program5. NOL6. Sick Leave Requirements and Resources

FOCUS: Small Business Administration Resources

• Small Business Loan Relief. SBA will pay all principal, interest, and fees on all pre-existing SBA 7(a) loan products for six months to provide economic relief. It excludes PPP loans.

• Paycheck Protection Program (PPP) – up to $10 million• Economic Injury Disaster Loans (EIDL) – up to $2 million

• Note: A small business may receive both PPP and EIDL loans, however, the funds must be used for different purposes.

SBA: Eligibility

• Business or non-profit with 500 or fewer employees• Sole proprietor, LLC, C-Corp, S-Corp, independent contractors, coops, ESOPs• Certain business types (e.g., legal gambling) are ineligible

• If more than 500 employees – look to the NAICS Code definitions of small businesses (link in AALU/GAMA materials in the action center)

• Entity must be located in the U.S. || Only U.S. based employees count for calculations

• If SBA does not work – then look to the Treasury Exchange Stabilization Fund

SBA: Payroll Protection Plan

• The program is designed for small businesses to preserve employees’ salaries.

• Created a new $350 billion program in SEVEN days.

• Trying to cram a tidal wave through a pinhole! (last year the SBA 7(a) program lent out $23 billion)

• Borrower Guidance v. Lender Guidance

• Apply for the loan -> Spend on Eligible Expenses -> Apply for forgiveness

• Things will change – important to stay connected to the Action Center

SBA: Payroll Protection Plan

• Up to $10 million; 6/12 month deferral of first payment; payable over 2 years; 1% || 8 weeks forgivable – income tax free

• Loans could equal up to 250% of average monthly total payroll costs incurred during the year prior.

• Payroll costs exclude any cash compensation in excess of $100,000 for any individual

• Non-cash compensation is not subject to the cash compensation cap. Non-cash comp includes: payments for heath benefits, contributions to qualified plans, state taxes on employee compensation.

• Can include owner comp up to the limits.

• Your ICs do not count for your business calculation || they can make their own application

• A business can bring back previously furloughed employees by 6/30/20 to avoid a reduction in forgiveness amount

• The PPP loan can function much like a grant given that it can be fully or partially forgivable. (8 weeks). No federal income tax is owed on that forgiveness.

• Apply –

• First – contact your bank and ask about their 7(a) / PPP program

• Second - SBA.gov has lender matching tools available

PPP: Two Distinct Calculations• Maximum Loan Amount = Average Monthly Payroll

Expenses x 2.5

• Payroll costs exclude any cash compensation in excess of $100,000 for any individual

• Payroll costs include: cash compensation (e.g., salary, commissions, PTO) and non-cash compensation (e.g., group health benefits including insurance premiums, retirement benefits, state or local tax on comp). Can include owner comp up to the limits.

• Your ICs do not count for your business calculation || they can make their own application

• A business can bring back previously furloughed employees by 6/30/20

• Maximum Forgiveness = 8 weeks of actually-paid permissible expenses

• 75% or more must be for payroll• 8-week period begins on date the loan is

made.• Eligible costs include: payroll costs; any

interest on any covered mortgage obligation; any payment on any covered rent (or lease); and any utility obligations (all with respect to services beginning, or obligations incurred, before February 15, 2020).

• You can only apply for loan forgiveness after the loan is originated.

SBA: PPP Example 1

C Corp – with employees and independent contractors• 5 employees, each making, respectively, $50,000, $75,000, $75,000, $100,000, and $200,000 per year, for a

grand total of $500,000 in compensation paid for period one-year prior• $15,000 of each employee’s compensation is non-cash

• Covered rent, covered leased equipment, and covered utilities total $1,750 per week• Max loan amount = ($415,000 / 12) x 2.5 = $86,458.33• Max forgiveness = (($415,000 / 52) x 8) + ($1,750 x 8) = $77,846.15

• NOTE – if two of the employees (one at $75k and one at $100k) were independent contractors instead of common law employees – their compensation would not count for this business in either calculation. ICs are eligible to make their own application for PPP loans.

