In BlueSky's latest LIVE Q&A Webinar, David Blain, CFA, explains COVID-19 Stimulus Programs for business owners and independent contractors. Click here to see the full video or read the full transcripts below.
Introduction with Stephen Fletcher:
Hello, everyone. Thank you for joining us today for our webinar, navigating the COVID-19 stimulus programs for business owners and independent contractors. My name is Stephen Fletcher. I'm a wealth advisor here in our New Bern office. I hope all of you attending are safe and healthy, as well as all of your families. For those of you who aren't aware, Blue Sky Wealth Advisors is a fee-only, holistic financial planning firm, and we service clients all over the United States and in multiple countries. Our CEO and founder, as well as the person who will be presenting today, David Blain, is a business planning expert and a regular speaker at national conferences and business leader summits.
First for a few housekeeping items, all attendees will be in listen only mode throughout the webinar. David will be happy to answer your questions, so please type them into the questions box during the webinar. We'll get those answered for you at the end. For those of you who submitted questions when registering, thank you for doing that. David has incorporated answers to your questions into his presentation. David, over to you.
Introduction with David Blain:
Okay, great. Thanks Stephen, appreciate that. Hope everybody is doing well today. Just to reiterate what Stephen said, today I'm really going to be focusing on the stimulus programs for business owners and independent contractors. I know there were some regular financial planning questions, and things like that. And today is really designed to go over some of these programs. A lot of confusion out there. The rules are evolving. You'll see as I go through this presentation, some things have changed over the weekend, in fact. I have successfully navigated a couple of these programs already, and so, I'm going to apply not only the theory behind what the federal government was doing when passing these, but also my personal experience.
We'll go ahead and get started here. We're going to talk about the two loan programs. Number one, the Paycheck Protection Program, PPP, as well as the Economic Injury Disaster Loan, the EIDL. And these are both administered through the SBA, the Small Business Administration. There were allocated approximately $350 billion for these programs. There's also two payroll items. Number one, employee retention credits, that are also available. And number two, deferred payroll taxes available for businesses. We'll go through those as well. And then finally, we have the enhanced unemployment insurance for those of you that may be employees, as well as a business owner, maybe you have a part-time business, or in certain instances, the business owner could possibly be eligible themselves for unemployment.
Paycheck Protection Program: Am I Eligible?
We’re going to start with the Paycheck Protection Program. I'm going to get that straight by the end of this briefing. It's a big mouthful. But anyway, this is probably going to be your first choice. If you're eligible for this, I've looked at all these different things, it probably has the most advantages to it. If you're eligible for this one, you probably want to go ahead and apply. You'll see that the majority of my slides are actually focused on this program itself.
So what businesses are eligible? Businesses with less than 500 employees, less than or equal 500. There are some affiliate rules in place for accommodation of food services, some of these giant businesses with multiple locations. The same thing with franchise. If you're one of those businesses, they've tried to make it easy for you to qualify based on the location, no more than 500 employees at one particular location. What's interesting about this is they've also opened the doors for non-profits to be eligible to apply for the Paycheck Protection Program. Additionally, this does apply to sole proprietors, independent contractors, self-employed, whatever you want to call yourself, who regularly carry on a trade or business. Okay. There was some confusion about that, as far as how that was going to be counted. So those folks are able to apply on their own for the Paycheck Protection Program. We'll get into more on how that's computed.
A couple other minor concerns, tribal business, veteran's organizations, are also part of this. Employees are defined as full-time, part-time, and a very broad basis of what constitutes an employee. And that, for the purposes of counting how many employees you have, 500, so if you're nowhere near that, don't worry about it. As you start getting close to that 500 number, that definition of what counts as an employee becomes pretty significant. But once again, if you're a business owner, you cannot count people that you pay as an independent contractor. They apply for their own Paycheck Protection Loan.
There was some early on that the language of the bill actually implies that a business owner would count the people that he pays as independent contractor. In fact, the first PPP loan application I did with my bank, it had me include that. Then they came back on Friday and said, "Whoa, no, that's not it." If you're independent contractor, you apply on your own. If you're a business owner, you do not count what you pay your independent contractors.
Your eligibility for this program may be impacted based on the EIDL, which we're going to talk about, the Economic Injury Disaster Loan. You can apply for both programs, but you can't use the money from both programs to cover the same expenses. There is some interaction between the two, but once again, there was some confusion on that. You can apply for both of them.
Paycheck Protection Program: Is My Business Ineligible?
Okay, this is some key information. Is my business ineligible? The SBA, the Small Business Administration, already has a bunch of rules in place. In fact, the EIDL is a program that's been in place for a number of years. We have some clients that applied for that with the California wildfires. Of course, here in North Carolina, hurricanes come into play. And so that program has been around for a while. And the SBA's standard operating procedure, 50 10 subpart B, chapter 2, lists a whole bunch of businesses that are not eligible. Business engaged in lending, like banks, passive businesses, this is going to pick up some of your developers, a lot of real estate businesses. The regulations for this are very complicated. I didn't want to go into detail today on that. But if you have a passive business in development, real estate, things like that, we'll have to walk through the rules very closely to see if you're eligible for this, because it only includes a small portion of passive type businesses.
