PAYCHECK PROTECTION SBA 7(A) LOAN PROGRAM · 2020. 3. 31. · BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

March 31, 2020

PAYCHECK PROTECTION SBA 7(A) LOAN PROGRAM

2 Paycheck Protection SBA 7a loan program

Today’s Speakers

• Linda Harding – BDO Alliance Tax Consult Director

• Kevin Moquist – Alliance Relationship Partner

• Matt Becker – National Managing Partner of Tax

• Alex Lifson – Compensation, Benefits & GES Practice Leader

• Daniel Fuller – STS Managing Partner

• Joan Vines – Compensation & Benefits/GES Technical Practice Leader

• Jim White – Tax Office Managing Partner

• Kevin Van Nortwick – Tax Office Managing Partner

• Jason Kadow – KMA Bodilly CPAs & Consultants, S.C.


Agenda

Welcome Linda Harding & Kevin Moquist

Program Introduction Matt Becker

Payroll Tax Related Incentives Alex Lifson & Daniel Fuller

“The Tricky Bits” Joan Vines

• Basics of the Old & New SBA Disaster Loan Programs

• Practical Applications/Discussions of Key Issues

Jim White & Kevin Van Nortwick

Urgent Opportunity to Assist Banks and Clients with CARES Act 7(a) Loan Application and Related Administration/Forgiveness Issues.

Jason Kadow, KMA Bodilly CPAs & Consultants, S.C.

Concluding Remarks Matt Becker, Linda Harding, & Kevin Moquist


Payroll Tax Related Incentives

Alex LifsonDaniel Fuller


Available in the Tax Knowledge Base (TKB)

https://bdoworld.bdo.com/sites/tax/tkb/Tax%20Documents/COVID-19%20Business%20Relief%20Analysis.xlsx?Web=1




The Tricky BitsJoan Vines


The Tricky Bits – Employee Counts

A different law is referenced for each provision that depends on employee head count• Less than 500 employees that mandates Emergency Paid Sick Leave – Fair Labor

Standards Act- Usually entity by entity with exceptions for joint employers –DOL guidance issued March 30, 2020

• Less than 500 employees that mandates Emergency Family and Medical Leave Act – Has its own standard of integrated entities- DOL guidance issued March 30, 2020

• Less than 500 employee for SBA Loan Increased Eligibility – SBA standards with special exceptions for SAIC codes beginning with “72”

• 100 or less for Employee Retention Credit – Controlled group and affiliated group basis

• Number of Full Time Equivalent (FTE) employees for purposes of loan forgiveness – Rules applied under IRC 4980H according to the Affordable Care Act


The Tricky Bits- Competing Ideas

Idea that “mandated” paid leave should be avoided if possible • Need a full understanding of the 100% and immediate funding by the

government Previous positions taken for FLSA and FMLA purposes that are counter to the desired position for FFCRA credits • Involved their labor attorneyUnemployment benefits might be larger than mandated paid leave amounts• Maximum unemployment might be needed in addition to mandated paid leave• Employer can pay more than the benefits but only take 100% credit for the

mandated amount• Wages in excess of the mandated amounts might qualify for employee retention

credit• Reduction in FTE hurts SBA loan forgiveness


The Tricky Bits – Client Asks “What Should I Do?”

Can only be answered after a complete analysis of all of the facts and circumstances remembering• There are non tax advantages to keeping existing workforce intact and

available to the business by continuing wages− Shortens the time needed to return to normal operations− Accelerates economic recovery− Avoids costs to locate and train new employees− Builds loyalty

• The FFCRA mandated leave provisions and SBA loans that are forgiven allow the federal government to pay the employees with no cost to employer

• The Employee Retention Credit and the Payroll Tax Deferral assist the employer at lower levels but still helps employers conserve cash


Tricky Bits- Payroll Processing

• Some Third Party Payroll Companies have not been proactive on this matter.

