Small Business Relief:Answering Your Questions

Josh CaronAVP of Political Affairs

AALU/GAMA

Armstrong RobinsonVP of Legislative Affairs

AALU/GAMA

Ken KiesManaging Director

Federal Policy Group

Featuring

C19 – Relief Resources for Small Businesses

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

REVIEW: Relief for Employers

1. Delay Employer Payroll Taxes2. SBA Loans for Small Business3. Employee Retention Credit4. Short-term comp program5. NOL6. Sick Leave Requirements and Resources7. Q&A

Delay Employer Payroll Taxes

• The bill allows employers and self- employed individuals to defer payment of their share of the 6.2% Social Security tax they otherwise pay from 3/27/2020 through 12/31/2020. [no one makes more than $137,000/year]

• Those deferred taxes would be repaid over the next two years, with half required by 12/31/2021 and the other half by 12/31/2022.

• No dollar cap on the amount deferred.• Note: A small business or individual receiving loan forgiveness under the Paycheck

Protection Program is barred from delaying their payroll taxes.

Small Business Administration Resources

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

• Paycheck Protection Program (PPP) – up to $10 million• Treasury and SBA have issued new guidance to get the loans up and running by Friday, April 3, 2020• New Federal guidance limits the use of the loan forgiveness to 25% for non-payroll costs

• Economic Injury Disaster Loans (EIDL) – up to $2 million• Note: A small business may receive both PPP and EIDL loans, however, the funds must

be used for different purposes.

SBA: Eligibility

• Small business or non-profit with 500 or fewer employees• Sole proprietor, LLC, C-Corp, S-Corp, Independent contractors, Coops, ESOPs

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

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

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

SBA: Payroll Protection Plan

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

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

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

• Borrower Guidance v. Lender Guidance

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

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

SBA: Payroll Protection Plan

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

• Loans could equal up to 250% of average monthly total payroll costs incurred during the year prior.• Payroll costs exclude any compensation in excess of $100,000 for any individual.• Payroll costs include: salary, commissions, PTO, group health benefits including insurance premiums, retirement

benefits, state or local tax on comp. Can include owner comp up to the limits.• Your ICs do not count for your business calculation || they can make their own application• A business can bring back previously furloughed employees by 6/30/20

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

• Eligibility: Employers with fewer than 500 employees or meet the the NAIC designation, including 501(c)(3), sole proprietors, independent contractors. (incl. franchisees with < 500 per location)

• Apply –• First – contact your bank and ask about their 7(a) / PPP program• Second - SBA.gov has lender matching tools available

SBA: PPP Example 1

C Corporation 1• 5 employees (i.e., W-2s), each making, respectively, $50,000, $75,000, $75,000, $100,000, and

$200,000 per year, for a grand total of $500,000 in compensation paid for period one-year prior• Covered rent, covered leased equipment, and covered utilities total $1,750 per week

Answer: “Payroll costs” = all compensation paid (as limited by $100,000 cap)

Max loan amount = ($400,000 / 12) x 2.5 = $83,333.33Max forgiveness = (($400,000 / 52) x 8) + ($1,750 x 8) = $75,538.46

SBA: PPP Example 2

C Corporation 2• 3 employees (i.e., W-2s), each making, respectively, $50,000, $75,000, and $200,000 per year• 2 independent contractors (i.e., 1099s), each making, respectively, $75,000 and $100,000 per year, for a grand

total of $500,000 in compensation paid for period one-year prior

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

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

Max loan amount = ($225,000 / 12) x 2.5 = $46,875Max forgiveness = (($225,000 / 52) x 8) + ($1,750 x 8) = $46,875

(Note the impact of the overall limitation on loan forgiveness equal to the max loan amount)

SBA: PPP Example 3

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

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

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

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

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

Max forgiveness = (($225,000 / 52) x 8) + ($1,750 x 8) = $46,875 (Note the impact of the overall limitation on loan forgiveness equal to the max loan amount)

SBA: PPP Example 4

Business Owner who is a Sole Proprietor, Self-employed, or Independent Contractor• No employees• Pays two unrelated independent contractors (i.e., 1099s), each making, respectively, $75,000 and $100,000 per

year

• Net income of $325,000 for period one-year prior • Covered rent, covered leased equipment, and covered utilities total $1,750 per week

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

Max loan amount = ($100,000 / 12) x 2.5 = $20,833.33Max forgiveness = (($100,000 / 52) x 8) + ($1,750 x 8) = $20,833.33 (Note the impact of the overall limitation on loan forgiveness equal to the max loan amount)

SBA: PPP Examples

The following scenarios require certain inferences from the statutory language, regulations, and guidance from the SBA. New guidance will be coming out on a rolling basis and we will update our materials as conditions warrant.

