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Understanding how The CARES Act Applies to Your Business

On April 1st, we sat down (virtually of course) for a Q&A with one of our lawyers – Mark Stansbury of Stansbury Weaver, LTD. We talked about all things CARES Act and how the legislation applies to small businesses. You can watch the video above but we’ve also shared the most important bits of information below.

Adam:

So there’s a lot of confusion and things going around the CARES Act. There’s a lot of information that’s all over the place, some of it true, some of it not. And so we came… we wanted to bring you on here to kind of clear things up. Why don’t you talk a little bit about what you do, your firm’s area of expertise, who you typically work with, and then we can just start tackling the questions.

Mark:

I’m a partner at Stansbury Weaver and we are a business law firm. We don’t litigate, we just handle transactions. We mostly work with small businesses and mid-sized businesses. We work with some startups that are raising venture capital and we work with a lot of solo entrepreneurs, designers, copywriters, bloggers, so across the spectrum of businesses on the smaller side. We handle everything from formation, the contracts, the tax planning and raising capital. 

So the CARES Act applies to a lot of our clients. There are provisions that apply to all different sizes of businesses, but most of what you’ve been hearing about is probably related to either the individual grant that everyone’s going to get a check from the Feds unless you phased out or the business stuff that relates to the loans through the SBA.

Adam:

We’re talking specifically about the pieces that apply to small businesses. Why don’t you run through a bit of that?

Mark:

I think the individual thing is worth just noting briefly because that’ll also benefit business owners and your employees if you have employees. So anyone who’s filing a joint tax return, and earning less than $150,000 a year or for those filing an individual return and earning less than $75,000; you’re going to get either $1,200 or $2,400 bucks plus $500 per dependent child. So that’s in addition to all this loan stuff that’ll help out. But let’s jump into the loan.

So the main programs under the CARES Act  are the Paycheck Protection Program, which is a short-term loan to cover two and a half months of payroll basically, and the Economic Injury Disaster Loan, which includes the $10K grant component that I’m sure everyone’s heard about. There’s also loan deferral, so if you have an existing SBA loan, the SBA will pay your loan payments for six months. And then sort of related to this is unemployment benefits, which the law extended to sole proprietors and independent contractors, which is usually not the case for unemployment.

So circling back to the Paycheck Protection Program, the way this works basically is you take your average monthly payroll over the past 12 months. It’s not clear from the law whether that means the 12 months leading up to the day you applied or the or it means 2019, that becomes interesting because some people are asking with they can deposit a bunch of money and make a huge payroll right now to drive up their average, probably not.

According to the SBA application form that they released, you probably cannot, so I’d be careful there. But anyway, you take an average of your monthly payroll and you multiply that by 2.5. If you weren’t, if you haven’t been in business for a year, you can use a shorter time period, which is the beginning of this year. So January and February of this year you can use and take the average from that. And if you’re a seasonal business then you have a specific time frame that is… It’s in 2019 but it’s a specific time frame that’s intended to capture seasonal swings.

So you take that average, you multiply by 2.5. You can also include in their refinance if you already got an economic disaster loan from this year, from the prior bill that was passed, you can refinance that as well. But for most people, it’s just going to be two and a half times your average monthly payroll. It’s a pretty broad spectrum of things that it can technically be used to cover because it’s anything under this traditional 7(a) loan program for the SBA, which is their main lending program.

But the main things that’s intended to cover are payroll, including salaries, commissions, tips, health benefits and so on. It can also cover mortgage interest for a business loan or rent or certain utilities, covered utilities, all of which have to have been in place on February 15th, so you can’t sign up for something now and get it covered. But everything else, for most people that’s going to be covered.

The loan, the paycheck protection loan has a max of a 4% interest rate and payments are deferred for six months but the real benefit is if you spend the whole loan in the next eight weeks after you got it on payroll, rent, utilities, mortgage interest, any of those qualifying things, then the SBA will forgive the loan entirely. So you won’t have to pay back any of it but what it looks like right now is you have to apply for forgiveness. So you’re going to have to provide evidence certainly and some sort of application that hasn’t been released yet to apply for the forgiveness.

