The X’s & O’s
Last time we discussed how the CARES Act impacted individuals and today we turn our focus to business owners. Listen to Brent, Matthew, and Joshua talk about how small business owners can gain some relief from this new bill.
Listen to the podcast episode…
Brent Pasqua, Matthew Theal and Joshua Winterswyk
Brent Pasqua: Welcome to the Retirement Plan Playbook. I am Brent Pasqua and I’m joined here with Matthew Theal and Joshua Winterswyk. We have another quarantine podcast coming from our home. Josh and I are currently at our homes in Rancho Cucamonga, Matthew is in Los Angeles, and this is episode 23. This is a special edition episode. We’re going to cover the CARES Act but how it actually affects business owners, and for anyone who hasn’t heard the CARES Act is and stands for the Coronavirus Aid Relief and Economic Security act and we’re going to cover the paycheck protection program within the CARES Act. I think it’s very helpful for business owners to find out how all of this is going to impact them during this time, how they can potentially inject some money into their business to try and avoid, or limit the amount of layoffs that they do for their current employees, and how they can sort of weather the storm until the economy really gets fired back up and started again, because it does sound like it’s going to take some time before the economy really gets full on and running again, like it was, it sounds like it may be a slow startup.
Brent Pasqua: So I guess the first question, Joshua, I have is what actually is this paycheck protection program?
Joshua Winterswyk: The payroll protection program is a loan by the SBA to business owners or businesses that have been impacted by the current coronavirus crisis.
Brent Pasqua : And who is actually eligible to collect money for this program?
Joshua Winterswyk: So businesses that, to be eligible, businesses that have 500 or less employees, that’s one criteria you have to qualify for. And then the business must be facing economic uncertainty due to COVID- 19 as well.
Brent Pasqua: And how much can a business owner or business receive from this program?
Joshua Winterswyk: So the max they can receive is two times the average monthly payroll costs, prior to the loan. So prior to the crisis, you’ll take your monthly payroll costs, times that by 2.5, and the cap is $10 million for the payroll protection program, or also dubbed PPP.
Brent Pasqua: So it’s two and a half times the average monthly payroll costs then?
Joshua Winterswyk: You got it.
Brent Pasqua: Capped at 10 million.
Joshua Winterswyk: You got it.
Brent Pasqua: So Matthew, what are the costs included in the payroll?
Matthew Theal: Yeah, so let’s go through a numerical example, but first we’ll start with, like you said, the costs. The first thing that goes into it is the salary, wages and commissions, and unfortunately it’s capped at 100000 per employee. So if you have an employee who’s making 150000, they only really account for a hundred, as far as the program’s concerned. You also include payment for vacation, parental family and medical or sick leave, any health care benefit payments or insurance premium payments. And then finally any retirement plan benefits, so that would be 401K matches, that gets included in the cost as well. But like I said, the salary portion, just the salary portion, so it’s slightly confusing, is capped at 100000.
Brent Pasqua: So anybody who’s making, let’s say 200000, an employee that works for a company that makes 200, for the calculation purpose, only a $100,000.00 of their salary counts towards the calculation.
Matthew Theal: Correct.
Brent Pasqua: And how does somebody actually calculate this out, because it seems like there’s a lot involved here?
Matthew Theal: Yeah, don’t worry. I came up with a quick and dirty, very easy to follow numerical example. Let’s say that you’re a business owner, and your annual payroll’s $120,000.00. What that means is your average monthly payroll is 120000 divided by 12, because there’s 12 months in a year, so your average monthly payroll is $10,000.00. That means your max loan amount would be the $10,000.00 times 2.5 that Josh was talking about, and we get to $25,000.00, so that’s the max loan you could receive from this program.
Brent Pasqua: And things that need to be added to that calculation would be some of the things that you just previously mentioned, vacation, family sickness, benefits, those things like that, correct?
Matthew Theal: Yeah, and if you want, you could Google for calculators for this and they’ll help you out. I know for ours, I used a spreadsheet that is created by Permanent Equity, which is a private equity company that works with business owners, and then we also use lendeo.dot com, which has a payroll calculator on there as well.
Brent Pasqua: It sounds like, and this is only been rolled out for a few days, it sounds like there are some challenges in people applying. What are some of those challenges and how are people navigating through them?
Matthew Theal: Oh, it’s an absolute disaster, man. I’m not going to sugar coat it. It sounds like it’s been an absolute disaster. The news for the program changes on the hour. You can apply, I don’t know if anyone’s actually received money yet. One of the issues is they put it through the SBA, and I guess the SBA, the Small Business Administration, or is it association? I don’t know. They aren’t staffed to handle us. But to actually get the loan you have to go through a bank that is SBA approved. And from my understanding, the banks weren’t ready for this. And I was even reading a Wall Street Journal article today that was really interesting and it was talking about how the banks don’t even really want to loan this money out because they’re not making enough on it.
