COVID-19 Economic Relief Through Small Business Loans and Payroll Tax Deferral
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COVID-19 Economic Relief
Through Small Business Loans
and Payroll Tax Deferral
Peter J. Walsh, J.D. and Jeffrey A. Bartlett, MBA
pwalsh@vonbriesen.com jbartlett@vonbriesen.com
von Briesen & Roper, s.c.
20975 Swenson Drive, Suite 400
Waukesha, WI 53186
Milwaukee | Madison | Fox Valley - Green Bay | Waukesha County
www.vonbriesen.comSBA Loans & The CARES Act • Introduction: von Briesen is a long-established Wisconsin law firm with more than 180 lawyers with offices throughout the State and with expertise in all areas of business law • COVID-19 Taskforce: Taskforce made up of a broad base of legal practice areas to study and report on legal issues arising out of the COVID-19 pandemic • Resources: Legal updates prepared by the Taskforce are available at vonbriesen.com/COVID-19
SBA Loans & Cares Act • Our COVID-19 Taskforce is examining the benefits offered by the Small Business Administration and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) for Wisconsin small businesses • The scope of the CARES Act and other relief initiatives introduced to mitigate the economic damage of the pandemic are broad and fluid; they are being examined by our business, labor, tax, banking and estate planning sections
SBA Loans & Cares Act
• Major programs now available to WI small businesses include:
– The Economic Injury Disaster Loans Program
– The Paycheck Protection Program
– Loan Forgiveness Program
– Business tax adjustments and deferrals including a deferral of
payroll taxes
• Since the administration of these programs is currently in flux,
businesses seeking to benefit from them need to investigate
further before pursuing a particular optionSBA Loans:
Economic Injury Disaster Loan Program
• The Economic Injury Disaster Loan (“EIDL”) Program was launched following
the declaration of the national emergency on March 13, 2020
• EIDL provides for loans to small businesses under these favorable terms:
– Maximum principal amount of $2M – amount of loan is based on the actual injury
incurred by the business (lost revenue) which is capped at $2M
– Interest rate of 3.75% (or 2.75% for non-profits)
– Maximum term of 30 years
– No personal guarantee required for loans of $200,000 or less
– Loans of more than $200,000 require a personal guarantee from any owner with a
greater than 20% ownership interest
– Collateral may be required for loans of more than $25,000
– The “credit elsewhere” test is being waivedSBA Loans:
Economic Injury Disaster Loan Program (continued)
• EIDL Loans can be used for working capital, i.e., mortgage payments, payroll, accounts
payable, utility payments, or vehicle payments
• EIDL Loans cannot be used to refinance existing debt, to replace lost sales or profits, or
to fund purchases of equipment, vehicles and supplies; EIDL Loans are not meant for
business expansion
• EIDL Loans are available to small businesses which are generally defined to include:
– Business with less than 500 employees, including all employees of affiliates under a common
control regardless of their individual location
– Business with more than 500 employees that constitutes a small business under SBA Size
Standards: https://www.sba.gov/size-standards
– Business operated by an individual as a sole proprietorship or as an independent contractor,
with or without employees
– Business must have been in operation on January 31, 2020 and must have been directly
affected by COVID-19SBA Loans:
Economic Injury Disaster Loan Program (continued)
• A business is disqualified from obtaining an EIDL loan if:
– Business is engaged in any illegal activity (as defined by Federal guidelines)
– A principal of the Business with a 50% or greater ownership interest is more than 60 days
delinquent on child support obligations
– Business is an agricultural enterprise other than an aquaculture enterprise, agricultural
cooperative, or nursery (extensive lobbying effort to eliminate this limitation)
– Business presents live performances of a prurient sexual nature or derives directly or indirectly
more than de minimis gross revenue through the sale of products or services, or the
presentation of any depictions or displays, of a prurient sexual nature
– Business derives more than 1/3 of gross annual revenue from legal gambling activities
– Business engages in lobbying, or
– Business is a state, local, or municipal government entity or a principal of the Business is a
member of CongressSBA Loans:
Economic Injury Disaster Loan Program (continued)
• EIDL Loans can be obtained online with the Small Business Administration:
https://covid19relief.sba.gov/#/
• SBA is aiming to make a final determination on EIDL Loans applications within 21 days
• Applicants are permitted to obtain more than one EIDL Loan but the loans cannot be consolidated,
i.e., a business may have an existing EIDL Loan for flood damage and be able to get a second EIDL
Loan for COVID-19 economic injury
• If SBA denies Loan request, the applicant has 6 months to provide new information and submit a
written request for consideration – Only one additional request may be made
• SBA can provide an emergency advance on an EIDL Loan of up to $10,000 to be paid within 3 days of
application
