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Paycheck Protection Program: New regulatory announcements

11.04.20

If you received over $2 million in PPP funds, read on.

The Small Business Administration (SBA) has posted a new form to collect additional information on loan necessity from businesses that received over $2 million in PPP funds. The comment period is now open and closes on November 25, 2020. As we seek more clarity, here is what we know.

What is happening: 

The SBA released PPP Loan Necessity Questionnaires (Forms 3509 and 3510) for borrowers that received PPP loans of $2 million or more on October 30, 2020. The forms are not available at the SBA or Treasury websites, but were released through the PPP Loan Forgiveness portal to lenders.  

Here is an excellent description of what we know thus far. Here are our concerns: 

  • The timing and lack of clarity. The 10-day turnaround is very tight. It could be very difficult to manage if it hits during a month or quarter close, or even worse at year-end.

  • This is counter to what was described in the FAQs at the time, so it leaves us with many unanswered questions.
  • It appears that information on the form might be subject to FOIA. There is a toggle to indicate what information you consider to be confidential. We recommend that you carefully review what information you have not flagged as confidential before submitting the form.

Other considerations and actions you can take in the meantime:

  • We know that the questionnaire is triggered by submitting an application for forgiveness. Given some of the uncertainty of other program impacts and this additional information that is requested, it may be reasonable to wait to seek loan forgiveness until we determine the impact.
  • You may wish to comment on the federal notice. See instructions for submitting comments below.

COVID-19 business support

We will continue to post updates as we uncover them. Let us know if you have questions. For more information regarding the Paycheck Protection Program, the CARES Act, or other COVID-19 resources, see our COVID-19 Resource Center.

Instructions for submitting comments:
Agency Clearance Officer                  
Curtis Rich
Small Business Administration
409 3rd Street SW
5th Floor
Washington, DC 20416

and 

SBA Desk Officer
Office of Information and Regulatory Affairs
Office of Management and Budget
New Executive Office Building
Washington, DC  20503

Your comments should be titled as follows:
Title: Paycheck Protection Program
OMB Control Number: 3245-0407

Comments should include one or all of the following: 
(a) whether the collection of information is necessary, 
(b) whether the estimate of 1.6 hours to complete or review the proposed application form is accurate (42,000 applications, 67,833 annual hour burden), 
(c) whether there are ways to minimize this burden, and
(d) whether there are ways to enhance the quality, utility, and clarity of the information.

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Read this if you are a business owner.

Here is some end-of-year tax information we would like to share. While it may vary in your specific situation, we are providing this general information for your review. Please contact us with any questions about your year-end preparations. 

As the world continues to contend with the COVID-19 pandemic and its economic fallout, businesses are doing all they can to mitigate risks and plan for a recovery that’s anything but certain. Here are some tax relief tactics that can help take your business from reacting to the day-to-day challenges to taking advantage of those incentives that are available to help move your business forward.

Tax strategies to generate immediate cash flow

While not exhaustive, here are several tax strategies to consider:

Debt and losses optimization

  • File net operating loss (NOL) carryback refund claims
  • File claim to relieve 2019 tax payments due with the 2019 returns for corporations expecting a 2020 loss 
  • Analyze the tax impact of income resulting from the cancellation of debt in the course of a debt restructuring
  • Consider claiming losses related to worthless, damaged, or abandoned property to generate losses 
  • Decrease estimated tax payments based on lower 2020 income projections, if overpayments are anticipated
  • Consider filing accounting method changes to accelerate deductions and defer income recognition with the goal of increasing a loss in 2020 for expanded loss carryback rules

Making the most of legislation and understand how the CARES Act can provide relief to employers: Defer payment of the employer’s share of Social Security taxes until the earlier of (1) Dec. 31, 2020, or (2) the date the employer’s Paycheck Protection Program (PPP) loan is forgiven

Take advantage of any remaining corporate AMT credit

Consider the Employee Retention Credit

Regardless of which tax strategies you leverage, keeping the focus on generating and retaining cash will help ensure your business can weather an extended period of disruption.

Optimizing operations: Uncover tax relief opportunities

The initial tumult of the pandemic and economic fallout has passed, but significant challenges remain. Although companies that have managed to survive up to this point may have overcome immediate safety and cash flow problems, we still face an uncertain future. No one can predict how long the downturn will last, whether the world will revert into crisis mode or the path towards long-term recovery has begun. 

Despite the uncertainty, savvy companies can position themselves to outperform their competitors by capitalizing on market shifts and strengthening their core business models. To do so, liquidity will continue to be at a premium, but many companies at this stage should be able to spend a bit in order to reap considerable returns. Tax planning is important to do just that. Consider which tax strategies can help you find a competitive edge, including: 

Uncovering missed opportunities for savings: 

  • R&D tax credit studies: The money companies spend on technology and innovation can offset payroll and income taxes via R&D tax credits.
  • Property tax assessment appeals: In the wake of the COVID-19 pandemic, some jurisdictions are reevaluating their property tax processes.
  • Cost segregation studies: Cost segregation studies can help owners of commercial or residential buildings increase cash flow by accelerating federal tax depreciation of certain assets.
  • State and local credits and incentives projects: By taking advantage of existing programs, as well as those implemented as a result of COVID-19, companies can qualify for state tax credits and business incentives. 
  • Opportunity zone program: This federal program is structured to encourage investors to shift capital from existing assets to distressed, low-income areas, and in doing so, deferring and even reducing taxes.

Maintaining compliance: If your business secured any federal funding in the early stages of the pandemic, those funds likely came with certain tax and financial reporting compliance measures attached. 