Life insurance companies are not eligible, business in a foreign country or owned by illegal aliens. Here's a big one: businesses selling through a pyramid plan, as defined by the SBA, would include multi-level marketing, are not eligible for the Paycheck Protection Program. Businesses engaged in legal gambling activities are not eligible either. Even though it's legal, they're not eligible. Businesses engaged in any illegal activity, so you can't borrow money for that illegal activity of yours. Incidentally, this would also include marijuana, because as a federal law, marijuana is not legal. Businesses which restrict patronage, like membership type clubs, government owned entities, businesses that are engaged in promoting a specific religious belief. The SBA lenders themselves are not eligible.
This is the one I like: businesses with an associate of poor character. And there's about four or five pages of what that constitutes, but essentially, if you have one of the owners or partners or something, in jail, or committed a felony, you're not eligible for the program, although you can apply for waivers. Businesses providing [inaudible 00:10:46] and sexual material. Prior losses, if you defaulted on an SBA loan or delinquent federal debt, you're not eligible for this. If you're a political or lobbying company, you can't do it. And then the last one, which is interesting, you cannot use this loan for speculation. Speculation, they list different things: wildcatting for oil, stock and bond investing, type things like that. You cannot use it if your business is speculation. It's really important to understand those categories. If you think you fall into one of those, get with your advisor to really pull out the regulations. These are just the headline categories of who is ineligible.
Paycheck Protection Program: Loan Limit
Okay, so now let's look at what is the loan limit. The loan limit is the lesser of two and a half times your average payroll, essentially during 2019. Now, if you weren't in business in 2019, it's a little bit different calculation. If you were in business for 2019, my particular lender used the average monthly payroll of the entire year of 2019, which is pretty standard, or $10 million is the maximum of this loan program.
Paycheck Protection Program: What is Defined as Payroll Cost?
Here's where we get into some other controversy. Payroll cost is defined in the act. So first of all, payments for compensation for employees, salaries, wages, commissions, you can only count the first $100,000 that you pay for somebody. If you pay somebody $150,000 a year, you can only count $100,000 of their salary. It doesn't include cash tips, or the equivalent, vacation, parental, family leave. Although, if you're getting a credit under the FFCRA, which is the new sick leave and expansion of FMLA laws that was the second stimulus bill that was passed, you can't double dip. You can't count compensation for which you're receiving a tax credit under the FFCRA.
You can count money paid for dismissal or separation. You can count group health benefits, including premiums. You can also count payment of retirement benefits, the 401K matching, things like that, as well as the payment of state or local tax assessed on the compensation of employees. Not the withholdings for state and local tax, but if your business is assessed a tax on the compensation, that counts under that.
Now, for sole proprietors, independent contractors, self-employed, it's the same thing. If you pay yourself... By definition, a sole proprietor is not going to pay themselves a W-2 salary. So essentially, it's the self-employment compensation. So last year, if you filed a Schedule C, which all sole proprietors should do, you just look at your net earnings from self-employment, and that would be the amount that you were eligible for the Paycheck Protection Program. Once again, limited to $100,000.
Now, excluded from payroll, what's not counted, as I already mentioned, any wage in excess of $100,000, any payment for an employee whose principal residence is outside the US. If you have employees that work and live overseas, that does not count. What is not counted: federal employment taxes imposed or withheld under chapters 21, 22, or 24 of the code, between February 15 and June 30th of 2020. And this is where a lot of it gets confusing. Let me just mention first, the qualified sick leave wages, as I already mentioned, is not counted as wages. The exclusion of income tax withholding and FICA tax has been a lot of confusion. In fact, the AICPA sent out an email. We have a CPA here at Blue Sky that forwarded it on, and they were actually wrong. A lot of people have been. It's very confusing. But the interim guidance from the SBA that just came out on, I guess Thursday night, last Thursday night, does not subtract taxes withheld in the calculation, but neither does it allow for the FICA taxes to be added in that calculation.
And just so you know, I applied for and was approved by my lender for this program, and there were no payroll taxes allowed in the calculation of my loan, and I'm going to get into that. The bank I use, Live Oak Bank, it's actually the nation's largest SBA lender, and so they've been working directly with the SBA on this program, and they've got a pretty good grasp on it. But there's been a lot of confusion. When you're figuring out what your allowable costs are, you don't have to subtract out the employee withholdings, but you can't add in the payroll taxes that you paid.
Now, when you look for what amounts are forgiven, it's going to be a slightly different calculation, and that's where you see that those dates between February 15th and June 30th. My sense is there's going to be some technical corrections that come out on this, especially on what is forgiven, but when you're applying for this, I would urge you not to wait. If your bank says one thing, and they're going to take your application, you're kind of stuck by what they're doing, but this program is probably going to run out of money. In fact, Wells Fargo, because of the shenanigans they pulled with the mortgage lending previously, they actually hit their cap already. They were capped not because of this program, but because of some restrictions placed on them by the federal government. So you're going to want to get your application in, and whatever I say here or whatever the law says, the reality is your bank is the one that's going to approve you for the loan, so you're going to have to follow that. And I would imagine they'll be some mistakes involved in that as well.
Paycheck Protection Program: Loan Forgiveness
Okay. I've heard it can be forgiven. Yes, it can. Loan proceeds used during the covered period, which is the eight weeks, starting on the loan origin date for payroll costs. Once again, the same that I just discussed on the previous slide. The interest portion of a mortgage on real or personal property and rent, you have to have had those leases and things in place before February 15th, so you can't go out and raise your rent to cover it, or anything like that. The lease had to be in place, or the mortgage had to be in place prior to February 15th. It also covers utilities, listed there you can see. Once again, in place before February 15th.
