After digesting and reading everything I can with regards to the CARES Act, here is my current thinking on how to best maximize and utilize the benefits to the fullest.
These are my thoughts as of this moment. As we have gone through this past week, what we thought we knew on Monday changed on Tuesday and so on. Some of the rules and guidance has shifted and changed and will probably continue to do so.
Also, we released a video regarding some payroll tax credits and then was alerted that the way we thought about the Employer Retention Credit was not right, so I am going to create a new video on that.
So with that being said, here is what we are thinking.
- Apply for both the SBA Economic Disaster Loan (EIDL) and SBA Paycheck Protection Program Loan (PPP)
Right now, this will get you in line for both loans and you then can decide whether you want to take those loans or not. When you apply for the PPP loan, you will get the amount you qualify for at that time and can identify if that makes sense. If the PPP loan is less than $10,000, you should not take the loan because the $10,000 emergency grant you get from the EIDL reduces your PPP loan. So anything less than $10,000 for PPP does not make sense to take if you applied for the EIDL.
- You can have both the SBA EIDL and PPP at the same time… maybe?
Right now guidance on this is hazy, but there was a FAQ put out by a Senate subcommittee that states you can get both the EIDL and the PPP as long as the purposes are different. Initial guidance had stated that Coronavirus relief was the purpose of the loans and therefore you could not have both. There was also some thought that SBA rules prohibited holding both 7a and 7b loans, but as we keep on going here the rules are being changed and loosened.
There was some information passed along by a bank president last night that suggested you can only have one or the other. So all of that to say, I don’t know and I am not sure anyone knows for certainty.
Now, one issue that could happen is that when the loan forgiveness attestation needs to happen they will also look to ensure that the EIDL loans were used for different purposes.
There is also guidance that you can refinance EIDL loans into the PPP Loans so you only hold one loan if you were planning to use EIDL loans for payroll or rent purposes.
- A decision needs to be made between taking the PPP Loan and the Employer Retention Credit.
One of the things the CARES act did was to create two mechanisms to keep people employed at small businesses. The PPP gives you a loan in the amount for 2.5x your average monthly payroll costs. This basically gives you 10 weeks of payroll to keep your employees employed.
The employer retention credit will give you a 50% credit of qualifying employee wages up to $10,000 in wages in a year for qualifying quarters. Qualifying quarters are quarters that your business is forced to shut down or partially shut down due to COVID-19 or your revenues dropped more than 50% from the same quarter in the prior year.
Since the employer credit is a 50% credit, the question becomes, do you think your business will be impaired and qualify for this credit for more than 20 weeks (assuming you keep payroll and employees the same and don’t hit the $10k in wages per employee). If so, the ERC might make sense. However, if this does go on for 20 weeks, you might make decisions to lower your payroll costs, which would limit the credit and there is a chance there is round 2 of the PPP.
We are going to put together a spreadsheet calculator to figure out what the best path is between the PPP and ERC.
Based on this calculator and running scenarios, I don’t see how the ERC would ever be better than the PPP, but it would depend on each situation.
- Its possible that 1099 contractors are included in the PPP loan, but no certainty.
Some banks have been asking for 1099s to be included in the wage amount for the PPP. Per the CARES act, this is not included, but some banks are believing that it is. I don’t know if it is or not, but I am also uncertain if it is included in the forgiveness or not. Again, talk with your banker.
We should have final guidance from the Treasury tonight or tomorrow on this.
Please let me know if you have any questions on this!