But in all likelihood the lending banks in order to facilitate this for the SBA are going to be fairly lenient, is my guess. Because if you qualify, for forgiveness, the feds are going to pay you back a full loan and if you don’t, then you’re going to have to pay back your loan and I think most banks would rather just get the money from the feds.

Adam:

Right, so the lender would be receiving money either from you or from the government one way or another, the SBA one way or another.

Mark:

Yes, exactly. And the nice thing about this is it’s not considered loan forgiveness income. So some people may be concerned that if they have a large amount of loan, then if you’ve had loans forgiven in the past you have written off, you owe income on that technically, so you pay tax on that but in this case, you do not have to pay tax on it. So it’s essentially two and a half months of free payroll if you play it right and just follow the rules.

There is a caveat here, which is the amount of forgiveness will draw down proportional to the amount of layoffs and pay costs that you implement over the next eight weeks. So if you have fewer people on payroll now than you had on average last year, you will get less forgiveness proportionally. And if you’ve cut people’s pay more than 25%, the same thing will apply. There is a correction period so if you get the numbers back up, either raise people’s payback up or hire more people by June 30th of this year, then the forgiveness amount will go back up to a hundred percent.

So you have a window of time there that you can make a correction if you’ve already laid people off. I know a lot of people have already laid off a lot of their staff, if not all their staff. So they may worry about this forgiveness. But if you get the loan money and you can bring people back on board, that’s essentially what the law was intended to do.

Adam:

That’s cool. So there are some business owners who were compensating themselves through owner’s draws but not necessarily on payroll. How does this apply to them? Another question we got is, do we need to be hiring back the same people?

Mark:

So on the second one, it does not have to be hiring back the same people. You can bring on anyone as long as the numbers are back up. The salary component may weigh in if you’re hiring people at different levels. So something to be careful of there. The laws actually are sort of ambiguous as to whether if you hire people at different pay rates that will count against you but I presume at this point that it does.

There’s a lot of stuff in this law that’s not crystal clear. It’s 880 pages that they wrote in a week. So there’s some ambiguity and we’re getting some guidance from the SBA, they issued a little bit but it wasn’t super helpful. But I would say the safe way to think about it is that your forgiveness is going to be reduced if the number of employees that you have on payroll right now is lower than last year, that’s easy to calculate, relatively speaking or if your overall payroll is lower. And I think that the way they count that as like on a person by person basis, it’s a 25%, you have a 25% cushion that you can sort of cut people’s wages a little bit and it doesn’t apply to any amount over $100,000. So if you have an employee who was making $150,000 and you cut them to $100,000 then it shouldn’t impact your forgiveness the way it’s written.

To answer your first question, if someone was paying themselves, there’s a lot of questions around if you’re taking draws, is that covered? The answer, like a lot of the stuff, it’s just not clear, but I would feel comfortable moving forward on the presumption that it does apply if it’s your regular pay, and if it’s irregular pay because you’ve got a big project or whatever, probably not. Self-employed individuals and independent contractors are covered by the Paycheck Protection Plan. So you should be able to apply if that’s how you earn your ordinary income.

Adam:

One question regarding contractors, if I’m thinking through what our payroll was, should I include 1099 teammates in that?

Mark:

Yes, absolutely. So you can include anyone who is on regular1099 if they just did one project for two months last year. I mean maybe you count that as part of the average, maybe not. I would say be careful of anything that really skews your average a lot if it’s just some huge project or whatever. But in general, it is absolutely written to cover contractors. I think the law basically recognized that a lot of people are in the same situation that you’re in where they have people who are on payroll and then people who are contractors and some people want to be contractors and not on payroll for tax reasons. And there’s obviously a lot of issues with that, with the IRS and fighting and back and forth. But I think for the purposes of this law, they just punted and said, “Oh, if you’re essentially an employee, whether you’re a W2 or 1099, you count towards the payroll and you’ll get covered.