It is called the Paycheck Protection Program for a reason, and the forgiveness is based on keeping the same amount of people employed at the same pay rate. The rules are somewhat complicated, but if you just understand the intent behind the rules, to keep people employed. They're going to loan you the money, and if you use it to keep people employed, it's going to be forgiven. If you reduce the number of full-time... FTE is full-time equivalents, basically the number of full-time employees that you have employed, or if you cut people on the payroll, you're not going to be eligible for full forgiveness. For example, let's say you had 25 people on your payroll when this thing started, and you lay off 12 people. Well, you're not going to be able to get the entire thing forgiven. They're going to use that ratio. Or if you keep all 25 people, but you cut their pay in half, once again, you're not going to be eligible to have the whole thing forgiven.
Now, you'll see there on the slide, you have until June 30th to restore the number of full-time equivalents and salary levels, if you had already laid off people. Let's say your business was shut down and you didn't have any money, and you had to lay some people off, so you do have an opportunity to restore those employees and salary levels prior to June 30th, and possibly still be eligible for full forgiveness. Right now, the rule is that there's no more than 25% of the forgiven amount can be those non-payroll costs, like utilities, rent, mortgage, those type of things, no more than 25%.
Paycheck Protection Program: How Do I Apply?
Okay, how do you apply? Contact your bank or financial institution. Most banks, as you can imagine, are a little bit overwhelmed with this. If they were not already an SBA approved lender, they're probably trying, and probably not getting very far right now. But if they are an SBA approved lender already, you want to go to your bank. Most banks are restricting it to their existing customers. My bank, as I mentioned, Live Oak Bank, I'm going to walk you through here the actual process that they use, and show you what I had to go through.
So first of all, the actual SBA loan, this is the Paycheck Protection Program application form. It's a very simple form, basic questions. Here, they ask for your average monthly payroll times 2.5%, plus the EIDL, if you have one, net of the advance, the number of employees. That's it. That's all the SBA is asking for on this official application. Who owns it, they ask you these questions to make sure you're not... just the basic qualifications of it, that you're not a felon, those type of things. And then you certify, and this is important, and I recommend that you read this. This is what you're certifying. Somewhere in here, there are criminal... for people that commit fraud.
And I would imagine, at some point, maybe not this week or next week, but at some point, you're going to read about people that are committing fraud under this program, and they will go after people. You can see here, fines and imprisonment for fraudulently stating these things, or obtaining the loan for fraudulent reasons. You want to make sure you read through these things and understand fully what you're signing up for. The rest of the form is pretty much government type disclosures.
My bank also added, if you have other businesses, the SBA asks for an addendum A affiliate information. If you do have multiple businesses, you can apply more than once, but if they're sort of daisy chain business, if you have an LLC, 100% owned by an LLC, owned by another LLC, owned by an S corp or something, that's what they're looking for. You're not going to be able to get loans at each one of those levels, I would imagine. But anyway, so they want information on any affiliates that you may have. And my bank just created the addendum A, as required to be included with the application.
Now, my bank did create its own application form. Just wanted to share it with you, what they required. So obviously, the business legal name, industry, NAICS code, this is important for some other programs. The EIDL has limits on the code per industry. But just some basic information on who owns the business, entity owned, authorized representatives. Now here's where they did get into, and they had their own little format for what they were going to count to compute the payroll. They are the ones responsible for certifying to the SBA, hey yes, this business, these are legitimate costs and this company is in fact eligible to receive this money.
So you can see here, they want to know the number of excess people, over $100,000, total number of individuals, how to compute that, if there are any employees outside of the United States, and some other basic questions for how to compute the payroll information. And then of course, the signature, copy a voided check, and then their standard disclosures—a pretty basic computation there. But my bank did have their own process that I had to follow. Here's just some little PDFs of that.
They also required my form 941, my quarterly payroll filings from 2019, each quarter for 2019. And they went right off of that. I think it was line two, and so that's what they used to decide how much the loan was. They asked for statements for healthcare providers, how much premiums we paid for that, as well as I had to create a report of how much we had put into employees' 401K, to compute that two and a half times payroll cost. They also asked for a copy of my business tax return, or if you hadn't filed your taxes, the P&L and balance sheet, and then of course, a voided check to deposit the money. So that's how you apply. Each bank may have a little bit different process. Certifications, I went through the actual application, read those, but basically, you're certifying that economic concerns make funds necessary to support your business and maintain payroll, and that you have not made another application for a PPP loan.
Paycheck Protection Program: Applying for Loan Forgiveness
All right, so the forgiveness part. Remember, if you use this loan for eligible expenses over the eight weeks after you receive it, you could be eligible for forgiveness. Once again, the bank is in the driver's seat here, and they're the ones that have to certify that you are due forgiveness. And they're probably going to require documentation of how many employees you have, payroll tax filings, a copy of your lease if you're claiming rental payments, things like that. There's more guidance that's going to come on this, as the loans are just now starting to get funded. I don't think many of the banks are focused on verifying the forgiveness part. Although in the law, it did say that the bank will not be held liable. This is a self-certifying type loan, and so the bank collects documentation, and they are allowed to rely on your documentation to verify the forgiveness.