• Paid leave and wages that are eligible for payroll tax credits should be processed through payroll with a new payroll code assigned to each type of payment, the separate payroll code allows the payments to be accumulated each pay period for purposes of determining the total payroll tax credit

• Not only will the payroll codes facilitate totaling the creditable payments, the system might provide the cut off when the employee reaches the maximum amount, such as the $10,000 maximum eligible for extended FMLA mandated payments and Employee Retention Payments

• Pay codes for Emergency Paid Sick Leave and Emergency Family and Medical Leave payments should be set up to treat the payments as wages for purposes of all employee tax withholding (FIT, SIT unless the state has made some special provision for exemption, Social Security and Medicare) and employer Medicare. These codes should be set up to treat the payments as exempt from employer Social Security taxes

• The pay code for Employee Retention Credit accumulates regular wages and therefore should be subject to the regular wages taxes

• If properly coded the payroll software should accumulate all taxes, including those due on creditable payments, at the end of each pay period that should be paid to the IRS under the regular payroll deposit rules. However, before making the payroll tax deposit the credit amount should be subtracted


Tricky Bits- Payroll Processing, (cont’d)

• The credit amount for Emergency Paid Sick Leave and Emergency Family and Medical Leave payments is the total gross payments under the associated payroll codes, plus the employer Medicare taxes withheld during the current pay period on the mandated paid leave, plus the employer’s cost of providing health care coverage to the employees while on leave. Although it is not clear, we read the “employer’s cost of providing health care coverage” as what the employer remits to the insurer (or needs to operate its self-insured plan), regardless of whether/how employers share that cost with employees

• The credit amount for Employee Retention Payments is 50% of the total gross payments under the associated payroll codes adjusted for the cost of providing health care coverage

• Notwithstanding the statutory language allowing the credit only against employer OASDI taxes, for the FFCRA federal paid sick and child care leave, IR 2020-57 provides the employer can retain any tax in its deposit including withheld FIT, employee share of OASDI (6.2% up to $137,700) and Medicare taxes (1.45%), and the employer share of OASDI (6.2% up to $137,700) and Medicare (1.45%) taxes with respect to all employees on all types of payments

• Perhaps the same retention will be allowed for the refundable Employee Retention Credit which has the same statutory language. Guidance is needed

• If the credit amount exceeds the regular total payroll deposit for all types of payments to all employees, then for the FFCRA for federal paid sick and child care leave (and perhaps for the Employee Retention Credit) the employer can request a rapid refund from the IRS which is supposed to be processed within 2 weeks. This process might be built in to the Form 941 due at the end of each quarter


Basics of the Old & New SBA Disaster Loan Programs

Jim WhiteKevin Van Nortwick

Practical Applications/Discussions of Key Issues


COVID-19 SBA Disaster Related Loans

Economic Injury Disaster Loan (Disaster Loans or EIDL)

SBA 7(a) CARES Act Loan known as the Paycheck Protection Program (PPP)


Economic Injury Disaster Loan

• Applications being accepted now on the SBA website• Maximum Loan size $2,000,000, determined by SBA during underwriting• Interest rate 3.75% for businesses and 2.75% for Not-For-Profits• Repayment – Based on ability to repay, up to 30 years• Interest is deferred for 12 months but does accrue• Eligibility – Same 500 or less employee rules but also includes revenue

limitations• See Table of Size Standards https://www.sba.gov/document/support--table-

size-standards• Use of Funds – Operating Capital/ to meet payroll, pay accounts payable and

fixed debt payments until situation improves• Ineligible uses – Debt refinancing or Expansion of Business

https://www.sba.gov/document/support--table-size-standards


Economic Injury Disaster Loan

• Credit / Underwriting – FICO Score > 570• No Prepayment Penalties• Personal Guarantees – Only on loans > $200,000• Collateral – May be required• General Processing Information – Historically this took up at least 3 weeks. The

process is supposed to be expedited

• New Quick $10,000 amount which will be forgiven

• Otherwise no forgiveness provisions


CARES ACT Loan Summary

Eligibility for CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT:• In addition to “small business concerns” as currently defined under the SBA,

eligible businesses include any business concern, nonprofit organization, veterans’ organization, or Tribal business if it employs not more than 500 employees. Includes full-time and part-time

• There is a special eligibility rule for businesses in the hospitality and dining industries. For businesses with more than one physical location, if it employs 500 or fewer employees per location and is assigned to the “accommodation and food services” sector (Sector 72) under the North American Industry Classification System (NAICS), the business is eligible to receive a loan

• No revenue limits• Allows lenders to approve applicants based solely on credit scores (no tax return

submission required) or "alternative appropriate methods to determine an applicant's ability to repay"