Additional guidance is expected specifically on independent contractors by the end of this week.

SBA: PPP Example 5

Business Owner who is a Statutory Employee• No employees

• Pays two unrelated independent contractors (i.e., 1099s), each making, respectively, $75,000 and $100,000 per year

• Receives $100,000 as a statutory employee of a different business, and has net income of $225,000 for period one-year prior

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

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

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

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

(Note the impact of the overall limitation on loan forgiveness equal to the max loan amount)

SBA: PPP Example 5 - more

Further thoughts on Example 5:• Open issue here is that it is not precisely clear how to treat statutory employees under the

statute• It is likely, however, that a statutory employee who is not a common law employee is

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

• High degree of confidence in the result

SBA: PPP Example 6

S Corporation• No employees

• Owners each own 33.33 percent of the entity• Reasonable compensation paid to three owners of the S corporation is $150,000, each• $50,000 of residual profit in S corporation, allocated $13,333.33 to each owner• Covered rent, covered leased equipment, and covered utilities total $1,750 per week

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

Max loan amount = ($113,333.33 / 12) x 2.5 = $23,611.11Max forgiveness = (($113,333.33 / 52) x 8) + (($1,750 x 8) / 3) = $22,102.50

SBA: PPP Example 6 - more

Further thoughts on Example 6:• One open issue here is that it is not precisely clear how to treat passthrough entities

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

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

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

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

• Moderately high degree of confidence in the result

SBA: PPP Example 7

LLC – no employees• No employees• Four owners each own 25 percent of the entity• $500,000 of profit is allocated $125,000 to each owner• Covered rent, covered leased equipment, and covered utilities total $1,750 per week

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

Max loan amount = ($100,000 / 12) x 2.5 = $20,833.33Max forgiveness = (($100,000 / 52) x 8) + (($1,750 x 8) / 4) = $18,884.62

SBA: PPP Example 7 - more

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

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

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

• Moderately high degree of confidence in the result

SBA: PPP Example 8

LLC with employees• One employee, who makes $40,000 per year• Four owners each own 25 percent of the entity• $460,000 of profit is allocated $115,000 to each owner• Covered rent, covered leased equipment, and covered utilities total $1,750 per week

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

Max loan amount = ($110,000 / 12) x 2.5 = $22,916.66Max forgiveness = (($110,000 / 52) x 8) + (($1,750 x 8) / 4) = $20,423.08

Small Business Loans: Emergency

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

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

• Emergency EIDL Grant of $10,000 advance within 3 days, does not have to be repaid• Eligibility: Small business with less than 500 employees or defined by NAIC Industry

Code based on revenue and/or employees; Non-profits [including (c)(3) and (c)(6)] • Apply – SBA.gov

Employee Retention Credit

• A refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose:

• Operations were fully or partially suspended, due to a COVID-19- related shut-down order, or

• Whose gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.

• Note: Employers taking the SBA’s Paycheck Protection Program loan cannot receive the employee retention tax credit.

Net Operating Loss

• Allows businesses to carry back losses from 2018, 2019, and 2020 to the previous 5 years, which will allow businesses access to immediate tax refunds.

• Can result in positive cash flow if it results in a tax refund.

Sick Leave Requirement

• Beginning 4/2/2020

• 80 hrs (two weeks) of sick leave for full-time employees available for immediate use because he/she:

• Is sick or quarantined (paid at 100% of employer rate and capped at $511/day and $5,110/total)

• Caring for someone who is sick or quarantined and caring for a child or lost childcare (paid at 66.7% of employee rate and capped at $200/day and $2,000/total)

• Up to 12 weeks of expanded FMLA leave, unpaid during the first 10 days, and then paid at 66.7% of the employee rate (capped at $200/day and $10,000/total) and available to anyone after 30 days of employment

Sick Leave Requirement Resources

• The bill provides employer tax credits to help cover the cost of the employee leave benefits.

• Computed Quarterly

• For purposes of computing the amount of the credit, there are two relevant periods:• First Two Weeks: This credit relates to qualified sick leave wages paid. The credit amount depends

on whether the employee is sick, caring for a sick family member, or providing childcare to the employee's child:

• Employee Sick: The credit is the lesser of the daily wage or $511/employee, per day, for 10 days.

• Providing Care to Family Member/Childcare to Child: The credit is the lesser of the daily wage or $200/employee, per day, for 10 days.

• Next 10 Weeks: This credit relates to qualified family leave wages paid. The credit is the lesser of the daily wage or $200/employee, per day, with the credit capped at $10,000/employee for a given calendar quarter.

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