Paycheck Protection Program: Loan Terms
Okay, so the loan terms themselves. If you do not qualify for 100% forgiveness of the loan, it's a two-year loan at 1%. At one point, it was 0.5%, but in the final interim guidance, it came out at 1%. And of course, you will owe that, the difference between what you were loaned, if you were loaned 250 grand let's say, and you spent 200 of it for authorized expenses, then you'll owe $50,000 on a two-year term at a 1% rate. The payments are deferred for six months, but the interest does accrue during that period. There's no collateral or personal guarantee required for these loans. And here's a huge one, you may not know this, but normally, cancellation of debt or loan forgiveness is included in your income. For purposes of the PPP, any amount forgiven is not included in your gross income.
Now, if you own an S corp, or something like that, and you're forgiven this, you may run into some basis problems, being able to subtract the full amount of the loss. It's really complicated the way, how you compute what you can take as a loss, so you're going to have to get with your CPA or tax professional. But just recognize the fact that when you have this money forgiven, but yet you had those expenses, you may not be able to take the full loss, depending on how your business is set up, and how it's capitalized.
Economic Injury Disaster Loan: Is My Business Eligible?
Okay, so now we're going to move on to the Economic Injury Disaster Loan, the EIDL. Well actually, before I leave, so the Paycheck Protection Loan is probably going to be your first go-to because of its forgiveness provisions. It's also, in my opinion, the easiest to qualify for, to some extent. This EIDL, you're going to have to prove that you had an economic injury. The worker retention credit, your revenue's going to have to drop by 50%, and we'll talk about that in a minute. But that PPP, my recommendation is to go ahead and apply for that, if you have been affected by this government shut down of your business, reduced income, all those type of things would be the first place to go.
Okay, so the EIDL, once again, small businesses with 500 or fewer employees. Now, here's where that SIC code comes into play. In fact, we have a medical company that's a client. The eligible average three-year revenue for that is $12 million, which is kind of low. Some industries, it's $50 million, it's very high. You have to look up, if you just Google that, SBA size limitations, they actually have a little interactive thing on the SBA website. You can figure out if you qualify for this or not. A sole proprietor, with or without employees, or an independent contractor, is also eligible for this.
But the key right there is, you have to have suffered substantial economic injury. They're supposed to be streamlining the application process to this. I do know that the EIDL previously, it would take six, nine months for people. They'd assign a caseworker, and they would collect all sorts of financial information to determine if you were eligible for this. I'm hoping they're going to streamline it a little bit, but I would anticipate, for this particular loan, you're probably going to have to provide a little bit more documentation and show that you suffered substantial economic injury.
Economic Injury Disaster Loan: Loan Limit
The limit is $2 million for this, although there is an emergency advance grant of $10,000, if requested. So when you apply for that loan, there's a little checkbox, it's kind of hard to see, don't miss it, but if you do apply for this loan, you can check the box and say that you're requesting an emergency advance grant of $10,000. Now, I went through this process early last week, the website was working, and as expected, I haven't heard a single thing from the SBA yet. My bank, Live Oak Bank, those guys really did an amazing job. I was chatting with them all weekend, they were working, they were cranking out loans. They submitted loans the first day you were allowed to at 3:00 in the morning, they were transmitting loan requests to the SBA. But this loan directly with the SBA, if you're waiting for your $10,000 to pay some bill, I would not hold your breath. I have not heard of anyone that's actually received it yet.
Economic Injury Disaster Loan: How Can I Use the Money and Is it Forgivable?
Okay, what can you use the money for? Similar, but slightly different than the PPP, you can use it for the paid sick leave due to the COVID-19, you can use it to pay employees obviously, increasing costs due to supply chain disruption. That's a broad-based thing. Rent, mortgage payment, and repaying obligations that cannot be met due to revenue loss. That's a broad base; it's much more broad based than the PPP allowable expenses. This loan cannot be forgiven. Okay, so once you take the loan up to $2 million, you do have to pay it back. You apply directly with the SBA. Here's the website there, or once again, you can just Google SBA EIDL loan application.
The emergency grant, if you do get the $10,000, by some miraculous happenstance, even if you are not approved for the actual loan, you do not have to pay the $10,000 back. So I suppose in a couple trillion dollar bill, the $10,000, they're not really worried about it at this point.
Economic Disaster Injury Loan: Loan Terms
Okay, so the advance will reduce any loan forgiveness amount under the... If you get a PPP loan, that $10,000 will go against that. The loan terms are up to 30 years. The SBA gets to decide that, not you. 3.75% interest rate, once again, a lot higher than 1%. Non-profits get a little bit of a break. There is no collateral required, if your loan is under $25,000, which not a large number, and no personal guarantee if the loan is under $200,000.
Employee Retention Credit: What is it?
All right, so shifting gears to the employee retention credit. Remember, we had the two loans: the PPP, Paycheck Protection Loan, which in my opinion, is your number one choice, and the EIDL, which you apply directly through the SBA. The next two things I'm going to talk about are run through your payroll. We've had discussions today with our payroll provider. Already, we use Paychex. As you can imagine, they're trying to figure all this out, how it's going to work. We know what the rules are, but from a practical application standpoint, it's going to totally depend on your payroll provider. If you use Paychex or ADP or maybe you do it in-house with QuickBooks payroll, or use a CPA. The mechanics of how you're going to get this, most of those people are still trying to figure it out.