Brent Pasqua: Right. So the banks are the one that are having to loan the money out, not the government.
Matthew Theal: The government gives the banks the money to loan out.
Brent Pasqua: And the banks don’t want to loan it out.
Matthew Theal: Right. Because it takes staff.
Brent Pasqua: Correct.
Matthew Theal: And they don’t make enough.
Joshua Winterswyk: And the interest charged on the loans isn’t enough to make it worth their while basically.
Brent Pasqua: And then I also heard that they don’t want to lend it to riskier businesses. They want to lend it to businesses that are solvent, but then the ones that need the money the most are the ones that are a little bit more risky businesses it sounds like.
Matthew Theal: Yeah. And the crazy thing about that though is they specifically put no risk qualifications into the am I eligible, can I get a loan.
Brent Pasqua: Right.
Matthew Theal: For that exact reason and now the banks aren’t doing it. I’m sure there’s an easier way to do what they’re doing right now. I’m not sure what it is, but yeah, this is been nothing short of a disaster.
Brent Pasqua: Yeah. I think if you’re a business owner and you’re looking for this money right now and maybe you’re struggling to file for it, that that’s not unusual right now. Everyone I think is having trouble for it. And it sounds like it is taking a very long time and they’re still trying to work out the kinks. So keep trying to do that. If you, and when you do get this money, what can owners use this money for? Or do they have to use this money for certain things?
Matthew Theal: Joshua, you want to take that one?
Joshua Winterswyk: Yeah. Yeah, of course. So once they actually receive the money, what the money can actually be used for is payroll costs. It can also be used for interest on like a mortgage for the business. Also rent, utilities, and interest on prior loans that were established before February 15th, 2020. I’ll let you kind of take the next portion of that, Matt, though, but using it for these specific needs will help qualify for forgiveness, which is I think one of the biggest benefits to this program.
Matthew Theal: Yeah, absolutely. So this is the kind of the golden goose of the loan, right? Is a large portion of it is a forgivable loan. So we were talking about free money earned here. So if you spend on qualifying expenses, so like Josh was saying, the payroll, the mortgage, the rent, the utilities, you could get a large portion of the bill forgiven. And Josh, I forgot off the top of my head, but it wasn’t like 80 or 90% of your loan gets forgiven?
Joshua Winterswyk: Yep. You got it.
Matthew Theal: So there is though one kind of catch here, and that catch is, you’ve got to keep your employees or re-hire them after this, to get forgiveness. So you can’t fire everybody, take the loan, use it to pay your rent and utilities, keep the lights on, kind of keep the business going, and then not re-hire anyone and get forgiveness.
Brent Pasqua: So if you’re planning on firing someone as a business going into this thing or not bringing them back because they were just not a good employee, are you stuck with them to the end of the year?
Matthew Theal: That’s a good question. And actually that no, theoretically you can lay them off, you can re-hire somebody else at the same pay.
Brent Pasqua: So when you say this money has to be used for this cost, does that mean that when you get the loan you have to stick it in another account that you’re only going to pay these expenses out of? Does it get commingled with the rest of your money? How do they prove that this was used for these items?
Matthew Theal: That’s a good question. And that’s one of our tips for business owners is if you do get this loan, open another account, so your paper trail is easy, and pay your qualified expenses, your payroll or your mortgage interest, or your rent, or your utilities, out of that specific account for this two month period.
Brent Pasqua: That way you’re not commingling expenses that aren’t qualified and gives you a greater chance for a higher percentage of forgiveness. Is that correct?
Matthew Theal: Correct. And if you think it’s hard getting the loan, I can’t imagine what the forgiveness process is going to be like.
Brent Pasqua: Yeah. The documentation that they’re probably going to want to see and approve is probably going to be pretty significant, correct?
Matthew Theal: Absolutely.
Brent Pasqua: So another question that I kept thinking about are what are the terms on this loan, Matthew?
Matthew Theal: So again, this is something that’s been changing a lot and we’re recording this on Wednesday, April 8th, the program started on Friday, April 3rd, and a few hours before they started the program, Treasury Secretary, Steven Minuchin changed the interest rate. So it was up to 4%, currently I believe it’s at 1%, but it could have changed in the last few hours. I just don’t know. Your payments are deferred for six months so you don’t actually have to make a payment on the loan until six months after you receive it. And it matures in two years.
Joshua Winterswyk: And I think that’s one of the other things that’s potentially changing, it seems like as much as we’re starting to understand the payroll protection program, they change it. So I think keeping up to date on the payroll protection program is another part of your process when applying and seeing if this is right for you.
Brent Pasqua: And when does it sound like they forgive the loan? I mean at what point do they make that decision?
Matthew Theal: I’m not sure. I know you’re supposed to apply for forgiveness after the two and a half month time period, right, because that’s where they got the 2.5 from. I’m not sure how fast they’ll get it forgiven, I haven’t read about that.