• NOTE – observe the impact of non-cash compensation (e.g., it increases the max loan amount by $3,125 and forgiveness by $2,307.69 as compared to the results were non-cash compensation to be subject to the $100,000 cap)

SBA: PPP Example 2

C Corporation – with statutory employees

• 3 employees (i.e., W-2s), each making, respectively, $50,000, $75,000, and $200,000 per year

• 2 statutory employees (i.e., 1099s) who are not common law employees, each making, respectively, $75,000 and $100,000 per year, for a grand total of $500,000 in compensation paid for period one-year prior

• Covered rent, covered leased equipment, and covered utilities total $1,750 per week

Answer: “Payroll costs” = only compensation paid to employees (as limited by $100,000 cap). The statutory employees are eligible for their own PPP loans, and do not factor into the company’s loan.

Max loan amount = ($225,000 / 12) x 2.5 = $46,875

Max forgiveness = (($225,000 / 52) x 8) + ($1,750 x 8) = $46,875

NOTE: observe the impact of the overall limitation on loan forgiveness, which is equal to the max loan amount

SBA: PPP Example 3Business owner who is a sole proprietor, self-employed, or independent contractor• No employees• Pays two unrelated independent contractors (i.e., 1099s), each making, respectively, $75,000 and $100,000 per year• Owner’s non-cash benefits equal $25,000 for period one-year prior

• Net income of $300,000 for period one-year prior• Covered rent, covered leased equipment, and covered utilities total $1,750 per week

Answer: “Payroll costs” = only that portion of the business owner’s cash income as is below the $100,000 cap. The unrelated independent contractors are eligible for their own PPP loans, and do not factor into the business owner’s loan.

Max loan amount = ($125,000 / 12) x 2.5 = $26,041.66

Max forgiveness = (($125,000 / 52) x 8) + ($1,750 x 8) = $26,041.66

NOTE: observe the impact of the overall limitation on loan forgiveness, which is equal to the max loan amount

SBA: PPP Example 4Business owner who is a statutory employee• No employees• Pays two unrelated independent contractors (i.e., 1099s), each making, respectively, $75,000 and $100,000 per year• Receives $100,000 as a statutory employee of a different business, and has net income of $225,000 for period one-

year prior • Covered rent, covered leased equipment, and covered utilities total $1,750 per week

Answer: “Payroll costs” = only that portion of the business owner’s total income (i.e., both the “W-2 income” received as statutory employee and also the “Schedule C,” “1099,” or “K-1” income from the independent business) as is below the $100,000 cap. The unrelated independent contractors are eligible for their own PPP loans, and do not factor into the business owner’s loan.

Max loan amount = ($100,000 / 12) x 2.5 = $20,833.33Max forgiveness = (($100,000 / 52) x 8) + ($1,750 x 8) = $20,833.33

NOTE: observe the impact of the overall limitation on loan forgiveness, which is equal to the max loan amount

SBA: PPP Example 4 - more

Further thoughts on Example 4:• Open issue here is that it is not precisely clear how to treat statutory employees under the statute• It is likely, however, that a statutory employee who is not a common law employee is treated just as

any other independent contractor would be (i.e., subject to the wages cap, the statutory employee takes into account as “payroll costs” both his or her “W-2 income” and also his or her other business income)

• High degree of confidence in the result

SBA: PPP Example 5S Corporation – no employees• No employees• Owners each own 33.33 percent of the entity• Reasonable compensation paid to three owners of the S corporation is $150,000, each

• $50,000 of residual profit in S corporation, allocated $13,333.33 to each owner• Covered rent, covered leased equipment, and covered utilities total $1,750 per week

Answer: for each separate owner’s PPP, “payroll costs” = the owner’s allocable share of the compensation paid by the entity that is below the $100,000 cap, plus that owner’s own share of business profit.