– This advance is essentially a grant and is not required to be repaid, even if the application is denied, if the
funds are used for qualified expenses such as payroll, sick leave, or making rent or mortgage payments
– but the amount of the advance must be deducted from any loan forgiveness amount under the Paycheck
Protection Program described below
• There may be multiple disbursements of an EIDL loan with the maximum amount of the first
disbursement being no more than $25,000SBA Loans: Economic Injury Disaster Loan Program (continued) • The general deadline for filing an EIDL Loan application is December 16, 2020 with some variation among the states • SBA authority to grant EIDL Loans for COVID-19 ends on December 30, 2020 • First payment on a EIDL Loan is due 12 months after the funds are issued (interest accrues during the deferment period) • SBA is granting an automatic deferment for existing disaster loans through December 31, 2020 • WEDC is offering a $20,000 grant to certain businesses with 20 or few employees and annual revenues of less than $2,000,000 – Must have a current loan with a community development financial institution
EIDL Program: Lessons from the Field • The $10,000 upfront payments have been coming fairly quickly (some within three business days from application) • $10,000 does not require payback, even if the loan application is denied • Online application takes at least two hours to prepare, must be submitted digitally, and all supporting documentation must all be submitted digitally to the SBA • Each 20% or more owner must be a co-applicant and certify that the application is accurate • If you have a loan agreement in place, it is best to notify them of your EIDL before you submit it
SBA Loans: Paycheck Protection Program
• Through the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, Congress allocated $350B
to support small businesses through the Paycheck Protection Program (“PPP”)
– PPP is set forth in Section 1102 of the Act; Section 1106 of the Act addresses the forgiveness of
PPP Loans
– Detailed rules for the administration of the PPP are set forth in
• Interim Final Rule – 13 C.F.R. Part 120 – Docket No. SBA-2020-0015 and 13 C.F.R. Part 121
– Docket No. SBA-2020-1
• Fact Sheets and Frequently Asked Questions released by the U.S. Treasury and the SBA
which are available at www.sba.gov
• Through the PPP, the SBA has the authority to provide 100% federally backed loans to help
businesses pay operational costs such as payroll, rent, and utilities
• If a business satisfies certain conditions, a portion of a PPP Loan is forgivable
• PPP Loans are available through June 30, 2020, or until funds made available for this purpose are
exhausted, application must be made on or before June 30, 2020
• Eligible borrowers are only entitled to one PPP Loan, so consider applying for the maximum amountSBA Loans: Paycheck Protection Program
(continued)
• PPP Eligibility Threshold for Applicant Businesses:
– Businesses (including, sole-proprietors, independent contractors, and other self-employed
individuals) with fewer than 500 employees
– 500-employee threshold includes all employees: full-time, part-time and any other status
– Certain businesses, such as those in the hospitality and food sectors which have multiple locations,
can have up to 500 employees per physical location
– Employees of individual franchises operated by separate owners are not aggregated under the SBA
normal affiliation rules
– Certain non-profits with fewer than 500 employees
– Businesses with more than 500 employees may qualify if they satisfy the existing statutory and
regulatory definition of a “small business concern” under section 3 of the Small Business Act, 15
U.S.C. 632; the SBA Size Standards for various industries can be found at
https://www.sba.gov/size-standards
– The business (including sole-proprietors, independent contractors, other self-employed individuals)
must have been both in operation on February 15, 2020 and paying salaries, compensation and
payroll taxes to employees or paid independent contractors for services renderedSBA Loans: Paycheck Protection Program
(continued)
• A business is ineligible for a PPP Loan, if:
– It is engaged in an illegal activity under federal, state or local law;
– It employees only household employees such as nannies and
housekeepers;
– It is delinquent or has been in default of a guaranteed loan from
SBA or any other Federal agency within the last seven years; or
– An owner of 20% or more of the business is incarcerated, on
probation, on parole; presently subject to an indictment or other
form of criminal charge; or has been convicted of a felony within
the last five yearsSBA Loans: Paycheck Protection Program
(continued)
• Maximum PPP Loan Available to a Business:
– Is based upon the average total monthly payroll costs incurred by
the business during the 1-year period before the date of the loan
– An adjustment to this 1-year period is available for businesses
with a seasonal workforce
– Each eligible business may receive up to 2.5x its average monthly
payroll costs subject to a $10M maximum
• PPP Loans are subject to a maximum term of 2 years and
an interest rate of 1%SBA Loans: Paycheck Protection Program
(continued)
• Determining the maximum PPP Loan, payroll costs are calculated by:
– Adding the amount of wages, salaries, commissions, tips, certain employee benefits
(including health insurance and retirement benefits), and state and local taxes, and
– Subtracting the amount of compensation of an individual employee in excess of
annual salary of $100,000, foreign employees, and qualified sick leave wages for
which a credit is allowed under section 7001 of the FFCRA
– Exclusion of compensation in excess of $100K annually applies only to cash
compensation, not to non-cash benefits, like employer contributions to retirement
plans and payment for group health care coverage
– Amounts paid to an independent contractor are excluded from eligible payroll costs;
independent contractors can make their own application
– Payroll costs are calculated on a gross basis without reduction for taxes imposed
under FICA or income taxes to be withheld for the employeeSBA Loans: Paycheck Protection Program
(continued)
• Allowable Uses of PPP Loan Funds Includes:
– payroll costs
– costs related to continuation of group health care benefits during periods
of paid sick, medical, or family leave, and insurance premiums
– interest payments on any mortgage
– rent and utility payments
– interest payments on any other debt obligations incurred before February
15, 2020
– Refinancing an EIDL Loan made during the period of January 31, 2020 and
April 3, 2020
– 75% of the PPP Loan must be used for payroll costsSBA Loans: Paycheck Protection Program
(continued)
• A business can obtain both a EIDL Loan and a PPP Loan, but the
acquired funds must be used for different purposes
– An EIDL Loan which was not used for payroll cost has no impact on the
amount of an available PPP Loan
– Amount of EIDL Loan used for payroll must be refinanced with a PPP Loan
• Example: if a business uses an EIDL Loan to cover a portion of the 8-week
payroll period, the amount of the EIDL used for the purpose essentially rolls
into the PPP Loan
• Example: if a PPP Loan is exhausted in 6 weeks and an EIDL Loan is used for
the final 2 weeks of the period, this does not constitute double dipping, and
the entire 8 weeks of loans may be forgiven
– An amount of an advance on EIDL (grant portion) reduces the amount of a
PPP Loan which can be forgivenSBA Loans: Paycheck Protection Program
(continued)
• Other key features of a PPP Loan include:
– No collateral or personal guarantees
– Typical loan fees are waived
– Payments of principal and interest are deferred for 6 months to 1
year
– No prepayment penalty
– No requirement to show that credit is not available elsewhere
– Interest rate of 1% and term of 2 years
– Potential loan forgivenessSBA Loans: Paycheck Protection Program
(continued)
• Applicants for a PPP Loan must make a good faith certification that:
– Business was in operation on February 15, 2020
– Current economic uncertainty makes the loan request necessary to support the
ongoing operations of the business
– Funds will be used to retain workers and maintain payroll or make mortgage
payments, lease payments, and utility payments – not more than 25% of the funds
may be used for non-payroll costs
– Business does not have an application pending for a loan, under EIDL or PPP, which
has duplicative purpose and amount
– From February 15, 2020 to December 31, 2020, business has not received amounts,
under EIDL or the PPP, for the same purpose or duplicative amounts
– Misuse of funds or knowingly false statement on application could constitute fraud
• Lenders can rely on this certification to determine eligibility for a PPP LoanSBA Loans: Paycheck Protection Program
(continued)
• PPP Loans are offered by authorized commercial lenders and
not the SBA directly
• Businesses should check with their commercial lender to
determine:
– Whether the lender is authorized to provide a PPP Loan
– Whether a PPP Loan may conflict with a provision in their current
loan documents
– List of participating lenders: www.sba.gov
• Application process is in operation but the procedures are
subject to regulatory change (PPP Applications – SBA Form 2483
are available online)SBA Loans – Forgiveness of PPP Loans
• PPP loans are eligible for loan forgiveness for the amount of certain expenses incurred
during 8-week period beginning on the date of the loan origination
• Maximum amount of forgiveness is the lessor of the full principal amount of the loan
Plus any accrued interest or the total cost incurred by the business during the covered
period for the following expenses:
– Payroll costs (using the same definition of payroll costs used to determine the maximum
amount of the PPP Loan)
– Interest on real or personal property mortgage obligations in existence before February 15,
2020 and incurred in the ordinary course
– Rent under a lease agreement in force before February 15, 2020
– Utility payments, including electricity, gas, water, transportation, telephone or internet, for
which service began before February 15, 2020
– Not more than 25% of the loan forgiveness amount may be attributable to a non-payroll cost
• Documentation required to support the amount of available forgivenessSBA Loans – Forgiveness of PPP Loans
(continued)
• The maximum amount of available loan forgiveness is
reduced if there is either:
– A reduction in the number of employees, or
– A reduction of greater than 25% in wages paid to employees, who
earn less than $100,000 annually.