Continue to grow liquidity: Cash is still key to navigating an uncertain road ahead. Continue to leverage liquidity-generating tactics, such as:

  • Evaluating existing accounting methods and changing to optimal methods for accelerating deductions and deferring income recognition, thereby reducing taxable income and increasing cash flow.
  • Reviewing transfer pricing strategies to identify opportunities to optimize cash flow.
  • Pursuing a tax deduction through charitable donations.
  • Maximizing state NOLs through elections, structural changes, intercompany transactions, and triggering unrealized gains.

Moving forward: Adopt new business strategies to reimagine the future

In the recovery phase, demand for goods and services has returned to pre-pandemic-recession levels. The wisest companies won’t spend this time resting on their laurels but will instead use it to reimagine their futures. 

Plans made prior to spring 2020 may no longer make sense in a post-COVID world. Companies need to not only recover from COVID-19, but also integrate the lasting forces of change brought on by the pandemic to emerge more resilient and more agile than before it began. It’s time to reset vision and strategy—and tax needs to be an integral part of that process. Here are some tax considerations that can align with new business strategies: 

Workforce

During recovery, businesses have likely confirmed near-term strategies around where employees will work. While these plans need to balance employee safety and operational efficiency, they also come with important tax impacts. Tax considerations: 

  • Assess the tax implications of your mid- to long-term workforce strategy, whether you take an on-site, fully remote, or a hybrid approach
  • Ensure tax compliance with state or local tax withholding for employees working remotely 
  • Consider the tax implications of outsourcing any business functions

Finances

As demand for products and services increases, it’s likely profits will also grow, meaning many companies that may have been incurring losses may find themselves with taxable income again. At this point, tax strategies should focus on lowering the organization’s total tax liability. Tax considerations: 

  • Optimize the use of any available credits, incentives, deductions, exemptions, or other tax breaks 
  • Maximize the benefit of changes to the net operating loss rules included in the CARES Act 
  • Consider the foreign-derived intangible income (FDII) deduction, if applicable (i.e., companies that earn income from export activities)

Transactions

Many businesses may be considering strategic transactions, such as acquiring another company, merging with a peer, selling certain assets, or purchasing new resources. Each of these actions can have multiple tax consequences. Tax considerations: 

  • Assess potential tax benefits or liabilities of strategic transactions before they take place as a part of the due diligence process
  • Identify loss companies and plan around utilizing losses and credits
  • Structure acquisitions and divestitures in a tax-efficient manner to increase after-tax cash flow

Innovation

As companies reconfigure their businesses to adapt to COVID-19 changes—from greater shifts to e-commerce to outsourced back office functions to partially remote work arrangements—they should determine how to use tax strategies to offset the costs of these investments. Tax considerations:  

  • Consider using federal, state, or even other countries’ R&D tax credits to offset costs of new products, processes, software, and other innovations
  • Explore whether previously undertaken activities may also qualify for these credits 

Regulations and legislation

As the economy improves, regulatory oversight likely will also increase. Noncompliance can be costly and can reverse much of the progress a business has made in its recovery. At the same time, additional tax law changes are likely on the horizon, and companies will need to be able to act quickly when they appear. Tax considerations

  • Ensure compliance with rules around federal funding received during the pandemic
  • Monitor tax regulatory and legislative developments at all levels, especially in the area of digital taxation, post-election tax reform, and federal, state, and local policy changes 
  • Scenario plan to outline the potential impact of future tax legislation on the company’s overall tax liabilities

Transformation

Staying ahead in the “new normal” means accelerating efforts around digital transformation to build a business with agility and resilience at its core. This should always include evolving the tax function. Businesses must strive to fully integrate processes, people, technology, and data to understand total tax liability and forecast how decisions and changes will impact their tax standing. Tax considerations

  • Collaborate with leadership and other areas of the business on a company-wide approach to digital transformation efforts
  • Establish a clear, shared vision of the future state of the tax department
  • Develop the business case for transformation efforts

Whatever pivots your business takes once the worst has passed, tax strategy needs to be an integral part of the plan to move forward. Evolving your tax strategy alongside business strategy will help prevent unforeseen costs and maximize potential savings.
 

Article
Tax relief strategies for resilience

Read this if you are a Maine business or organization that has been affected by COVID-19. 

The State of Maine has released a $200 million Maine Economic Recovery Grant Program for companies and organizations affected by the COVID-19 pandemic. Here is a brief outline of the program from the state, and a list of eligibility requirements. 

“The State of Maine plans to use CARES Act relief funding to help our economy recover from the impacts of the global pandemic by supporting Maine-based businesses and non-profit organizations through an Economic Recovery Grant Program. The funding originates from the federal Coronavirus Relief Fund and will be awarded in the form of grants to directly alleviate the disruption of operations suffered by Maine’s small businesses and non-profits as a result of the COVID-19 pandemic. The Maine Department of Economic & Community Development has been working closely with affected Maine organizations since the beginning of this crisis and has gathered feedback from all sectors on the current challenges.”

