The $2 trillion coronavirus stimulus package, also known as the CARES Act, has given hope to many small businesses to retain employees, pay rents and keep going during these crisis. While we eagerly await the next round of funding for PPP and EIDL programs, there are some common questions that business owners are struggling to answer.
In order to help small and mid size companies navigate through their finances amid COVID-19, Team Astute has been hosting ‘Town Hall’ discussions in partnership with CEO Success Community. Here are some of the questions and answers asked during the Town Hall sessions we conducted.
1. Question: Can I apply for both PPP and EIDL loans? Which is better?
Answer: Yes you can apply for both. Ultimately, this is an individual decision and will depend on the nature of your business and number of factors, including how much you qualify for, how you plan to use the funds and whether you expect to benefit substantially from forgiveness under PPP.
2. Question: How long is it taking to get the EIDL advances of 10K? Is it under 2 weeks duration or is it taking longer?
Answer: Initially SBA announced that upto 10K grant will be processed within 3 days upon submission of EIDL loan application. However later to ensure that the greatest number of applicants can receive assistance during this challenging time, the amount of Advance was determined by the number of pre-disaster (i.e., as of January 31, 2020) employees. The Advance will provide $1,000 per employee up to a maximum of $10,000.
3. Question: If you haven’t filed 2019 Business taxes yet, what will be used to determine payroll for PPP. If you take owner salary, does that count in the amount for PPP?
Answer: For PPP loans, most of the lenders requested 2019 payroll reports and documents to substantiate the payroll costs calculation. Which means the 2019 business tax return was not the primary document. Yes owners salary is included In the calculation for payroll costs.
4. Question: Is this accurate to say that with the EIDL, if you apply for $12k, you may only qualify for $5k as a grant and $7k for loan?
Answer: Under EIDL, the grant money is determined by the number of pre-disaster (i.e., as of January 31, 2020) employees. For e.g. if you have 8 employees you may qualify for only up to $8000 in grant. The rest can be combined with the other loan amount.
5. Question: If I decide to keep my current employee base in the hope of getting the loan, but I don’t receive the loan, what are my options? Does the bank provide any safety net if the loan doesn’t get approved?
Answer: The primary purpose of Paycheck Protection Program is to provide funds so that businesses can spend 75% of the loan amount towards employee payroll. Unfortunately, Banks don’t provide any safety net in case you don’t qualify for the loan. But the approval process is significantly faster after the application is submitted with all the required paperwork. Also there are other SBA offered disaster loans that is facilitated to cover the operating expenses during downturn.
6. Question: Does payroll cost cover independent contractors who may not have been hired prior to the loan request?
Answer: No. Independent Contractors have the ability to apply for their PPP loan on their own and do not count for purposes of a borrower’s PPP loan calculation.
7. Question: Can I defer the payroll taxes under “Deferral for FICA Taxes under the CARES Act”?
Answer: Yes. However, you cannot take this benefit, if you are receiving assistance under PPP loan.
8. Question: Can PPP or EIDL loan be used for paying owners distributions/dividends?
Answer: No. Primary goal of the PPP loan is to reduce unemployment rate. Owners distributions are paid out of net profits during the year.
PPP loans- must be used for paying permitted costs only.
EIDL loans – can be used for paying payroll costs and other operating expenses. No double dipping.
9. Question: Is there any downside to applying to both and does doing that mitigate your chances?
Answer: There is no downside for applying for both loan programs except the time involved in the process. However, both are loans, subject to repayment if it does not qualify for forgiveness.
10. Question: I’m in the self-employed category? Can I hire independent contractors that we have not hired before?
Answer: You can hire independent contractors, but you may not be able to apply for them through PPP or EIDL. Independent Contractors have the ability to apply for their own PPP loan and do not count for purposes of a borrower’s PPP loan calculation.
11. Question: If I have an existing SBA loan can I ask for forgiveness on that loan under the new EIDL program?
Answer: SBA has removed some restrictions on already existing SBA Loans such as 7(a), microloans, Bride loans etc. EIDL is a new disaster loan under the CARES Act and you can apply for it along with other SBA loans. However, restrictions apply. EIDL loans can be forgivable if converted into PPP and used for the permitted payroll costs.
12. Question: What do businesses need to produce and present at the time of asking for forgiveness under PPP?
Answer: Loan forgiveness application is submitted to the lender and the checklist can vary from lender to lender. However, the primary factor for loan forgiveness is the substantiation of documents showing the usage of loan. Atleast 75% must be used for permitted payroll costs and the remaining 25% for non-payroll costs for it to qualify for forgiveness.
13. Question: How is the usage of the loan audited?
Answer: As per the regulations, both loan programs under the Cares Act specify procedures for auditing how the loan should be used.
PPP: Paycheck Protection Program permits costs related to employee salaries, commissions, continued health care benefits, interests on mortgage & other debts and rents and utilities. (doesn’t include employers FICA taxes)
EIDL: The loan program can be used for paying fixed costs, payroll, accounts payable and other operating expenses that can’t be paid because of the disaster’s impact.
14. Will these programs be misused? How will the govt. make sure the loans are not misused?
Answer: When there are such incentive programs with less guidelines, there will always be double dipping, meaning some fraudulent activity is bound to happen. Fraudsters with inaccurate financial statements can take undue advantage and try to qualify for them. Government has imposed minimum fines upto $250k and maximum upto $1m. Also minimum of 5-years and maximum of 30 years imprisonment for non-disclosure of accurate financials and fraudulent activities.
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