Adam:

Got it, the person who asked that question was a yoga studio owner. And I know there’s a number of those folks who pay attention to our stuff. Most of those instructors typically end up being 1099, so just figuring all that out. It doesn’t mean like you’re going to be like opening your yoga studio next week probably, but yeah.

Follow up on that question is a there’s a number of great examples of some of these things are grants for rehiring people or keeping people employed over the next eight weeks. And that is to be forgiven if you use it for those certain things. What if those people don’t work? Or maybe like a yoga studio example, you don’t have stuff for them to do, you’re not having those classes for them to instruct. Is there much guidance on… does a person have to work?

Mark:

They don’t have to work. So three things I’d say on that. One is, even if none of it’s forgiven, the loan terms are pretty generous. So it’s a 10-year term, with a 4% max interest rate and you have six months to furrow on payment, any payments whatsoever on it.

So even if it ends up just being a straight loan, the terms are pretty good and you can kind of amortize it out your costs for what hopefully is not too long of a stretch here over a long period of time. The second thing is you can, if you want to get some of the forgiveness, you can spend it on rent and utilities, so that will help cover some of it. The SBA in the guidance that they just released said that they wouldn’t expect more than 25% of forgiveness to go to that sort of thing, rent and utilities as opposed to payroll. I don’t have any idea where they’re coming up with that because the law doesn’t say that. But if you want to fight the SBA on it, that’s just a heads up.

But also, if you want to bring people back on board, I’d think about other things you could have them do. I you can pay people to create content or anything like that, that’s not normal in the studio stuff then I would say that’s fantastic, even if it’s like having someone come in and help paint the studio while you’re not open. If you can put people on payroll and pay them, then that will count towards the forgiveness and I’m sure they’d appreciate it too.

Adam:

Awesome. Can you talk about if someone should submit for one program, all of them in a particular order, what kind of guidance have you seen to be useful for people?

Mark:

So the SBA hasn’t issued any guidance on this explicitly. My hunch is that you can apply for both of them. What we do know is that explicitly as you can apply for both the paycheck protection and the EIDL program for the same purpose, so you can’t use them both for payroll. You could use one for payroll and one for rent. Basically, do the Paycheck Protection Program for payroll. Use it, if there’s any leftover, for rent and utilities and then use the EIDL loan for any other purpose, whether that’s, whatever, to buy supplies. It explicitly says if the cost of your supplies go up, you can use it for that. And you can use it to cover any other preexisting obligation basically but be careful that you don’t use it for the same purpose.

The Paycheck Protection Program section of the statute explicitly says that if you have a preexisting economic disaster loan issued now or in the last month or two, that will not preclude you from getting the Paycheck Protection Program. And in fact, in the EIDL section under the grant program it references people later applying for the paycheck programs. So we know you can at least do the economic disaster loan and then go to the paycheck one, not clear if you can do both at the same time. My guess is given the atmosphere right now and the purpose of this bill that you can, but if you want to be safe, I would say do the economic one first and then the paycheck one after that.

Adam:

Cool, love it. So let’s run through some rapid fire questions:

Should I just go do this and see what happens? Should I go sit and adjust my business plan with some of these potential figures in there and then go show up or what? How much of our priority is that?

Mark:

I would say just go now, do as fast as you can. This is the one big factor that cuts against what I just said about doing the two loans sequentially instead of at the same time that the money is presumably going to run out because everyone’s interested in getting it, particularly the forgivable money and then the 10K grant under the EIDL loan. So we didn’t even touch on that but I’ll bring that up very quickly here. So if you apply for the Economic Injury Disaster Loan, then you can select that you’d like an advance on that and that’ll get you up to 10K.