What is the retention credit? It's a fully refundable tax credit for employers, equal to 50% of qualified wages. Remember, a refundable tax credit is if you don't use it all against your taxes, they actually send you money. Okay? Now, are you eligible? Well, you can't double dip. You can't do this program if you receive a loan through the Paycheck Protection Program. There are no employee count restrictions on this program, however, so for employers more than 500, this may be their go-to thing. In most cases... Well, I'll go through that, who this may be applicable for, in a minute.
Employee Retention Credit: Who Is Eligible?
Who is eligible? A trader business that was either fully or partially suspended during a quarter during 2020, as a result of a governmental order due to the coronavirus. If your business was not suspended, that's one thing, you don't qualify. Or if your gross receipts for 2020, any calendar quarter, are less than 50% for the same quarter calendar of last year. This has some qualifications. Once again, either by governmental order, your operations were fully or partially suspended, or you have gross receipts of 50% or less than the same quarter of last year. There's some definite criteria there.
Employee Retention Credit: What Is the Time Frame?
What time period is this employee retention applicable for? Quarters in which your operations were fully or partially suspended. You can't take the credit for January, before some of these stay at home orders, and things like that, were enacted. It counts the first calendar quarter when gross receipts are less than 50%, the same, so when operations were suspended or when you meet that 50% threshold. And they continue through the following quarter, the quarter following when your gross receipts get back up to 80% of the same quarter in 2019.
Employee Retention Credit: How Much Is the Credit?
The credit, as I mentioned, is 50% of the total wages, with respect to any employee, up to a maximum credit of $10,000 per employee is the most you can count, 50% of that, so the maximum credit you're going to get is $5,000 per employee. The credit is claimed against the employer portion of Social Security Taxes. So as an employer, you pay that 6.2% Social Security Tax. This employee retention credit is claimed against that Social Security Taxes. That's where the payroll provider comes in, because you're not going to have to pay that Social Security Tax for the employer to the extent that you enough credits to offset it. It does not count for Medicare taxes, and it has nothing to do with the employee portion of the Social Security or Medicare. It's just against the employer 6.2%.
Employee Retention Credit: What Are Qualified Wages?
I already mentioned that, what is qualified wages? It's the first $10,000 per employee, so you do the math, 50% of $10,000, $5,000 is the max credit for an employee. So for example, if you have 10 employees, the most credit you could take under this, 10 employees times $5,000 would be a $50,000 credit against the Social Security Tax, or if $50,000 is more than you paid in Social Security Tax, you will get the remainder of it as a refundable credit.
Wages, just like some of the other things, you can't take this credit against wages, where you got a credit under the FFCRA, the Family First Coronavirus Relief Act. It does include the group health plan, what you pay for an employee's group health plan does count as qualified wages. The last little bullet there, if you get a credit, there are some veterans hiring credits and things like that. Essentially, if you're already getting a credit for the pay that you give somebody, you can't get another credit under this program.
All right, so there is a little bit of a difference for employers that have greater than 100 average full-time equivalents. It's wages paid after March 12th and before December 31st, to employees when they're not providing services. If you have more than 100 employees, you can only get the credit if the people are not providing services. Basically, you're paying them for not working. And those qualified wages may not exceed the amount that they would have been paid working during an equivalent amount of time. You can't bump it up to try to get more credit. Now I would imagine that most people on the call have less than 100 FTEs, so for that, the rules are a little bit different. It's any qualified wages between March 12th and December 31, 2020 that you're paying people are qualified wages—a little bit different if you're over 100 employees or under 100 employees.
Deferred Payroll Taxes: What Is This Incentive?
Okay, the final payroll tax is the deferred payroll taxes. This is an incentive that delays the employer portion of payroll taxes or half of the self-employed’ s SECA taxes. Once again, this is just the Social Security portion, and only the employer portion.
Deferred Payroll Taxes: Am I Eligible?
You are eligible if you do not receive debt forgiveness through the PPP. The employer tax credit, if you got a loan at all, you weren't eligible for this one, you can't be receiving any debt forgiveness through the PPP. Employers have to paid or incurred wages subject to Social Security or their RRTA withholding. Self-employed individuals are eligible for this. Once again, the Social Security portion, and there's no employee count restrictions on the deferral of the payroll tax.
Deferred Payroll Taxes: What Time Period
It's applicable to taxes required to be deposited from March 27th through the end of the year. And once again, it's the employer's Social Security and half the self-employed individual's Social Security. There's no dollar caps, so your giant companies are going to be able to take advantage of this for because there's no dollar caps on this program.
Deferred Payroll Taxes: Is this Only for Social Security?
Is this only Social Security? I think I said this several times. Yes, it's only the employer's 6.2% Social Security. It does not affect the employee's portion of Social Security, or anyone's Medicare tax.
Deferred Payroll Taxes: When Do I Pay It Back?
How do I pay it back? Okay, so 50% of it is due by December 31st of next year, so you have over a year deferral on the first half, and then the remaining balance will be due by December 31st of 2022.
Unemployment Insurance: What Is the Benefit?