CARES ACT Loan Summary (cont’d)

SBA regulations on entity affiliations (under 13 CFR 121.103) are waived for the covered period for business concerns, non-profits, and veterans' organizations for:• Businesses in Sector 72 under the NAICS with 500 or fewer employees;• Franchise businesses with SBA franchisor identifier codes; and• Any business that receives financial assistance from a company licensed under

section 301 of the Small Business Investment Act

An exception to prior rules - for the Covered Period of January 31 through December 31 of 2020, the following entities will qualify:• Sole proprietorships, with or without employees, and independent contractors;• Cooperatives with 500 or fewer employees;• ESOPs with 500 or fewer employees; and• Tribal small business concerns


Maximum Loan Amount

Up to $10MM but capped at the lesser of:• 2.5 times average total monthly “payroll cost” incurred in the one-year period before the

loan is made. Essentially, take average payroll March 1 to June 30, 2019 times 2.5, plus any outstanding balance on an SBA Disaster Assistance loan

• If a business was not in existence during the 2019 period you can use 2.5 times the average monthly payroll between January 1 and February 29, 2020

Borrower Requirements are few. Borrower will have to include a Good-Faith Certification:• The loan is needed to continue operations during the COVID-19 emergency;• Funds will be used to retain workers and maintain payroll or make mortgage, lease, and

utility payments;• The applicant does not have any other application pending under this program for the

same purpose; and• From February 15, 2020 until December 31, 2020, the applicant has not received

duplicative amounts under this program


Potential for Abuse of the ProgramMost subjective borrower requirement is:

“THE LOAN IS NEEDED TO CONTINUE OPERATIONS DURING THE COVID-19 EMERGENCY”

The overriding purpose of the 7A program is to keep small businesses alive and their workforce in place and employed until the Covid-19 crisis wanes. It will do so by helping thousands of businesses pay certain expenses and keep employees on the payroll during this emergency situation. The hope is they will continue as viable entities going forward

There is potential for rampant abuse. For example, some well capitalized applicants may “certify” that they deserve Federal help under this program due to losing customers, laying off employees, taking a significant hit to the bottom line, etc., yet their operations would have “continued” and survived without SBA help. Should they qualify for a loan?

Hopefully additional underwriting guidance will be issued soon by the SBA….


New SBA Business Loan Program Terms and Information

• Prior to the new program, SBA only participated in loans with banks• 7A loans are 100% backed by SBA• No collateral or personal guarantee is permitted to be required for a loan• Underwriting focus appears to be cash flow history of the business prior to the

arrival of the Covid-19 virus in the USA• Interest rate is not to exceed 4%• No prepayment penalties• Guidance is that administrator need to assure that priority is given to small

business concerns, entities in underserved rural markets/veteran communities, businesses owned by socially and economically disadvantaged individuals, women, and businesses in operation for less than 2 years


Loan Can Cover

• Payroll costs:− Compensation, paid leave, severance payments, payment for group health benefits, including

insurance premiums, retirement benefits, state & local taxes− Excludes individual employee compensation above $100,000 per year, prorated over the covered

period− Also excludes sick and family leave wages for which credit is allowed under the Families First

Act

• Group health care benefits during periods of paid, sick, medical or family leave, and insurance premiums

• Salaries, commission or similar compensation• Payment of interest on mortgage obligations• Rent/lease payments• Utilities• Interest on any other debt incurred before covered period

• Payment Deferral− Principal, interest and fees deferred for six months to one year


ForgivenessIndebtedness is forgiven in an amount equal to the costs incurred during the covered period, March 1 through June 30th for:• Payroll Costs• Interest payments on mortgages• Rent• Utilities

The Forgiveness is not included in income

Incentive not to reduce workforce:Forgiveness amounts will be reduced for any employee cuts or reduction in wages using a pro-rata formula

Formula:Maximum available for forgiveness as determined above,XAverage number of FTE’s per month divided by a base number of FTE’s.