• Amount of reduction in loan forgiveness related to the
number of employees is calculated by multiplying the
amount of payroll costs used to calculate the amount of a
PPP Loan by the percentage of a decline in payroll during
the covered periodSBA Loans – Forgiveness of PPP Loans
(continued)
• Amount of reduction is calculated as follows:
– Multiplying the amount of payroll costs used to
calculate the amount of a PPP Loan by a quotient
obtained by:
– Dividing the average number of FTEs per month for the
covered period by the average number of FTEs during a
period, at the election of the borrower, of either
• February 15, 2019 to June 30, 2019, or
• January 2, 2020 to February 29, 2020
• Payroll x (FET for Covered Period/FET for Elected Period)SBA Loans – Forgiveness of PPP Loans
(continued)
• Amount of reduction in available loan forgiveness related to salary or
wages equals the amount of any reduction in total salary or wages of
any employee, who makes less than $100,000 annually, during the
Covered Period that is more than 25% of the total salary or wages of
the employee during the most recent full quarter
• A reduction in salary or wages in an amount of less than 25% appears
to cause no reduction to the amount of PPP Loan which can be
forgiven
• At least 75% of a PPP Loan needs to be used for payroll so a reduction
of payroll by more than 25% could disqualify the loan for PPP Loan
statusSBA Loans – Forgiveness of PPP Loans
(continued)
• Reduction to available loan forgiveness related to a reduction in the
number of employees or the amount of salary and wages is eliminated
if, by June 30, 2020, the borrower has eliminated the reduction in
number of employees or the reduction to the amount of salary and
wages; rehiring by June 30th can maximize the loan forgiveness
• Borrower shall submit application for loan forgiveness to the lender
that is servicing the loan
• Lenders have 60 days to issue a decision on loan forgiveness
• Amount of interest or principal forgiven is excluded from the
borrowers taxable income
• Portion of the PPP Loan not forgiven continues according to termsPPP: Lessons From the Field • Some banks are performing better than others in accepting and processing applications • Most are giving preference to existing customers - Know Your Customer rules are cited by many for this • Each bank has it own interpretation of calculating loan amounts (check with your bank first) • Some require filling out a bank provided spreadsheets and supporting documentation requirements vary • Guidance on the calculation of the forgiveness is still being refined by the SBA. Your bank will have to verify your calculations. Consider a separate account for the proceeds to properly document forgiveness calculations
CARES Act – Deferral of Payroll Taxes • Under the CARES Act, businesses can defer paying the employer’s portion of employment taxes – known as FICA taxes, which amount to 6.2% - for the period of March 27, 2020 to December 31, 2020 • 50% of the deferred amount is required to be paid on or before December 31, 2021 and the balance is required to be paid on before December 31, 2022. • Payroll taxes related to Medicare are not deferred
CARES Act – Deferral of Payroll Taxes
(continued)
• No interest is charged on deferred payroll taxes so the provision
constitutes an interest free loan
• Employer is deemed to have made timely deposit of deferred
payroll taxes, if payment is made no later than the applicable
dates, i.e., December 31, 2021 and December 31, 2022
• Identical deferral is allowed for half of the SECA taxes paid by
self-employed individuals
• CARES Act does not put any size limitation on the businesses
which can defer payroll taxes; it is available to large and small
companies as well as self-employed individualsCARES Act – Deferral of Payroll Taxes
(continued)
• Critical caveat to the deferral of payroll taxes is it may
disqualify a business from the forgiveness of a PPP Loan
• Importantly, CARES Act indicates that a business can both
secure a PPP Loan and defer payroll taxes; it just cannot
seek the forgiveness of a portion of the PPP Loan if it
intends to defer payroll taxes
• Creates an issue of timing because the option to defer
payroll taxes and to seek a PPP Loan exist now while the
potential for forgiveness will not arise for at least 8 weeksCARES Act – Deferral of Payroll Taxes
(continued)
• It is unclear whether the mere receipt of a PPP Loan disqualifies a
business from delaying payroll tax payments or just accelerates the
due date of the payment of such taxes to the date of the PPP Loan
forgiveness and whether interest and penalties might apply to
deferred payroll taxes paid upon PPP Loan forgiveness
• Until this issue is resolved, businesses seeking a PPP Loan should
closely examine the issue of whether a payroll tax deferral will
disqualify them for forgiveness
• The way the CARES Act is written, it appears to allow a self-employed
individual to take advantage of both the forgiveness of the PPP Loan
and the deferral of half of the SECA taxesSBA Loans & The CARES Act
Thank you.
Peter J. Walsh, Esq. Jeffrey A. Bartlett, MBA
pwalsh@vonbriesen.com jbartlett@vonbriesen.com
von Briesen & Roper, s.c. von Briesen & Roper, s.c.
20975 Swenson Drive, Suite 400 411 East Wisconsin Avenue, Suite 1000
Waukesha, WI 53186 Milwaukee, WI 53202You can also read