All right, and then the final section that I want to talk about, and we're right on time here, we'll have plenty of time for some questions, is I do want to talk about unemployment insurance. Hopefully, I went through all four of those programs, and there's something in there for just about everybody. Some people aren't eligible for one or the other, but hopefully there's something in there for every self-employed person, independent contractor, small business owner, in there. If not, there is the last chance at unemployment insurance.
The CARES Act added a lot of federal dollars to enhance state unemployment programs and add what's called the new Pandemic Unemployment Insurance Assistance Programs. For those of you who don't know, unemployment is actually run by the states, and it's funded with employer contributions. If you're a business owner, you never look at all the stuff that you pay that gets deducted when you pay employees. This is one of those. You're paying into your state fund for this. The CARES Act added a whole bunch of federal dollars to enhance this program.
Unemployment Insurance: What Changed?
So what changed? Added an additional $600 to the weekly unemployment benefits for up to four months, through July 31st. Yes, some people may earn more on unemployment than they would when they were working. In North Carolina, the standard unemployment maximum was about $350 a week, so you add that to 600, $950 a week. When you do the math over a year, it's the equivalent of 40, $50,000 a year, mid-20, $24 an hour or so. And so some people will actually make more money on unemployment, and they realized this when they passed the bill, but it was just kind of they put a too hard to do checkbox on that one, and they just went ahead and passed it.
It also increases the length of time someone can be on unemployment benefits to a maximum of 39 weeks. For a lot of states, this is going to be an increase of 13 weeks. It also removed the one week waiting period. Most states had a one week waiting period before you could draw unemployment, so someone, even if they can't get through... It's a real problem, 10, 15, 20 million people filing for unemployment. The official numbers right now are about 10 million. Of course, there's a lag on that. So it's very difficult to obviously get through the websites or even apply, but once you do get through and you are approved, you do get back paid to the date that you were unemployed.
Unemployment Insurance: Who Is Eligible?
So who is a covered individual? Who's eligible? Is someone that provides self-certification that they're able and available to work, but unemployed or partially unemployed because of the following, and this is a real laundry list of everything: diagnosed with COVID, experiencing symptoms of it, a household member, providing care, they're the primary caregiver for a child who can't go to school, or their daycare is closed, or something like that, so that they can't work. They reach the workplace because they have to self-quarantine, or they were supposed to get a job, but now don't because of COVID-19. You can see the laundry list there, and then the final one, they meet additional criteria established by the Secretary of the Department of Labor.
The intent of this bill is to make it widely available to people that are affected in any remote way because of the coronavirus. I did put a note down there, if you're able to telework with full pay, or you're on paid sick leave, or other paid benefits, you can't get unemployment. You can't double dip; you can't be getting a paycheck for sick leave from your employer and get unemployment.
The other big thing about this is they expanded it to include self-employed people, independent contractors, "gig workers", people without sufficient work history, somebody that just started working or something like that, or somebody that was already on unemployment that exhausted their benefits. Once again, they're trying to increase the amount of people that are eligible for this, and it runs from the end of January through December 31, 2020.
Unemployment Insurance: Other Provisions
A couple other provisions. Number one, the state needs to opt into the program. Every state will, but it's taken a while. Each state has different rules and different amounts. As I said, this program is run by the states, and the law that was just passed does not supersede a lot of those rules. It adds to, it adds money, it adds benefits, but each state runs their program the way they run it, and you're just going to have to dig in and figure out how your state runs it. It did provide some additional funding for work share. And yes, if your hours are reduced, you can possibly qualify for unemployment under the reduced hours provisions, so if you were full-time and now, you're part-time. Just about the only thing you can't do is if you're business is open and is not affected by coronavirus, you can't just quit and qualify for it. Before you do that, make sure you understand those rules that I just showed on the other slide.
This is really confusion. My recommendation is if you have been affected, either you have a job that you've been laid off, reduced hours, something like that, just apply. All they can do is say, "No, hey, you don't qualify," unless it's obvious that you're continuing to get paid.
Unemployment Insurance: What if I am a Corporate Officer/owner?
This is the big question, what if I'm a corporate officer or owner? And this is a big depends. Prior to this thing, each state had different rules for unemployment insurance. New York had a pretty stiff one, that basically your company had to be in involuntary bankruptcy for a corporate officer or business owner to qualify for unemployment. Some states, the business owner could opt in or opt out. If you're an S-corp and you're paying wages, most likely, you're already paying into the program. How you claim them though, each state has different rules. Like I said, the idea is to prevent abusing it, and just saying, "Oh well, I'm just going to fire myself and go claim unemployment." There are some commentators that are suggesting that you go out and do that. Besides the ethical implications of that, if you aren't impacted, it does depend on the state, whether a corporate officer or business owner is going to be eligible for that if the company is not actually shut down.
I've read a fair number of states recently, and the rules are just all over the place. Some of them have very public and easy to find rules; others of them, it's impossible to find without calling and figuring that out. I know that's not a great owner, we've got a lot of business owners on the call here, but it does vary by state, and it's kind of up in the air at this point.
Okay. So that's it for the formal portion of the presentation. I believe, Stephen, do we have some questions that we want to get to? We've got some time here.
Live Q&A Section
Stephen Fletcher: We do. Thank you for that wonderful presentation. The first one is, for PPP purposes, do retirement payments into SEP IRAs count, and Medicare Part A, B, D, F premiums paid by the company?