Eligibility requirements for the program from the state

To qualify for a Maine Economic Recovery Grant your business/organization must: 

  • Demonstrate a need for financial relief based on lost revenues minus expenses incurred since March 1, 2020 due to COVID-19 impacts or related public health response; 
  • Employ a combined total of 50 or fewer employees and contract employees;
  • Have significant operations in Maine (business/organization headquartered in Maine or have a minimum of 50% of employees and contract employees based in Maine); 
  • Have been in operation for at least one year before August 1, 2020; 
  • Be in good standing with the Maine Department of Labor; 
  • Be current and in good standing with all Maine state payroll taxes, sales taxes, and state income taxes (as applicable) through July 31, 2020;
  • Not be in bankruptcy; 
  • Not have permanently ceased all operations; 
  • Be in consistent compliance and not be under any current or past enforcement action with COVID-19 Prevention Checklist Requirements; and 
  • Be a for-profit business or non-profit organization, except
    • Professional services 
    • 501(c)(4), 501(c)(6) organizations that lobby 
    • K-12 schools, including charter, public and private
    • Municipalities, municipal subdivisions, and other government agencies 
    • Assisted living and retirement communities 
    • Nursing homes
    • Foundations and charitable trusts 
    • Trade associations 
    • Credit unions
    • Insurance trusts
    • Scholarship funds and programs 
    • Gambling 
    • Adult entertainment 
    • Country clubs, golf clubs, other private clubs 
    • Cemetery trusts and associations 
    • Fraternal orders 
    • Hospitals, nursing facilities, institutions of higher education, and child care organizations (Alternate funding available through the Department of Education and Department of Health and Human Services for hospitals, nursing facilities, child care organizations, and institutions of higher education.)

For more information

If you feel you qualify, you can find more details and the application here. If you have questions about your eligibility, please contact us. We’re here to help. 

Article
$200 Million Maine Economic Recovery Grant Program released

Read this if your company is seeking assistance under the PPP.

The rules surrounding PPP continue to rapidly evolve. As of June 22, 2020, we are anticipating some additional clarifications in the form of an interim final rule (or IFR) and additional answers to frequently asked questions (FAQ). The FAQs were last updated on May 27, 2020. For the latest information, please be sure to check our website or the Treasury website.

A few important changes:

  1. The loan forgiveness application, and instructions, have been updated.
  2. There is a new EZ form, designed to streamline the forgiveness process, if borrowers meet certain criteria.
  3. Changes now allow for businesses to use 60% of the PPP loan proceeds on payroll costs, down from 75%.
  4. Businesses now have 24 weeks to use the loan proceeds, rather than the original eight-week period (or by December 31, 2020, whichever comes earlier).
  5. The rules around what is a full-time equivalent (FTE) employee and the safe harbors with respect to employment levels and forgiveness have been clarified.
  6. Entities can defer payroll taxes through the ERC program, even if forgiveness is granted.

These changes are designed to make it easier to qualify for loan forgiveness. In the event you do not qualify for loan forgiveness, you may be able to extend the loan to five years, as opposed to the original two years.

The relaxation on FTE reductions is significant. The reductions will NOT count against you when calculating forgiveness, even if you haven’t restored the same employment level, if you can document that:

  • you offered employment to people and they refused to come back, or
  • HHS, CDC, OSHA or other government intervention causes an inability to “return to the same level of business activity” as of 2/15/2020.

As of June 20, 2020, there was still an additional $128 billion in available funds. The program is intended to fund new loans through June 30, 2020. 

We’re here to help.
If you have questions about the PPP, contact a BerryDunn professional.

Article
PPP loan forgiveness: Updates

Read this if your company is seeking assistance under the PPP.

With additional funding for the PPP pending, we’re updating this blog post with more recent information.


This information is current as of April 21, 2020.

The Treasury Department has issued guidance and answers to Frequently Asked Questions that alters some of the original assumptions around PPP:

  1. At least 75% of the forgiven amount should be used for payroll (changed due to anticipated high demand for program)
  2. Repayment of non-forgiven amounts are now repaid over 2 years at 1.0% interest (not 2 years and 0.5% as previously stated or 10 years and 4% as in the CARES Act)

Although the “covered period” is February 15, 2020 to June 30, 2020, forgiveness of the loan is based on expenses (primarily payroll) during the eight-week period after the loan is received. Loan amounts should be disbursed within 10 calendar days of being approved.

Important to note:

  1. Questions around size:
    1. 500 employees. The SBA has clarified that it measures employees consistent with the existing 7(a) loan program guidance. See CFR Section 121.106 for details.
    2. The SBA has also clarified that if a business meets both tests in the “alternative size standard”, it qualifies to participate in the program
      1. Maximum tangible net worth of the business is not more than $15 million.
      2. Average net income after Federal income taxes for the two full fiscal years before the date of application is not more than $5 million. 
    3. If the existing SBA definition of a small business for your industry (found on SBA websites) has over 500 employees, your business may qualify if you meet that expanded definition. 
  2. The CARES Act states that loans taken from January 31, 2020, until “covered loans are made available may be refinanced as part of a covered loan.”
  3. People may want to tap into available credit now. If they are granted a covered loan (PPP loan), they can refinance. Given anticipated demand, it may take time to get the PPP loan processed.
  4. Participation in PPP (Section 1102 and 1106 of the CARES Act) precludes participation in the Employee Retention Credit (Section 2301).
  5. The IRS clarified that companies may still defer Payment of Employer Payroll Taxes (Section 2302) even if participating in PPP until a decision on forgiveness is reached by your lender. This is a change from our prior understanding.

Economic Injury Disaster Loans (EIDL)

EIDLs are available through the SBA and were expanded under section 1110 of the CARES Act. Eligible are businesses with 500 or fewer employees, including ESOPs, cooperatives, and others. Up to $2 million per loan. Up to 30 years to repay. Comes with an emergency advance (available within 3 days) of $10,000 that does not have to be repaid – even if your loan application is turned down. This $10,000 does not impact participation in other programs/sections of the CARES Act. Some portion of the EIDL may reduce your loan forgiveness under PPP, but receiving an EIDL does not preclude you from participating in the PPP.