It looks like the SBA is just treating that as 10K the law actually says up to, so I don’t know if anyone would get less than that, but something to be aware of if you apply, you may not get 10K but that 10K is a grant. So whether you’re approved for the loan or not, you don’t have to pay it back. If you get the Economic Injury Disaster Loan and the Paycheck Protection Loan, this is what I was alluding to a minute ago, your forgiveness will be reduced by the amount of your advance.

So if you get the 10K, you’re not also going to get the full amount of forgiveness, it will be reduced by that 10K. But if you don’t get the paycheck loan, then you won’t have to pay back the 10K at all. Anything on top of that will be a loan that you’ll have to pay back and it has six months deferral and generous terms and all that too.

Adam:

Yeah, so go do it. This is not a normal time and the federal government and the SBA are acting in very not normal ways. I would tell people, “You’re going to do things that feel like what you would do in the midst of defeat but this is not, everybody, this is how this is all sort of operating at this moment.”

Mark:

Let’s say on a sort of a broad political and ethical standpoint, I can understand people having general opposition to just taking money as a handout when your business is relatively strong, but explicitly the way the law is written that Congress just assumes that everyone is going to be hard hit by this and what they want to do is just put money in people’s hands. So if you’ve been a taxpayer up till now and a good citizen, I wouldn’t consider this as you milking the system. You’re doing what the system’s designed to do, which is just try and keep you afloat for a while. And if you don’t need the money and you take it out, then just pay it back. But I think it is in every business interest to just, to try and get the money now and especially if you can keep people on payroll, that’s even better.

Adam:

Yeah, I’m thinking of it as the government trying to work out, not unemployment essentially, but doing it through some of those, the SBA and other channels rather than just directly. And so you can think of yourself a little bit like you’re handing that pass through some. 

Someone asked about double-dipping, which in their terms was, vendors are going to be applying for this, landlords are applying for this, people who I pay, people who pay me are all sort of getting this. Is there any restriction or is there any way to think about, I don’t have to pay this person because they’re probably getting it too or any of that. Or is that from a legal standpoint, does that matter?

Mark:

So the Paycheck Protection Program requires certification that you’re not receiving money separately under the same program basically. If you have independent contractors who are on your regular staff and you borrow money to pay them and they as independent contractors try to borrow money to pay themselves also, then they’re going to be blocked from doing that or they’re going to have to purge themselves on form so that’s prohibited. If they want to take out an Economic Injury Disaster Loan, if they’re independent contractors, they can do that. It’s a loan, they’ll have to pay it back other than the grant component. And the grant component is sort of, like Adam just said, it’s sort of like a unemployment handout basically. Like try and keep people going so funnel unemployment through the SBA. So other than that component, yeah, you could take out a loan. If you take out a paycheck loan, and you include that average wage that includes that contractor, but you don’t spend it on that contractor, then they could also take it out and cover themselves. So if you end up spending on rent and utilities and you don’t keep them around, then they could apply for it themselves and they wouldn’t be double-dipping. So yes, stay in touch, talk with them, make sure you kind of coordinate that.

Adam:

Got it. So some people are working from home or operate remotely, and have operated remotely for a while. Is there any distinction amongst paying your home internet bill versus your office internet bill?

Mark:

So there’s no guidance on that and the law doesn’t talk about that. But the way I would think about it is that is the way that you treat it as deductible for the IRS. So whatever portion of your house you have allocated to that, then you can probably get away with stuff like that component, but there’s any guidance. So I feel pretty comfortable with that but yeah, there’s always that little risk.

Adam:

The policing or the verification of those expenses is going to happen after the fact when you are applying or they’re looking to see what percentage of that loan is forgiven. Seemingly, you will have to defend that at a later date though we don’t exactly know what specific questions will be asked at that later date yet. All of the SBA loans that you talked about you need to go work with the bank or lender, right?

Mark:

Yes.