David Blain: The SEP contribution is in fact an employer only contribution, so it would count. Medicare premiums, that's a tricky one. It does, if it's part... So, Medicare premiums are allowed to be paid for by an employer, as long as it's under the correct type of plan. And so those would count as a group health plan, as long as they're paid under an applicable group health plan with those provisions in it. That's a really complicated question. The way that Medicare premium payments are allowed to be paid for by an employer. And it even varies based on the size of the company. But yes, it can potentially qualify as health insurance premiums.
SF: Great. For someone who is still retained as a W-2 employee, but is not able to work because the company doesn't have any work for them to do, can they file for unemployment?
DB: Yes, so under the rules, and in fact a lot of states had this already, you can stay on the roles of a company, like for health benefits and things like that, and still file for unemployment, yes. That's typically called a furlough, is the technical term, where they don't have any work, you're not laid off in that you're still considered an employee, you just don't get paid.
SF: These next two questions go hand in hand. If my bank is not an SBA approved lender, or if Wells Fargo is my bank, then what?
DB: So Live Oak Bank does have a waiting list. You're just going to have to call around and find an SBA lender, unfortunately. As you can imagine, these banks are swamped with people, and they are prioritizing their own customers first. Live Oak Bank, if you go to the website, they do have a sign-up list for businesses that are not current clients of the bank, for them to help you. Oh, and one big thing I forgot... I forgot. It's not in the slideshow. Sole proprietors, independent contractors, Schedule C, self-employed, whatever you call yourself, that program does not actually open up until April 10th, Friday. You cannot apply as a sole proprietor, Schedule C, independent contractor, for the PPP program until April 10th. They opened it up for other businesses last Friday, and then sole proprietors on next Friday. I think it's because there are probably a few more rules they had to sort out first. I'm not sure, but that was in the interim guidance that the SBA released.
SF: Great. You mentioned non-US employees do not count for PPP purposes. Is Puerto Rico considered part of the US for this consideration?
DB: Yes, I'm pretty sure that the territories are fine.
SF: Great. Applying for the PPP as an independent contractor for some of these new companies, such as Uber, or Waitr, if you're in food delivery, are you eligible to apply in that instance?
DB: Yes. Now, you obviously, you're going to have to follow the rules and meet the criteria, but it will be based on your net self-employment earnings. If you were not in business last year in 2019, there's obviously an alternative calculation period for the time that you were in business.
SF: As an owner, if you're not on the formal payroll, how would you account for your income through the loan process?
DB: If you're not on the payroll, that means you're either a Schedule C or a partner in a partnership receiving guaranteed payments. Somewhere, you're going to have net self-employment income from that business. I'd have to know how you're structured. If you're a C corp or an S corp, you're going to get a W-2, you're going to pay yourself and run it through payroll. If you're a sole proprietor, Schedule C, or a partner in a partnership, you do not get paid on a W-2, but you do have net earnings from self-employment. It will show up either on your Schedule C, or in your tax return on Schedule E from your K-1 from your partnership.
SF: Great. What about newly hired employees, how would you calculate their gross pay on the PPP application?
DB: So if I understand the question correctly, let's say you had 20 employees last year and you ramped up in the beginning of the year, and you had 50 employees now. Does that sound like the question?
DB: Okay, so there is an alternative calculation of the payroll, but that is somewhat of a drawback to the program. There's no way to calculate that. If you were in business as of last year, they're using your average wages from 2019.
SF: Great. If I applied for the PPP last week, but am a sole proprietor, are they going to not process it until the 10th, or will I need to reapply?
DB: They probably won't process it till the 10th. That's my guess. The SBA is not accepting applications from sole proprietors until the 10th. Back to the business, you had to have been in business prior to February 15th of 2020, so if you started the business between January and February, you'll be able to use those figures in your payroll. But if you were in business in 2019, it's going to count that amount.
SF: What if the employee count has reduced from 2019 for something other than COVID-19, how would you calculate the average monthly payroll?
DB: Well, the average monthly payroll is whatever it was last year, and then the employee count, so the employee count is going to be... I don't know the answer to that. I was asked two things. I was asked how many employees you had on February 15th, or whatever date that was, and then what was your average payroll last year. There are some of these situations where if you ramped up payroll significantly, or if you cut employees significantly from last year for another reason, it's going to be more difficult to justify 100% payroll forgiveness.
SF: If I am a business owner that takes distributions, can I calculate those on the PPP application?
DB: No. I have this discussion all the time with business owners. There are valid reasons to reduce your payroll, but you're supposed to be paying yourself a reasonable salary, and this is one of the instances where if you make 500 grand and you've been paying yourself $25,000, that you're kind of out of luck. For the PPP, at least.
SF: Right, right. If you are an independent contractor and you have deductions and expenses that would outweigh your 1099 wages, would you still be eligible for PPP?
DB: If you were an independent contractor and you had Section 179 deductions and other expenses that will outweigh your wages, would that mean that you would still be eligible? That's going to be tough because your net earnings from self-employment are negative. So if you're a sole proprietor, independent contractor, you should be filing a Schedule C, and I believe it's line 31, but anyway, the application with the bank, and most banks are going to do this, asks for the net earnings from self-employment from a very specific line on your tax return, which in fact may be negative.
Here's a question from someone trying to secure some assistance for a non-profit. They were asking is there any difference in the application process for a non-profit versus a for-profit?