From the Treasury: Small business PPP

The Paycheck Protection Program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. More details at treasury.gov.

Fully forgiven

Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.

Must keep employees on the payroll—or rehire quickly

Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

All small businesses eligible

Small businesses with 500 or fewer employees—including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors— are eligible. Businesses with more than 500 employees are eligible in certain industries.

When to apply

Starting April 3, 2020, small businesses and sole proprietorships can apply. Starting April 10, 2020, independent contractors and self-employed individuals can apply.

How to apply

You can apply through any existing SBA 7(a) lender or any federally insured depository institution, federally insured credit union, or Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. All loans will have the same terms regardless of lender or borrower. Find a list of participating lenders and additional information and full terms at sba.gov.

The Paycheck Protection Program is implemented by the Small Business Administration with support from the Department of the Treasury. Lenders should also visit sba.gov or coronavirus.gov for more information.

BerryDunn COVID-19 resources

We’re here to help. If you have questions about the PPP, contact a BerryDunn professional.

Article
Updated: Funding for the Paycheck Protection Program (PPP)

Focus: Disaster Loan Program and Paycheck Protection Program (PPP)

Background

The Coronavirus Aid, Relief and Economic Security (CARES) Act will provide $562 million to cover administrative expenses and program subsidy for the US Small Business Administration (SBA) Economic Injury Disaster Loans and small business programs. 

Additionally, the CARES Act specifically provides the authorization for $349 billion for the SBA 7(a) program through December 31, 2020. 

SBA disaster loan program (updated for CARES Act) highlights


General
The US Small Business Administration is offering designated states and territories low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of the coronavirus and COVID-19.

Eligibility 
Industry may be subject to different standards, but the general rule of thumb is that the SBA defines most small businesses as having less than 500 people, both calculated on a standalone basis and together with its affiliates (see PPP below for more information). A company’s average annual sales may also be used for the small business designation. 

Historically, businesses that are not eligible for this program included casinos, charitable organizations, religious organizations, agricultural enterprises and real estate developers that are primarily involved in subdividing real property into lots and developing it for resale for themselves (other real estate entities may apply, such as landlords). 

However, the CARES Act expanded eligibility to include (i) any individual operating as a sole proprietor or independent contractor; (ii) private non-profits and (iii) Tribal businesses, cooperatives and ESOPs with fewer than 500 employees during January 31, 2020 to December 31, 2020.

If the entity has bad credit or has defaulted on a prior SBA loan, the entity is not eligible. The CARES Act removed the credit elsewhere requirement (i.e., previously if the business had credit available through another source, such as a line of credit, it was ineligible). 

Basic terms

  • Loan amount
    The lesser of $2 million or an amount determined that that borrower can repay (i.e., underwriting requirement).
  • Maximum term
    Up to 30 years and all payments on these loans will be deferred for 12 months from disbursement date. Interest will accrue.
  • Interest rate
    3.75% for for-profit business and 2.75% for a non-profit entity.
  • Collateral
    Loans for under $25,000 do not require collateral.  Any person with an interest in the company worth 20% or more must be a guarantor; however the CARES Act eliminates the guaranty requirement on advances and loans under $200,000. 
  • Use of proceeds
    Loan proceeds may be used to pay fixed debts (including short-term notes and balloon payments that are due within the next 12 months), payroll, accounts payable, and other bills the borrower would have to pay that but for the disaster would have been paid, such as mortgage payments. Landlords and other passive entities are eligible. Agriculture-related entities are eligible, but farmers are not. Borrowers must maintain proof of how the loan proceeds were used for three years from the date of disbursement. Borrowers cannot use the proceeds to expand their business, buy assets, make repairs to real estate or refinance long-term debt. 
  • Forgiveness
    No forgiveness provision.

Applying
Loan applications are available here

Length of time for funding
Upon submittal of a completed application, it can take 18-21 days to be approved and another four to five business days for funding. However, the SBA has never dealt with this much volume so expect delays.  

If funding is needed immediately, contact any SBA partnering non-profit lender and request an SBA microloan up to $50,000 or contact a commercial lending partner to see if they offer SBA express loans up to $1,000,000 (CARES Act increases this from $350,000 to $1,000,000) and/or SBA 7(a) loans up to $5 million. The 7(a) loans are typically processed within 30 days, while microloans and express loans are processed even more quickly. 

The CARES Act has also established an emergency grant to allow eligible entities who have applied for a disaster loan because of COVID-19 to request an advance of up to $10,000 on that loan. The SBA is to distribute the advance within three days. 

This advance does not need to be repaid, even if the applicant is denied a Disaster Loan. ($10,000,000,000 is appropriated for this program and funds will be distributed on a first come, first served basis). An applicant must self-certify that it is an eligible entity prior to receiving such an advance. Advances may be used for providing sick leave to employees, maintaining payroll, meeting increased costs to obtain materials, rent or mortgage payments, and payment of business obligations that cannot be paid due to loss of revenues. Applicants must apply directly with the SBA for this program.

Other considerations
Each company should review any current loan obligations and confirm that it does not include a provision forbidding that applicant from acquiring additional debt. If the document does, the applicant will want to discuss a waiver of that provision with its current lender. The lender should be amenable to this waiver and the applicant will want the waiver verified in writing. The lender should be amenable because the SBA disaster loan can be used to satisfy monthly debt obligations and any collateral taken by the SBA would be subordinate, if the same collateral secures the lender’s loan.

