By Judy Mason, CPA, CVA, MichaelSilver
 
President Trump signed into law the CARES Act — worth more than $2.2 trillion — on March 27 to help stimulate the economy reeling from the effects of the coronavirus.

 

What are the aspects of the CARES Act that can help my business (and my employees)?
Loans and payroll credits along with unemployment benefits, including the Paycheck Protection Program loans (PPP), emergency Economic Injury Disaster Loans (EIDL), refundable payroll tax credits, deferment for some payroll tax payments, and enhanced unemployment benefits.

 

Which loan is best for my business, an EIDL or PPP loan?
EIDLs provide a $10,000 cash advance within three days of applying for the loan. The $10,000 cash advance does not need to be repaid if the loan is subsequently denied. EIDLs are capped at $2 million. PPP loans are capped at $10 million and provide an opportunity for a portion of the loans to be forgiven. The forgiveness or cancellation of the loans would not be treated as income for tax purposes. If cash flow is not an immediate concern, the PPP loan may be the better option.

 

Should I use my other sources of business funding before applying for these loans?
A key factor to consider when deciding whether or not to apply for these loans is the potential forgiveness factor of the PPP loan. However, applying for a line of credit to help in the short run doesn’t preclude you from applying for a PPP loan.

 

Is my business eligible for the PPP loans? What are the affiliation rules?
Businesses with 500 or fewer employees are eligible. To determine the 500 limit, affiliation does not apply to a business operating a franchise that is assigned a franchise identifier code by the SBA. OEM brands with franchise identifier codes including Chrysler, Dodge, Jeep, Ram; Kia; Ford, Lincoln; Mazda; Mitsubishi; Subaru; and Volvo. Many other OEM’s have applied to the SBA for a franchise identifier code. Once obtained, the franchisee may also be exempt from the affiliation rules. The NADA is encouraging the SBA to expedite this process.

 

How much of a loan can I receive for each one of my dealerships?
The maximum loan amount is limited to 2.5 times the average monthly payroll costs for the last 12 months, with compensation of each employee limited to $100,000. Payroll costs include salary, wages and commissions, tips, paid leave, healthcare, and retirement payments. The payroll costs are reduced for any qualified sick leave or family leave wages for which a credit was allowed under the Families First Coronavirus Response Act. The maximum loan amount is $10 million.

 

What are the allowable uses of the loan proceeds?
• Salaries and commissions
• Costs related to the continuation of group health insurance and other benefits
• Mortgage interest payments
• Rent subject to a lease
• Utilities
• Interest on debt obligations incurred before the covered period

 

How much of the loan will be forgiven?
Total payroll costs, rent, utilities, and mortgage interest paid during the eight-week covered period. This amount is reduced if the number of employees declines during the covered period as compared to the number of employees for the period Feb. 15-June 30, 2019 or Jan. 1-Feb. 29, 2020, whichever is lower. Reductions in employment or wages that occur during the period beginning Feb. 15, 2020 and ending 30 days after enactment of the CARES Act, (as compared to Feb. 15, 2020) will not reduce the amount of loan forgiveness IF the borrower eliminates the reduction in employees or reduction in wages by June 30, 2020.

 

What if I continue to reduce my workforce? Does that reduce how much will be forgiven?
Yes, the amount of loan forgiveness is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees.

 

What happens after the forgiveness period?
Any loan amount not forgiven at the end of one year is carried forward as a loan with a maximum term of two years. Principal and interest will be deferred for a total of six months to one year after disbursement of the loan.

 

What are the loan terms and interest rates?
The maximum term is two years and maximum interest rate is 0.5% as of April 1, 2020.

 

Will I be required to personally guarantee the loan?
No personal guarantee or collateral is required. A "good faith certification" is required to verify the forgiveness portion of the loan.

 

Who should I contact if I would like to apply for a loan?
Most of the banks will be handling the application and processing of the PPP loans through the SBA. EIDLs can be applied for directly from the SBA website.

 

How should I account for these loans and track the expenses?
Document the amount eligible for forgiveness. Support includes the following:
• Verification of the number of employees and payroll paid using payroll tax returns
• Documentation of other eligible costs such as group health care benefits, including insurance premiums, payments of interest on mortgage loans, rent, utilities, and interest on debt incurred before the covered period
• Certification by a representative of the business

Consider a separate bank account to track the appropriate use of funds for specific costs during a specific period.

Should I consider taking these loans or should I use the payroll tax credits instead?
There is a payroll tax credit available if you choose not to apply for a loan. The details are provided below. There also is an option to defer the payment of a portion of the employer payroll taxes.

• Employee retention credit in the form of a refundable payroll tax credit:
  o Eligible employers include any business that is required to partially or fully suspend operations due to COVID-19
  o Businesses whose gross receipts are 50% or less this quarter compared to the same quarter in the previous year
  o The credit is computed at 50% of wages up to $10,000 of wages per employee for eligible employers ($5,000 credit).
  o Wages of employees who are furloughed or face reduced hours are eligible for the credit
• Delayed payment of certain employer payroll taxes (6.2% OASDI) through the end of 2020
  o The deferred tax liability would be paid in two installments – half by Dec. 31, 2021 and the remaining half by Dec. 31, 2022

 

Can I take the credits and payroll tax deferral if I have a PPP loan?
No. If you receive PPP loan proceeds, you are not eligible for the credit and tax deferral payments. More than likely, the PPP loan is a better option unless your workforce is significantly decreased during the next several months.

 

What are my options if I do not qualify for the PPP loan?
Small businesses with less than 500 employees may request an advance of $10,000 through an EIDL to be used for providing sick leave, maintaining payroll to retain employees, meeting increased material costs, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses.

 

If I have to lay off employees, what kind of unemployment benefits would they receive?
• Recipients are eligible for an additional $600 per week payment through the end of July in addition to their state unemployment benefits.
• The unemployment benefits created under the CARES Act terminate at the end of 2020.

 

What is the Families First Coronavirus Response Act?
Congress also passed the Families First Coronavirus Response Act (FFCRA). This act went into effect April 1, 2020 and mandates employers with less than 500 employees to provide paid sick pay and family leave for employees who are affected by the virus. The NADA issued a FAQ document that can answer many questions about how the various credits work under this Act.

If I have any questions about the CARES Act and FFCRA, who should I contact?
You should discuss all of these options with your professional advisors including your banker, your employment attorney, and your CPA. We at MichaelSilver also are available to answer any additional questions that you might have.