Not that I've seen. There are some minor differences, but the application itself is the same.
So for a business that is a brick and mortar service, if they are unable to open their doors or clients don't feel safe walking in, how does hiring back a complete workforce within an arbitrary timeframe, without any work for them to do, assist them?
Well, it assists the employees by giving them a payroll. It's not going to help the business if the brick and mortar is still closed. Your two options: there is A) hire them back and just give them the money. Essentially what happens at that point is the business is a conduit to give money to the employees, and then assuming you meet all the other criteria, it's forgiven. Hopefully, by the end of June, you're back open and you are able to pay your employees. If you choose not to rehire them because you need the money to pay the rent on the brick and mortar place, or something like that, those are allowable expenses under the program. It's just, you're not going to get the whole thing forgiven. And I would say a two-year, 1% loan, if you have to, to keep the doors open, it would still be worthwhile. But yes, if you rehire those people just for the forgiveness and they can't work, you're essentially a conduit to getting money out into the economy.
Great. If you are a gig worker, do you know what verification of income requirements states typically require?
For the unemployment, I'm guessing. I do not because this is one of the elements they've never, ever before had gig workers, independent contractors eligible for unemployment. And so, I would imagine the states are scrambling, trying to figure out how they're going to require people to document their earnings. This is new, so the answer to the question is, it's never been done before, so the states are making it up.
Does the CARES Act provide any relief for business loan payments if the loan is not through the SBA?
Does it provide relief? You can use the loan for interest on other debts, like if you had a business loan from your bank, one of the allowable proceeds is for interest on that debt. If you have another SBA loan, if you already had an SBA loan, there's no principal, and I didn't put this in the briefing, but there's no principal and interest payments on other SBA loans for, I'm pretty sure it's through at least the end of the year. But the PPP program does allow for the payment of interest on other non-SBA debt. And the forgiveness portion, that is an allowable...So when you get the PPP loan, whether it's forgiven or not, you can only spend it on the certain category of items, so that's the first test is you can't go, "Oh, I got this PPP loan, and I'm going to go buy a new truck for my company," or something like that. That's not an allowable expense. You'll go to jail if you do that. So that's the first thing, make sure you spend it on allowable expenses. Then, if you retain the requisite number of employees and salary levels, and all that, you can get part of that loan forgiven. But interest on other debt is an allowable expense.
SF: If I apply for the PPP to retain and pay my employees, how do I get enough money to pay for other office expenses like rent, utilities, et cetera?
DB: That's where the EIDL would come in. You'd have to apply for the EIDL. So let's say you got the PPP, covered your payroll and maybe a few of the other expenses... Remember, that's limited to 25% of non-payroll costs for forgiveness, so then you would apply for the EIDL, and say, "Hey, this is not enough money. I need some more money to do this." You can contact your regular bank, so even Wells Fargo, if you can't get the SBA loan... We've had a lot of success with business clients just calling up their banker and saying, "Hey, can you increase my line of credit?" Or call up your landlord and say, "Hey, can I defer my rent?" You're just going to have to get on the phone and try to get some deferral of these payments or go to a regular bank. Regular banks are loaning money under different terms than this to credible borrowers. I know that's not a great answer, but you're just going to have to kind of scramble around and try to make it work. There's no easy answer for that.
SF: Great. Last question that we have here that I'm seeing is the, my business pays rent to an LLC, which is 50% owned by myself. Should I get full credit for rent paid, or will I have to calculate my share of interest paid on the mortgage by the LLC?
DB: If you have rent, assuming you have a lease in place before the requisite date, with a related party, and it's an arm’s length transaction, meaning that it's a legitimate lease, that should be an allowable cost for the PPP. Your operating entity is the one that's getting the PPP, and they have a rent payment of say 10 grand a month or something. Just because that's paid to an LLC that owns the building that you own half of, there's nothing that would disqualify that, as long as it's an arm’s length transaction.
Stephen Fletcher: Great. Well, that's all the questions that I see. If anybody has any additional questions, please feel free to reach out to the BlueSky team. We'll see how we can get those answered for you. Thank you everybody for your time today. Thank you. David for the wonderful presentation and your time as well.
David Blain: Yeah, I'd just like to, really quick, just wrap up then. This stuff is very fluid. As I recommend with the coronavirus itself, go to reputable sources, us, obviously, if you're a client of ours. If you're not, your attorney, my friend Alan Gasman, an attorney down in Florida. He's my friend; he's our attorney for BlueSky. He's an attorney for lots of our clients. Gasmanpa.com. Alan is on top of all this stuff as well. He puts on regular webinars almost every day, it seems like, on this. Make sure you're going to reputable sources. Your bank, of course for the PPP is the one that ultimately is going to approve or disapprove you, so try to get in there with them. But look, this stuff is changing, and like most laws that are written, the language, sometimes they make mistakes, sometimes it's unclear unintentionally, sometimes it's unclear unintentionally. A lot of it's subject to rule making. We're asking the federal government, that moves as slow as molasses to turn on a dime. So, we'll try to keep you updated with these webinars, but things do change over time. The best thing I can say is just get in there with your bank or the SBA and start applying for this stuff as soon as you can.
Stephen Fletcher: Great. Well, thank you David for your time. Thank you everybody who attended. We hope that you continue to stay safe and healthy, and thanks for your attendance.