Under the CARES Act, Congress has also directed the SBA to use funds to make principal and interest payments, along with associated fees that may be owed on an existing SBA 7(a), 504 or micro-loan program covered loan, for a period of six months from the next payment due date. Any loan that may currently be on deferment will receive the six months of covered payments once the deferral period has ended. This provision will also cover loans that are made up to six months after the enactment of the CARES Act. If the loan maturity date conflicts with benefiting from this amendment, the lender can extend the maturity date of the loan. 

Newly enacted Paycheck Protection Program (PPP)


General
This new program will be offered with a 100% SBA guaranty through December 31, 2020, to lenders, after which the guaranty percentage will return to 75% for loans above $150,000 and 85% for loans below that amount. 

Eligibility 
A business, including a qualifying nonprofit organization, that was in operation on February 15, 2020, and either had employees for whom it paid salaries and payroll taxes or paid independent contractors, is eligible for PPP loans if it (a) meets the applicable North American Industry Classification System (NAICS) Code-based size standard or other applicable 7(a) loan size standard, both alone and together with its affiliates; or (b) has an employee headcount that is lower than the greater of (i) 500 employees or (ii) the employee size standard, if any, under the applicable NAICS Code. 

Businesses that fall within NAICS Code 72, which applies to accommodations and food services, are also eligible if they employ no more than 500 people per physical location. Sole proprietorships, independent contractors, and self-employed individuals are also eligible. It is unclear as of what date the size test will be applied, but historically, SBA size tests have been applied on the date of application for financing. More information on the NAICS-Code-based size standards can be found here

Borrowers are required to provide a good faith certification that the loan is necessary due to economic conditions brought about because of COVID-19 and that the borrower will use the funds to retain workers, maintain payroll and pay utilities, lease and/or mortgage payments.

The credit elsewhere test is waived under this program. 

Lenders shall base their underwriting on whether a business was operational on February 15, 2020, and had employees for whom it was responsible for or paid for services from an independent contractor. The legislation has directed lenders not to base their determinations on repayment ability at the present time because of the effects of COVID-19.

Applicants for SBA loan programs, including PPP loans, typically must include their affiliates when applying size tests to determine eligibility. That means that employees of other businesses under common control would count toward the maximum number of permitted employees. A business that is controlled by a private equity sponsor would likely be deemed an affiliate of the other businesses controlled by that sponsor and could thus be ineligible for PPP loans. However, the CARES Act waives the affiliation requirement for the following applicants:  

  1. Businesses within NAICS Code 72 with no more than 500 employees
  2. Franchises with codes assigned by the SBA, as reflected on the SBA franchise registry
  3. Businesses that receive financial assistance from one or more small business investment companies (SBIC) 

Basic terms

  • Loan amount
    Lesser of $10 million or 2.5 times the applicant’s average monthly payroll costs of the business over the year prior to the making of the loan (practically, this may become the year prior to the loan application), excluding the prorated portion of any annual compensation above $100,000 for any person. Note that under the CARES Act, “payroll costs” include vacation, parental, family, medical, and sick leave; allowances for dismissal or separation; payments for group health care benefits, including insurance premiums; and retirement benefits. Calculations vary slightly for seasonal businesses and businesses that were not in operation between February 15 and June 30, 2019. To the extent that a SBA Disaster Loan was used for a purpose other than those permitted for PPP Loans, the Disaster Loans may be refinanced with proceeds of PPP loans, in which case the maximum available PPP loan amount is increased by the amount of the Disaster Loans being refinanced. 
  • Maximum term
    Payments will be deferred for a minimum of 6 months and a maximum of 12. SBA is directed to issue guidance on the terms of this deferral. Any portion of the PPP loan that is not forgiven (see below) on or before December 31, 2020, shall automatically be a term loan for a maximum of 10 years. For PPP loans, the SBA has waived prepayment penalties.
  • Fees
    SBA will waive the guaranty fee and annual fee applicable to other 7(a) loans. 
  • Interest rate
    Maximum rate of 4%.
  • Collateral
    The standard requirements of collateral and a personal guaranty are waived under this program. Accordingly, there will be no recourse to owners or borrowers for nonpayment, except to the extent proceeds are used for an unauthorized purpose.
  • Use of proceeds
    This loan can be used for: (i) payroll support, excluding the prorated portion of any compensation above $100,000 per year for any person; (ii) group healthcare benefits costs and insurance premiums; (iii) mortgage interest (but not prepayments or principal payments) and rent payments incurred in the ordinary course of business, and (iv) utility payments. 
  • Forgiveness
    A borrower will be eligible for loan forgiveness related to a PPP loan in an amount equal to 8 weeks of payroll costs, and the interest on mortgage payments (not principal) made in the ordinary course of business, rent payments, or utility payments so long as all payments were obligations of the borrower prior to February 15, 2020. Payroll costs are limited to compensation for a single employee to be no more than $100,000 in wages and the amount of forgiveness cannot exceed the principal loan amount. 

    The amount of loan forgiveness will be reduced proportionally by any reduction in the borrower’s workforce, based on the full-time equivalent employees versus the period from either February 15, 2019, through June 30, 2019, or January 1, 2020, through February 29, 2020, as selected by the borrower, or a reduction of more than 25% of any employee’s compensation, measured against the most recent full quarter. If a borrower has already had to lay off employees due to COVID-19, employers are encouraged to rehire them by not being penalized for having a reduced payroll at the beginning of the covered period, which means the initial 8 week period after the loan’s origination date. 