Brent Pasqua: I think a lot of these questions probably are questions that a lot of people have, and I think that everything is so unique right now that I don’t even think they have all the answers already figured out, obviously, because they can’t get the program up and running yet.
Matthew Theal: Yeah. This solution, this kind of program solution thing is changing on the hour. It’s a very fluid situation.
Brent Pasqua: So how do I get or receive a paycheck from the protection loan?
Matthew Theal: Josh, you want to grab that one?
Joshua Winterswyk: Yeah. So it’s first come, first serve right now. So hopefully your lender, and what we’ve seen is contact your existing bank. Obviously banks are more likely to lend to their existing customers, and they have to be an SBA lender. And Matt, it’s Small Business Administration. So you had it right, on there, and so contacting them, getting that, seeing what their process is and to get started, and again you can use banks, credit unions, business lenders. I know guys had already mentioned one of them, Lendeo, that you had was a good resource, not only resource but a place to apply with as well.
Joshua Winterswyk: It’s just right now it’s you have so many people, business owners, applying that the system’s bogged down, and not enough staff to actually assist everybody, and everyone’s working for the most part from home, so you’re just getting a traffic jam on the business lending freeway right now.
Brent Pasqua: I heard some tips too right now are, it’s probably best or you have the best chances if you work with a business bank, and you have your accounts there to try and go with you the bank that you work with. Is that what you’ve heard also?
Joshua Winterswyk: Yeah, that’s what I’ve heard and typically like if you’re already working with a business bank, they’re just more familiar with the SBA process, and working with them. If your bank isn’t too familiar, or just doesn’t do a lot of business lending, that process is already kind of tired and kind of hasn’t been updated in a while. So working with someone that was already been practicing business lending, like if your bank is a business bank, it’s just going to be that more helpful at this time.
Brent Pasqua: And I heard that CPA’s are also working on this also, so if you have a CPA it sounds like you could use them also, but I think they’re running into the same challenges. I think one of the benefit of using your CPA is, if you as a small business owner don’t actually control your own books or you have an accounting company do it, there is documents that you’re going to need to pull up, and submit to file for the loan, and you’re going to either need to grab that from your CPA and if they are offering a service to go through and try and file this for you, that might be a benefit of some as long it’s cost effective. But I know, I mean obviously regardless of who you funnel through, it’s going to have to go through the banking channel regardless. Right?
Joshua Winterswyk: Yeah, that’s a good tip.
Brent Pasqua: And then lastly, Matthew, what are some tips for business owners?
Matthew Theal: Well, like you said earlier, if you do get the loan, open a separate account, put the money in that separate account, and only pay for the qualified expenses so you could get forgiveness. Apply early, right? This money is limited and businesses are lining up. I’m of the opinion and they’re already starting to talk about it in Congress for I don’t know what stimulus we’re on. I think we’re on Phase Four, that they are going to get more money for this program, because it is so popular and they want to get money in the hands of small business owners. But essentially, get in line, apply early. Independent contractors and self employed can apply on Friday, April 10th, so that would be this coming Friday. If you lay off an employee, re-hire, so you can get forgiveness. The forgiveness is really what makes this free money. And finally, again, don’t just listen to this podcast and think, “Hey, I’m a business owner. I’m going to go apply for this free money.” Consult with your CPA, or your accountant, or whoever your, or your banking professional, whatever. Consult with someone because taking a PPP loan can affect other relief provisions that were passed in the act that we’re not going to talk about today, such as the employee retention credit, or even the deferral of payroll taxes. So you kind of got to know which program is best for you.
Brent Pasqua: It sounds like the best way to find out is to talk to an expert on, I don’t even know if you can call them experts right now because everything is so fluid, but talk to someone that’s up to date on the programs, so that you know which one’s best to apply for, because if you apply for one you’re probably out on the other options. Is that right?
Matthew Theal: For my understanding, yes.
Joshua Winterswyk: Yeah, and I think it’s important to just reiterate, there is a portion of the PPP program that isn’t forgivable depending on your approval, approved amount. So again, just another reason why to consult with someone before going forward and knowing your situation well so you don’t run into consequences later down the road.
Brent Pasqua: Yeah, and to our people that are listening to this who are business owners, we are staying up to date on this information. So if you do have questions free to go on our website. You can schedule a call with us, and we can talk to you about what we do know in specific, find out a little bit more about what your business is looking for, and can probably offer a way to talk through some of these options with you. So there’s another way to get in contact with us, if you just go to RPAwealth.com, and schedule a call with us, and we can try and help navigate through some of this as we’re learning it daily.
Brent Pasqua: Thank you all for listening to the Retirement Play Playbook. I’m Brett Pasco here with Matthew Theal, and Joshua Winterswyk, if you enjoyed our show and want more information, you can visit us at retirementplanplaybook.com. You can also get our show notes there and leave us a review on our podcast. But for any questions, please feel free to reach out to us either directly or through our website, and schedule a call, and thank you for listening. Wish everyone a great one.
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