Max loan amount = ($113,333.33 / 12) x 2.5 = $23,611.11

Max forgiveness = (($113,333.33 / 52) x 8) + (($1,750 x 8) / 3) = $22,102.50

SBA: PPP Example 5 - more

Further thoughts on Example 5:• One open issue here is that it is not precisely clear how to treat passthrough entities under the

statute• Another open issue here is that it is not precisely clear how to treat the reasonable compensation

that is required to be paid to participating S corporation owners• It is likely, however, that an owner of a passthrough entity is treated just as any other self-employed

individual would be (i.e., subject to the wages cap, the passthrough entity owner takes into account as “payroll costs” his or her share of passthrough income as well as his or her share of passthrough compensation expenses)

• It is also likely that the reasonable compensation required to be paid to the S corporation owners is treated as a passthrough expense that is shared by each owner

• Moderately high degree of confidence in the result

SBA: PPP Example 6S Corporation – employees • One employee, who makes $50,000 per year• Owners each own 33.33 percent of the entity• Reasonable compensation paid to three owners of the S corporation is $130,000, each

• $60,000 of residual profit in S corporation, allocated $20,000 to each owner• Covered rent, covered leased equipment, and covered utilities total $1,750 per week

Answer: for each separate owner’s PPP, “payroll costs” = the owner’s allocable share of the compensation paid by the entity—including reasonable compensation paid to the owners—that is below the $100,000 cap, plus that owner’s own share of business profit.

Max loan amount = ($136,666.66 / 12) x 2.5 = $28,472.22Max forgiveness = (($136,666.66 / 52) x 8) + (($1,750 x 8) / 3) = $25,692.07

SBA: PPP Example 7LLC – no employees• No employees

• Four owners each own 25 percent of the entity• $500,000 of profit is allocated $125,000 to each owner• Covered rent, covered leased equipment, and covered utilities total $1,750 per week

Answer: for each separate owner’s PPP, “payroll costs” = the owner’s allocable share of the entity’s profit that is below the $100,000 cap

Max loan amount = ($100,000 / 12) x 2.5 = $20,833.33

Max forgiveness = (($100,000 / 52) x 8) + (($1,750 x 8) / 4) = $18,884.62

SBA: PPP Example 7 - more

Further thoughts on Example 7:• One open issue here is that it is not precisely clear how to treat passthrough entities under the

statute• It is likely, however, that an owner of a passthrough entity is treated just as any other self-employed

individual would be (i.e., subject to the wages cap, the passthrough entity owner takes into account as “payroll costs” his or her share of passthrough income as well as his or her share of passthrough compensation expenses)

• Moderately high degree of confidence in the result

SBA: PPP Example 8LLC – employees• One employee, who makes $40,000 per year

• Four owners each own 25 percent of the entity• $460,000 of profit is allocated $115,000 to each owner• Covered rent, covered leased equipment, and covered utilities total $1,750 per week

Answer: for each separate owner’s PPP, “payroll costs” = the owner’s allocable share of the entity’s profit that is below the $100,000 cap, plus the owner’s allocable share of the employee’s salary

Max loan amount = ($110,000 / 12) x 2.5 = $22,916.66

Max forgiveness = (($110,000 / 52) x 8) + (($1,750 x 8) / 4) = $20,423.08

Small Business Loans: Emergency

• The loans are designed to provide economic relief due to an emergency or catastrophe. They can be used to pay fixed debts, payroll, accounts payable and/or other bills that can’t be paid due to the epidemic’s economic impact.

• Up to 2 million; payable over 30 years; 3.75% or 2.75% for expenses that could have been met had the disaster not occurred.

• Emergency EIDL grant is an advance of $10,000 on loan application (within 3 days), and it does not have to be repaid – even if the loan is not approved

• Eligibility: Small business with less than 500 employees or defined by NAIC Industry Code based on revenue and/or employees; Non-profits [including (c)(3) and (c)(6)]

• Apply – SBA.gov

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