    Accordingly, reductions in the number of employees or compensation occurring between February 15, 2020, and 30 days after enactment of the CARES Act will generally be ignored to the extent reversed by June 30, 2020. Any additional wages that may be paid to tipped workers are also covered in the calculation of payroll forgiveness. Borrowers must keep accurate records and document their payments because lenders will need to verify the payments to allow for loan forgiveness. Borrowers will not have to include any forgiven indebtedness as taxable income. 

Applying
A company needs to apply on or before June 30, 2020, with a lender who is currently approved as a 7(a) lender or who is approved by the SBA and the Treasury Department to become a PPP lender. PPP lenders have delegated authority to make and approve PPP loan, with no additional SBA approval required. 

There are certain portions of the CARES Act that require SBA to provide further guidance so there may be some slight changes to the rules and procedures as best practices present themselves. 

We recommend contacting existing 7(a) lenders as soon as possible to learn what you will need to provide for underwriting and approving a PPP loan. 

We are here to help
Please contact a BerryDunn professional if you have any questions, or would like to discuss your specific situation.

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Impact of CARES Act on SBA loans

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides relief to taxpayers affected by the novel coronavirus and COVID-19. The CARES Act is the third round of federal government aid related to COVID-19. We have summarized the top provisions in the new legislation below, with more detailed alerts on individual provisions to follow. Click here for a link to the full text of the bill.

Compensation, benefits, and payroll relief
The law temporarily increases the amount of and expands eligibility for unemployment benefits, and it provides relief for workers who are self-employed. Additionally, several provisions assist certain employers who keep employees on payroll even though the employees are not able or needed to work. 

The cornerstone of the payroll protection aid is a streamlined application process for SBA loans that can be forgiven if an eligible employer maintains its workforce at certain levels. 

Additionally, certain employers affected by the pandemic who retain their employees will receive a credit against payroll taxes for 50% of eligible employee wages paid or incurred from March 13 to December 31, 2020. This employee retention credit would be provided for as much as $10,000 of qualifying wages, including health benefits. Eligible employers may defer remitting employer payroll tax payments that remain due for 2020 (after the credits are deducted), with half being due by December 31, 2021, and the balance due by December 31, 2022. 

Employers with fewer than 500 employees are also allowed to give terminated employees access to the mandated paid federal sick and child care leave benefits for which the employer is 100% reimbursed by the government through payroll tax credits, if the employer rehires the qualifying employees.

Any benefit that is driven off the definition of “employee” raises the issue of partner versus employee. The profits interest member that is receiving a W-2 may not be eligible for inclusion in the various benefit computations.

Eligible individuals can withdraw vested amounts up to $100,000 during 2020 without a 10% early distribution penalty, and income inclusion can be spread over three years. Repayment of distributions during the next three years will be treated as tax-free rollovers of the distribution. The bill also makes it easier to borrow money from 401(k) accounts, raising the limit to $100,000 from $50,000 for the first 180 days after enactment, and the payment dates for any loans due the rest of 2020 would be extended for a year.

Individuals do not have to take their 2020 required minimum distributions from their retirement funds. This avoids lost earnings power on the taxes due on distributions and maximizes the potential gain as the market recovers.

Two long-awaited provisions allow employers to assist employees with college loan debt through tax free payments up to $5,250 and restores over-the-counter medical supplies as permissible expenses that can be reimbursed through health care flexible spending accounts and health care savings accounts.

Deferral of net business losses for three years
Section 461(l) limits non-corporate taxpayers in their use of net business losses to offset other sources of income. As enacted in 2017, this limitation was effective for taxable years beginning after 2017 and before 2026, and applied after the basis, at-risk, and passive activity loss limitations. The amount of deductible net business losses is limited to $500,000 for married taxpayers filing a joint return and $250,000 for all other taxpayers. These amounts are indexed for inflation after 2018 (to $518,000 and $259,000, respectively, in 2020). Excess business losses are carried forward to the next succeeding taxable year and treated as a net operating loss in that year.

The CARES Act defers the effective date of Section 461(l) for three years, but also makes important technical corrections that will become effective when the limitation on excess business losses once again becomes applicable. Accordingly, net business losses from 2018, 2019, or 2020 may offset other sources of income, provided they are not otherwise limited by other provisions that remain in the Code. Beginning in 2021, the application of this limitation is clarified with respect to the treatment of wages and related deductions from employment, coordination with deductions under Section 172 (for net operating losses) or Section 199A (relating to qualified business income), and the treatment of business capital gains and losses.

Section 163(j) amended for taxable years beginning in 2019 and 2020
The CARES Act amends Section 163(j) solely for taxable years beginning in 2019 and 2020. With the exception of partnerships, and solely for taxable years beginning in 2019 and 2020, taxpayers may deduct business interest expense up to 50% of their adjusted taxable income (ATI), an increase from 30% of ATI under the TCJA, unless an election is made to use the lower limitation for any taxable year. Additionally, for any taxable year beginning in 2020, the taxpayer may elect to use its 2019 ATI for purposes of computing its 2020 Section 163(j) limitation. 

This will benefit taxpayers who may be facing reduced 2020 earnings as a result of the business implications of COVID-19. As such, taxpayers should be mindful of elections on their 2019 return that could impact their 2019 and 2020 business interest expense deduction. With respect to partnerships, the increased Section 163(j) limit from 30% to 50% of ATI only applies to taxable years beginning in 2020. However, in the case of any excess business interest expense allocated from a partnership for any taxable year beginning in 2019, 50% of such excess business interest expense is treated as not subject to the Section 163(j) limitation and is fully deductible by the partner in 2020. The remaining 50% of such excess business interest expense shall be subject to the limitations in the same manner as any other excess business interest expense so allocated. Each partner has the ability, under regulations to be prescribed by Treasury, to elect to have this special rule not applied. No rules are provided for application of this rule in the context of tiered partnership structures.

