Reading the 880-Page Stimulus Package, Here's What I Learned

Your new normal may look like this.

Last week, we hosted our second webinar in the 90 Ways to Survive the Next 90 Days series. We covered the Families First Response Act and the CARES Act, which at the time had only passed the Senate.

Because we were still waiting for the bill's exact language to be released, much of our conversation was speculative. Our next webinar will focus exclusively on this stimulus bill and how bars and restaurants can use it to keep their business afloat during this global pandemic.

Reaching out to both legal and accounting experts, I obtained insight and an early copy of the stimulus package draft. The version that has since been released isn't much different from the Senate one.

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Over the latest quarantined weekend, I read the 880 pages of the stimulus plan. Stimulating it was not. However, it contains many relief options that our industry desperately needs yesterday.

While the bill contains all sorts of relief for our citizens, I narrowed my scope to what would be important to small businesses. While a business owner may also benefit from the individual payouts or student loan suspensions (payments are suspended until October 1), these notes are omitted.

Please note that I'm not a legal or accounting professional and my college professors usually took great issue with my attendance record. However, as best as this marketing major could muster, I've distilled the most interesting parts in the summary below. Consult your experts before making any major business decisions as this information is only a guide and not meant to be legal advice.

I suggest possibly working with a bigger firm as relates to these packages only because they'll have the resources and additional protections in place to comb through the massive amount of changes happening in record-setting time. This isn't a slight against one-(wo)man shops, I would just be extra cautious to avoid overlooking any important compliance steps.

Overview

The full name of CARES is Coronavirus Aid, Relief, and Economic Security Act. The full extent of how this program will be enacted is still being worked on but a number of outlets are reporting this information should be released this week. 

There was $350 billion carved out for small businesses in the form of forgivable loans, and they're very creatively referred to as "Section 7(a) loans." 

Eligibility

  • Small businesses are 500 employees or less, or businesses that meet the Small Business Administration's (SBA) size standard found here.
  • Individuals, 501(c)(3)s, and independent operators are also included.
  • Accommodations and food services that are NAICS 72, the 500-employee guideline applies to physical locations. The hospitality industry worries this opens up a loophole for larger chains to swoop in and grab these funds that were meant for small businesses. It's surprising this stipulation allowed for companies larger than 500 employees to have access to these funds when they were specifically exempted from the Families First Response Act. Facts, not politics—you decide.
  • The business was in operation before February 15, 2020 and had employees for whom they paid salaries and payroll taxes or paid independent contractors.

Lender Requirements

  1. Economic conditions are present that require capital infusion to sustain the business.
  2. Loan proceeds are going to be used to pay employees, rent/lease, and utilities. These are the costs that are forgivable.
  3. The business is not double-dipping with other loans and grants. If you have already applied for the SBA disaster loan, that should be okay. However, do not accept any of that money until after you have consulted your attorney and accountant to decide if you should pursue this money first.
  4. Loans are unsecured and, as such, do not require any collateral or personal guarantees. 
  5. These loans aren't issued based on the forecasted ability of the business to repay but are based on proof of impact on the business from COVID-19.

Loan Calculations

The maximum loan is 2.5 times the business' average monthly payroll or $10 million dollars, whichever is lesser value.

Calculating your average monthly payroll:

  • Seasonal Employers: 2.5 times the average payroll beginning February 15, 2019 or March 1, 2019 (the business can choose) and ending June 30, 2019.
  • Non-seasonal Employers: 2.5 times the average payroll cost for 2019. If your business didn't exist at that time, then the average payroll cost for January and February.

What’s included in your payroll cost:

  • Salary, wages, commission, payment cash tip, or equivalent.
  • Payments for vacation, parental, family, medical, or sick leave.
  • Allowances for dismissal or separation, e.g. severances.
  • Group health care benefits including insurance premiums.
  • Payment of state and local tax assessed on the compensation of employees.
  • For sole proprietors, independent contractors, and self-employed, the sum of compensation that's less than $100,000.

Excluded payroll costs:

  • Compensation of any employees with annual salaries over $100,000.
  • Payroll taxes, railroad retirement taxes, and income taxes.
  • Compensation for any employees whose primary residence is outside the United States.
  • Qualified wages from the Families First Response Act that is already a tax credit.