The base is either the average number of FTE’s employed between 2/15/19 – 6/30/19, orAverage number of FTE’s employed between 1/1/20 – 2/29/20

There is a different rule for seasonable employers…

Bank assistedBanks earn a fee for handling the process. Therefore, we should recommend to clients to work with banks


CARES ACT modifies the old SBA Disaster Loan

• Modifies program from January 31, 2020 to December 31, 2020.• Personal guarantees waived on advances or loans of $200,000 or less• Waives the 1 year in business rule prior to the disaster• Waives the requirement that the applicant be unable to find credit elsewhere• Allows $10,000 emergency advances that

don’t have to be repaid, even if the application is later denied

• Guaranteed by SBA• Guidance encourages payment

deferments when appropriate and to extend loan maturity


Disaster Loan Modifications

Principal, interest and associated fees owed in regular servicing status:• For loans made before this bill was enacted not on deferment, for the six-

month period beginning when the next payment is due• For loans made before this bill was enacted that are on deferment, for the six-

month period beginning with the next payment due after deferment; and• For loans made within six months of enactment of the bill, for six months after

the first payment is due

Does not require lenders to increase their reserves based on payments received from the Administrator under this section


Client Checklist to Prepare for SBA Loans

• Current Personal Financial Statement• Latest Available Personal Tax Return• Latest Available Business Tax Return• Latest Available Internal 2019 YE Financials• YTD Internal 2020 Financials• Spreadsheet Detailing the following:

- List of all Full Time Employees with 8 weeks salary + payroll taxes

- 2 months rent with copies of leases- 2 months mortgage interest with copy of loan

payments- 2 months of utility costs with copy of utility

payments

Note: This was provided by a bank and actual requirements may differ bank to bank


7(a) Loan Application Checklist


SBA 2020 COVID-19 Loan Program


SBA 2020 COVID-19 Loan Program (cont’d)


SBA 2020 COVID-19 Loan Program (cont’d)


Practical Applications/Discussion of Key Issues

What are clients most concerned about during this liquidity crisis? • How do they keep their businesses viable and employee teams intact?• Will commercial banks rework present loans to help?• Which SBA loan program fits best?• Can clients justify an SBA 7(a) loan based on facts and circumstances? • How do we deal with SBA affiliation rules and prequalification questions?• What is the restaurant/hospitality industry exception and why?• How do client’s plan/budget for the correct loan forgiveness amounts?• What tools have we created to assist clients in making key decisions?• How can we provide the best value to our clients and society during this

strange time?• Other


Urgent Opportunity to Assist Banks and Clients with CARES Act 7(a) Loan Application and Related Administration/Forgiveness Issues.

Jason Kadow – KMA Bodilly CPAs & Consultants, S.C.


Payroll Protection Program – Business Plan

Assist bank customers in understanding their eligibility and benefits available under the Paycheck Protection ProgramAssist

Gather the required documents from customers and compile into complete loan application packages to submit to financial institutions

Gather

Utilize your accounting services team to do this workUtilize


Payroll Protection Program – Marketing to Banks

Alleviate the stress on them when their business customers call all at once to get their PPP loans processed

Reduces the bank’s need to hire short-term employees or reallocate employees to package the PPP loans

Allows the bank to off load customers questions on documents and information on programs, therefore freeing up valuable bank resources

Will allow the bank to process more loans than would be able to with only using bank personnel


PPP Loans – Services to be provided to banks

Assist in packaging all of the necessary information required to be submitted for the PPP loan applications including, but not limited to:

• SBA Forms• Client Documents (tax returns and financial statements)• Verify supporting payroll records and calculations

Assist customers through the 8-week period starting on the loan origination date

• Stay in contact with the customer and field any questions• Minimum of 1 check-in call mid-way through the period• Provide support to the bank for any interim issues

Collect the necessary documents and complete the forms to aid in calculating the loan forgiveness amount after the 8-week period ends


PPP Loan Processing – Why do it

Bank pays fee to firm for processing of each loan

Builds or strengthens relationship with banks for future referral work

Get access to potential new customers


Summary of Resources

• SBA Paycheck Protection Program (Word document)• SBA Economic Injury Disaster Loan Info (Word document)• Project Work Steps (Word document)• Engagement Letter for CARES Act (Word document)• First Email (Word document)• Second Email (Word document)• 2020 Paycheck Protection Program Loan Internal (Excel Workbook to be used by

firms)• 2020 Paycheck Protection Program Loan Client (Excel Workbook to send to

clients)


2020 Paycheck Protection Program


Urgent Tax Strategies


Questions?