Net operating losses carryback allowed for taxable years beginning in 2018 and before 2021
The CARES Act provides for an elective five-year carryback of net operating losses (NOLs) generated in taxable years beginning after December 31, 2017, and before January 1, 2021. Taxpayers may elect to relinquish the entire five-year carryback period with respect to a particular year’s NOL, with the election being irrevocable once made. In addition, the 80% limitation on NOL deductions arising in taxable years beginning after December 31, 2017, has temporarily been pushed to taxable years beginning after December 31, 2020. 

Several ambiguities in the application of Section 172 arising as a result of drafting errors in the Tax Cuts and Jobs Act have also been corrected. As certain benefits (i.e., charitable contributions, Section 250 “GILTI” deductions, etc.) may be impacted by an adjustment to taxable income, and therefore reduce the effective value of any NOL deduction, taxpayers will have to determine whether to elect to forego the carryback. Moreover, the bill provides for two special rules for NOL carrybacks to years in which the taxpayer included income from its foreign subsidiaries under Section 965. Please consider the impact of this interaction with your international tax advisors. 

However, given the potential offset to income taxed under a 35% federal rate, and the uncertainty regarding the long-term impact of the COVID-19 crisis on future earnings, it seems likely that most companies will take advantage of the revisions. This is a technical point, but while the highest average federal rate was 35% before 2018, the highest marginal tax rate was 38.333% for taxable amounts between $15 million and $18.33 million. This was put in place as part of our progressive tax system to eliminate earlier benefits of the 34% tax rate. Companies may wish to revisit their tax accounting methodologies to defer income and accelerate deductions in order to maximize their current year losses to increase their NOL carrybacks to earlier years.

Alternative minimum tax credit refunds
The CARES Act allows the refundable alternative minimum tax credit to be completely refunded for taxable years beginning after December 31, 2018, or by election, taxable years beginning after December 31, 2017. Under the Tax Cuts and Jobs Act, the credit was refundable over a series of years with the remainder recoverable in 2021.

Technical correction to qualified improvement property
The CARES Act contains a technical correction to a drafting error in the Tax Cuts and Jobs Act that required qualified improvement property (QIP) to be depreciated over 39 years, rendering such property ineligible for bonus depreciation. With the technical correction applying retroactively to 2018, QIP is now 15-year property and eligible for 100% bonus depreciation. This will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries. Taxpayers that placed QIP into service in 2019 can claim 100% bonus depreciation prospectively on their 2019 return and should consider whether they can file Form 4464 to quickly recover overpayments of 2019 estimated taxes. Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible. For C corporations, in particular, claiming the bonus depreciation on an amended return can potentially generate NOLs that can be carried back five years under the new NOL provisions of the CARES Act to taxable years before 2018 when the tax rates were 35%, even though the carryback losses were generated in years when the tax rate was 21%. With the taxable income limit under Section 172(a) being removed, an NOL can fully offset income to generate the maximum cash refund for taxpayers that need immediate cash. Alternatively, in lieu of amending the 2018 return, taxpayers may file an automatic Form 3115, Application for Change in Accounting Method, with the 2019 return to take advantage of the new favorable treatment and claim the missed depreciation as a favorable Section 481(a) adjustment.

Effects of the CARES Act at the state and local levels
As with the Tax Cuts and Jobs Act, the tax implications of the CARES Act at the state level first depends on whether a state is a “rolling” Internal Revenue Code (IRC) conformity state or follows “fixed-date” conformity. For example, with respect to the modifications to Section 163(j), rolling states will automatically conform, unless they specifically decouple (but separate state ATI calculations will still be necessary). However, fixed-date conformity states will have to update their conformity dates to conform to the Section 163(j) modifications. 

A number of states have already updated during their current legislative sessions (e.g., Idaho, Indiana, Maine, Virginia, and West Virginia). Nonetheless, even if a state has updated, the effective date of the update may not apply to changes to the IRC enacted after January 1, 2020 (e.g., Arizona). 

A number of other states have either expressly decoupled from Section 163(j) or conform to an earlier version and will not follow the CARES Act changes (e.g., California, Connecticut, Georgia, Missouri, South Carolina, Tennessee (starting in 2020), Wisconsin). Similar considerations will apply to the NOL modifications for states that adopted the 80% limitation, and most states do not allow carrybacks. Likewise, in fixed-dated conformity states that do not update, the Section 461(l) limitation will still apply resulting in a separate state NOL for those states. 

These conformity questions add another layer of complexity to applying the tax provisions of the CARES Act at the state level. Further, once the COVID-19 crisis is past, rolling IRC conformity states must be monitored, as these states could decouple from these CARES Act provisions for purposes of state revenue.

2020 recovery refund checks for individuals
The CARES Act provides eligible individuals with a refund check equal to $1,200 ($2,400 for joint filers) plus $500 per qualifying child. The refund begins to phase out if the individual’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). The credit is completely phased out for individuals with no qualifying children if their AGI exceeds $99,000 ($198,000 for joint filers and $136,500 for head of household filers).

Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, or trusts. Eligible individuals and qualifying children must all have a valid social security number. For married taxpayers who filed jointly with their most recent tax filings (2018 or 2019) but will file separately in 2020, each spouse will be deemed to have received one half of the credit.