Adam:

There’s going to be a lot of sort of almost predatory lenders or other people who will make it easy for people to pop up and sort of promise that they’ll help with these things or do these things sort of for you. What do they need to be looking for?

Mark:

So it has to be a certified SBA lender. Most banks are lenders. There are other organizations that are SBA lenders. There is also a concept of an agent in the law and I think most of these people who are going to be doing like cash flow loans and stuff like that are going to fall under this agent thing where agents are allowed to earn 1% of the loan amount and the lender is supposed to pay them but they’ve made these forms relatively simple. I don’t think anyone really needs an agent and you probably shouldn’t be paying anyone to help you. Maybe your CPA, I’m not going to say your lawyer, but maybe your CPA.

And for the most part, even on traditional SBA loans, we as a law firm don’t help out that much because it’s mostly just business questions. So I would say most of that you can handle in house and you don’t need to pay anyone, so look out for that. If someone seems like they are not legitimate, then they probably are not legitimate. There’s going to be a lot of bad behavior around this.

Adam:

Yeah and there’s a lot of question marks still about how this gets worked out. And I think one of the things that we both, you and I have both seen around the internet is that there’s a lot of information that feels very definitive. I have people call me every day telling me I need to do something because obviously this does X, Y and Z where there’s a lot of question marks left in those.

Mark:

Well, on that point really quick, I’ll say that, you could go on Reddit on that small business, sub Reddit and there are people who say, I talked to the SBA or I talked to my lender and they told me this and what the lenders telling them is just wrong. Like this is the tax advance or this is just like the loan deferral, there’s a large discussion on there about the loan deferrals. So if you have an existing SBA loan, the SBA is going to pay your loan for six months, that’s to say you’re going to pay principal and interest on your loan as if you are paying it, you’re covered for six months.

So lenders aren’t really up on what’s going to happen there, I guess, so they’re providing a lot of misinformation, but Congress appropriated $19 billion to cover that for six months. So the money is there and it’s pretty explicit in the law. So just to say that you’ll hear misinformation and you’ll hear information that sounds like it’s legitimate and for people who should know better, but there’s just a lot of confusion right now. So yeah, be careful.

Adam:

I will go to another question. A freelancer is considering hopping into unemployment at this moment because that’s for the first time open to contractors, or the EIDL or the 7(a) loan and all the things that are kind of filled in with that or that are included in that. Does it matter, would you say, do all of them or do none of them? How does a person think about all of that?

Mark:

Yeah, we don’t know exactly and part of it’s going to be how does this play out over the next couple of weeks. The Paycheck Protection Loan is not open to independent contractors until April 10th. It’s open to other businesses April 3rd so there’s going to be a little bit of a gap there that may be to discourage people. I’m not really sure or just to try and make sure the money goes to businesses with employees. The EIDL loan is probably, I would check the state unemployment office website and maybe talk with someone there just to make sure that’s not going to be a problem but if it’s not going to be a conflict, I would start with the Economic Injury Disaster Loan and at least try and get the 10K advance.

If you get more than that, great. If you can use it for some other purpose that’s not unemployment, great, if not just sit on it and pay it back because the rates are so low, you basically break even. And then unemployment as the last sort of last effort. There is ambiguity under the paycheck program about whether an independent contractor without any employees can get the benefit. It seems to suggest that they can, but the way that the other sections are written, it’s sort of similar language but that references employees suggest that maybe not and we have no guidance on that at all, which is unfortunate.

So something to be aware of, I would say definitely move forward and apply for it. Worst they can say is no for that, but it’s just not clear how the SBA is going to treat that. If you’re just an independent contractor or a sole proprietor with no employees at all, can you get it? I think my gut feeling is that unless national sentiment changes dramatically, like there’s a virus or a vaccine in a week for this, then everyone’s sort of going to be leaning in favor of providing more money to more people and not trying to be super strict. That’s the way the law is written and that’s the way the SBA seems to be treating it so far.