Loan Forgiveness Rules

The amount of the loan that may be forgiven may be proportionally reduced from the 2.5x multiplier if the number of full-time equivalents (FTE) is less than the previous periods (whichever formula was used above in calculating your average monthly payroll), or if the wages were reduced by 25 percent. The program does allow for forgiveness for additional wages being paid to tipped employees.

Note: If a business did terminate its staff, the business may bring any of those employees back and the loan will still be forgivable if the number of employees and wages are brought back to previous levels before June 30, 2020.. The full-time employees do not have to be the same workers you terminated and all that matters if your staff levels

For any amounts that aren't forgiven, the loan rate will be four-percent, fixed interest rate loan. Prepayment fees aren't allowed and the maximum term is ten years. Note that loan origination fees will still apply and won't be forgiven. The market will determine the processing fee costs and a uniform standard should be established fairly quickly. 

Where and When Will The 7a Loans Be Available

The SBA has yet to issue guidance to financial institutions but nearly any bank that a business is already working with will be able to issue these loans. 

The Forms You Should Get Ready

While this list isn't official, it's a good starting point to make sure you're first in line for these loans. Don’t hesitate—there's no telling what will happen when the $350 billion is exhausted, which will happen faster than you think. 

  • Payroll reports for 2019 and 2020
  • 1099s for independent contractors 
  • State and local tax forms 
  • Completed 2019 tax return OR 2019 accounting forms including P&Ls and Balance Sheets
  • Group health benefits, premiums, and retirement benefits from 2019 and 2020
  • Quarterly IRS forms 940, 941, or 944 from March 31 to June 30 for both 2019 and again in 2020 when available
  • Receipts for mortgages, rent payments, and utilities from Feb 15th to June 30th 

Other notes

  • Employee Retention Credit for a business that has been fully or partially shut down or had their receipts drop by more than 50 percent in a given quarter. 
  • Deferment of the 6.2 percent employer Social Security payroll taxes from March 27, 2020, to the end of 2020. They must be paid by the end of 2021 and 2022.
  • Net operating losses (NOLs) no longer have an 80 percent income limitation for NOL carryover for tax years before Jan 1, 2021. These NOLs may also be carried by five years. 
  • The excess business loss limitation rule for non-corporate taxpayers is also suspended for 2018-2020. It was $250,000 for individuals, $500,000 for joint returns. 
  • Corporate Alternative Minimum Tax (AMT) was accelerated and may be claimed fully in 2018 or 2019.
  • The amount of business interest expense that may be deducted was increased from 30 percent to 50 percent for tax years 2019 and 2020.
  • Qualified Improvement Property (QIP) was updated to be treated as a 15-year property subject to 100 percent bonus depreciation, retroactive to Jan 1, 2018. This was more of a technical issue that came out of the Tax Cuts and Jobs Act that included an error of QIP having a 39-year life being ineligible for depreciation.
  • CARES Act waives the 10-percent withdrawal penalty for COVID-19-related distributions up to $100,000. This possibly opens up another avenue to infuse cash into the business (please be careful here).
  • The deductions for charitable contributions were increased: 50 percent adjusted gross income (AGI) limitation for 2020 for individuals; 25 percent AGI limitation for corporations in 2020; food inventory contributions limit raised from 15 percent to 25 percent. If you are giving away food to those in need during this time, make sure to document your costs!

Lastly, while we hope bankruptcy isn't an option owners and operators will need to choose, the following changes were made: 

  • The Small Business Reorganization Act was amended to increase the eligibility threshold to file under subchapter V of chapter 11 of the U.S. Bankruptcy Code to businesses with less than $7,500,000 of debt. The increase sunsets after one year and the eligibility threshold returns to $2,725,625.
  • The definition of income in the Bankruptcy Code for chapters 7 and 13 was amended to exclude coronavirus-related payments from the federal government from being treated as “income” for purposes of filing bankruptcy. Sunsets after one year.
  • The calculation of disposable income was clarified for the purpose of confirming that a chapter 13 plan shall not include coronavirus-related payments. Sunsets after one year.
  • Individuals and families currently in chapter 13 are explicitly permitted to seek payment plan modifications if they're experiencing a material financial hardship due to the coronavirus pandemic, including extending their payments for up to seven years after their initial plan payment was due. Sunsets after one year.

Note: This information will be updated for clarification and process as more information is shared with us.

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