A qualifying child (i) is a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them, (ii) under age 17, (iii) who has not provided more than half of their own support, (iv) who has lived with the taxpayer for more than half of the year, and (v) who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.

The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their 2018 or 2019 tax return, as appropriate. If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return.

Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099). Other individuals may be required to file a return to receive any benefits.

The CARES Act provides that the IRS will make automatic payments to individuals who have previously filed their income tax returns electronically, using direct deposit banking information provided on a return any time after January 1, 2018.

Charitable contributions

  • Above-the-line deductions: Under the CARES Act, an eligible individual may take a qualified charitable contribution deduction of up to $300 against their AGI in 2020. An eligible individual is any individual taxpayer who does not elect to itemize his or her deductions. A qualified charitable contribution is a charitable contribution (i) made in cash, (ii) for which a charitable contribution deduction is otherwise allowed, and (iii) that is made to certain publicly supported charities.

    This above-the-line charitable deduction may not be used to make contributions to a non-operating private foundation or to a donor advised fund.
  • Modification of limitations on cash contributions: Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Any such contributions in excess of the 60% AGI limitation may be carried forward as a charitable contribution in each of the five succeeding years.

    The CARES Act temporarily suspends the AGI limitation for qualifying cash contributions, instead permitting individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the excess of the individual’s contribution base over the amount of all other charitable contributions allowed as a deduction for the contribution year. Any excess is carried forward as a charitable contribution in each of the succeeding five years. Taxpayers wishing to take advantage of this provision must make an affirmative election on their 2020 income tax return.

    This provision is useful to taxpayers who elect to itemize their deductions in 2020 and make cash contributions to certain public charities. As with the aforementioned above-the-line deduction, contributions to non-operating private foundations or donor advised funds are not eligible.

    For corporations, the CARES Act temporarily increases the limitation on the deductibility of cash charitable contributions during 2020 from 10% to 25% of the taxpayer’s taxable income. The CARES Act also increases the limitation on deductions for contributions of food inventory from 15% to 25%.

We are here to help
Please contact a BerryDunn professional if you have any questions, or would like to discuss your specific situation.

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The CARES Act: Implications for businesses

In a closely held business, ownership always means far more than business value. Valuing your business will put a dollar figure on your business (and with any luck, it might even be accurate!). However, ownership of a business is about much more than the “number.” To many of our clients, ownership is about identity, personal fulfillment, developing a legacy, funding their lifestyle, and much more. 

We explored the topic of what business ownership means on Wednesday, May 8th, in the final presentation of our value acceleration series, exploring how to increase business value and liquidity. In this final installment, we discussed the decision of whether to grow your business or exit, and which liquidity options are available for each path. 

While it may seem counterintuitive, we find that it is best to delay the decision to grow or exit until the very end of the value acceleration process. After identifying and implementing business improvement and de-risking projects in the discover stage and the prepare stage (see below), people may find themselves more open to the idea of keeping their business and using that business to build liquidity while they explore other options. 

Once people have completed the discover and prepare stages and are ready to decide whether to exit or grow their business, we frame the conversation around personal and business readiness. Many personal readiness factors relate to what ownership means to each client. In this process, clients ask themselves the following questions:

  • Am I ready to not be in charge?
  • Am I ready to not be identified as the business?
  • Do I have a plan for what comes next?
  • Do I have the resources to fund what’s next? 
  • Have I communicated my plan?

On the business end, readiness topics include the following:

  • Is the team in place to carry on without me?
  • Do all employees know their role?
  • Does the team know the strategic plan?
  • Have we minimized risk? 
  • Have I communicated my plan?

Whether you choose to grow your business or exit it, you have various liquidity options to choose from. Liquidity options if you keep your business include 401(k) profit sharing, distributions, bonuses, and dividend recapitalization. Alternatively, liquidity options if you choose to exit your business include selling to strategic buyers, ESOPs, private equity firms, management, or family. 

In our discussion about liquidity, we addressed several other topics that audience members were curious about. One of these topics was the use of earn-outs in the sale of a business. In an earn-out, a portion of the price of the business is suspended, contingent on business performance. The “short and sweet” on this topic is that we typically find them to be most effective over a two- to three-year time period. When selecting a metric to base the earn-out on (such as revenue, profit, or customer retention), consider what is in your control. Will the new owner change the capital structure or cost structure in a way that reduces income? Further, if the planned liquidity event involves merging your company into another company, specify how costs will be allocated for earn-out purposes. 

We also discussed rollover equity (receiving equity in the acquiring company as part of the deal structure) and the use of warrants/synthetic equity (incentives tied to increases in stock price). Here are some of the key points from this discussion:

  • Make sure you know how you will turn your rollover equity into cash.
  • Understand potential dilution of your rollover equity if the acquiring company continues to acquire other targets. 
  • Make sure the percentage of equity relative to total deal consideration is reasonable.
  • Seller financing typically has lower interest rates and favorable terms, so warrants are often attached to compensate the seller. 
  • Warrants are subject to capital gains tax while synthetic equity is typically ordinary income. As a result, warrants often have lower tax consequences.
  • Synthetic equity may work well for long-term incentive plans and for management buyouts. 

We enjoyed talking with business owners, management, and their advisors during this five-session series. We have found that through the value acceleration process, clients are able to increase business value and liquidity, giving them control over how they spend their time and resources.

If you are interested in learning more about value acceleration, please contact me. I would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations. 

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Decide: Value acceleration series part five (of five)