Adam:

Yeah, no, that’s the truth. So I’m going to ask the question about buying a home. So someone was supposed to close on a home in the next two months and was nervous about any of this activity changing any of that stuff. So the person is talking to a loan officer, the loan officer doesn’t know a lot of information. Does it seem like there’s anything in this that would translate to someone sort of like mortgage and or personal liabilities as they sit now?

Mark:

No, so my guess is it would have no impact because there is no personal liability on these so there’s no personal guarantee and there’s no collateral obligation either under the Paycheck Protection Program or under the EIDL loans up to $200,000. So as long as you’re not taking more than 200K in loans and we don’t know the actual formula for the loans, it looks like it’s going to be 50% of your profit from last year, so that’s what I’m seeing floating around, but not from anything official. So TBD, but if you’re taking less than $200,000, there’s no personal guarantee and there’s no collateral obligation so it shouldn’t impact your credit.

The only exception to that, I guess is, there’s sort of a backend personal guarantee if you use the Paycheck Protection Program for something that’s not at all covered, then they reserve the right to hold you personally responsible for that but that’s essentially fraud, so it shouldn’t impact you personally.

Adam:

For the record, Mark is not advising fraud nor has ever or will ever.

Mark:

I’m not advising one way or the other.

Adam:

Yes, I saved all that forms and everything in a Dropbox folder and a lot of it is duplicated in the 7(a) loan. So the first thing a person would be doing, or I would tell a person to do is the economic injury, go do that first. The second thing would be go hit up the 7(a) program. Is there anything besides those two things that would be an obvious next step for a business when it comes to the CARES Act?

Mark:

So those are the two main things and then sort of more tangential things are, if you have an existing SBA loan, whether it’s current and payments or it’s in deferral, you’ll have six months covered. Sso if you’ve been working on getting a loan, like you were working on a loan in January and then it got put on hold if, and you still could use a loan, if your business is still operating more or less and you can use a loan, move forward with it because the SBA will pay your first six months of payments and that’s not a deferral. It’s not… they’re not kicking it down six months if they’re going to make six payments on your behalf. So that’s for brand new loans that are started this year. So that’s something worth looking at as well.

And then, I mean there are others, you may see stuff about tax credits, I don’t think that’s going to apply to most mid size or even smaller midsize businesses, mostly for larger businesses under 500 employees so sort of at that point. But if that applies to anyone, I’m happy to talk offline about the credits, it gets pretty wonky and I don’t think it’ll help most people, but it is an option for some, if you see stuff floating around about that.

Adam:

Cool, but that’s kind of the next step to take.You’ll still run your business in a smart profitable way that makes money and takes care of your customers and all that other stuff. I think I see sometimes people trying to circumnavigate building an actual healthy, strong business. And I would encourage everyone to build a healthy and strong business in the midst of all of this and take care of other people and pay people what you can for sure. 

So the last question is how can people find you?

Mark:

Yeah, so you could check us out at stansburyweaver.com. We put together a PDF that outlines this stuff as well so if you want a copy of that, get on our website. We are taking clients and you can contact us here. You can, yeah, take a look at the way we work, it’s a different business model than most law firms. We don’t charge hourly, we do flat monthly rates on a subscription model or flat fees if you have a standalone project like raising capital, say, forming a new company. But a little different approach than most law firms so check it out and I’m happy to talk offline with anyone who’s interested in looking at what that looks like.

Adam:

I would encourage you to subscribe to the newsletter. A lot of law firms, Mark and the partners only send out helpful information, they don’t just spam email people all the time so you’re not going to get like eight million emails hitting you up to try and sell you stuff. So yeah, thanks a ton, Mark. Appreciate it. 

Mark:

Happy to help.

If you are interested in our online community, Gem Club, you can learn more here. We are updating information about The CARES ACT daily as well as answering other business-related questions. 

April 19, 2020
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