Confronting the Brutal Facts

“You must never confuse faith that you will prevail in the end – which you can never afford to lose – with discipline to confront the most brutal facts of your current reality, whatever they might be.” – Admiral Jim Stockdale

Admiral Stockdale was the highest-ranking U.S. military officer in the “Hanoi Hilton” prisoner-of-war (“POW”) camp during the height of the Vietnam War, imprisoned there from 1965 to 1973. If you haven’t read Good to Great by Jim Collins, it’s worth the investment of your time. This quote was taken out of Chapter 4 where Collins talks about “The Stockdale Paradox.” Stockdale also says, “I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade.”

 

Fortunately, what we are going through now is nothing like being in a POW camp; however, it is the worst economic climate that many of us have ever known. Couple that with the uncertainty surrounding us, the fact that many things that were familiar are now new (if I hear one more person say “new normal” I’m going to puke) and it all adds up to a very frustrating, stressful, and frightening time. The Stockdale Paradox holds true for us in business, as discussed in Good to Great, as it did for Admiral Stockdale’s time in Vietnam.

 

The reality is that we don’t know when we will be past this and therefore we need to focus and make our decisions based on our current brutal facts. We can’t look past the pandemic nor can we afford to make decisions based on what we hope will happen in the next month or two or three. This is not easy, but if we can do this, we and our teams will get through this and be stronger in the end.

 

One of the brutal facts many of us are facing is PPP money running out (if it hasn’t already) and ensuring that we get full loan forgiveness. Over the last two weeks, there has been additional information released regarding PPP loan forgiveness that is discussed below. Our updated workbook is also linked below.

 

If loans are on your radar – or even if they aren’t but should be (think “brutal fact”) – you should consider the interest-free loan relating to payroll tax deferral, the Economic Injury Disaster Loan (“EIDL”), and the Main Street Lending Program. We will briefly discuss the payroll tax deferral loan and EIDL below. The Main Street Lending Program is beyond the scope of this writing; however, we are happy to discuss this, so feel free to reach out to us for guidance.

 

With regard to the PPP loan, the recent guidance issued included:

 

1) An updated PPP loan forgiveness application indicating the following:
  • The 24-week covered period as opposed to the original 8-week covered period;
  • The maximum forgivable cash compensation per employee of $46,154 over the 24-week covered period;
  • Owner Compensation, including compensation of S corporation and C corporation owners, is limited to the lesser of 2.5 months of 2019 compensation up to a maximum of $20,833; and
  • There is no “cliff effect” for not spending at least 60% of PPP loan proceeds on payroll.

 

2) In addition to the updated PPP loan forgiveness application, an additional EZ PPP loan forgiveness application was also released if you meet one of the three following requirements:
  • The borrower is a self-employed individual, independent contractor or sole proprietor with no employees;
  • The borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period (exceptions apply); or
  • The borrower was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, related to maintenance of standards of sanitation, social distancing or any other work or customer safety requirement related to COVID-19.

 

3) Other PPP items to consider:
  • Currently, forgivable expenses are NOT deductible for income tax purposes;
  • With regard to applying for forgiveness, for those companies that require financial statements, keep in mind that you will most likely need the bank’s forgiveness determination to issue such financial statements; and
  • Please note that if you qualify for the EZ application referred to above, there is no need to complete the workbook linked below in its entirety. Please see the updated instructions.

 

With regard to the payroll tax deferral, EVERY BUSINESS that carries debt and has payroll should consider taking advantage of this opportunity. This option became more attractive with the Paycheck Protection Flexibility Act of 2020. Employers are permitted to defer the employer share of Social Security taxes for the period March 27, 2020 (practically July 1, 2020) – December 31, 2020. Since the second quarter ends today, June 30, 2020, you should notify your payroll company of the desire to take advantage of this IMMEDIATELY. The payroll taxes deferred are due 50% each on December 31, 2021 and 2022 without interest. Click here for the link to the IRS FAQs regarding this program.
With regard to the EIDL, the program was recently reopened. We are suggesting businesses that carry debt to apply for this loan as the terms can be up to $150,000 to be repaid at an interest rate of 3.75% over 30 years.

 

Thank you for your time and please let us know if we can assist in any way.

 

– Alan R. Sasserath, CPA, MS

Download the workbook here.

Paycheck Protection Flexibility Act

Late yesterday, the Senate passed the House version of the Paycheck Protection Flexibility Act (“PPFA”), adjusting some of the rules under the Paycheck Protection Program (“PPP”). The bill will now go to President Trump, who is expected to sign it. Like much of the guidance that has been issued by the Treasury since the PPP was originally enacted, this bill is a further relaxing of the PPP rules, permitting more borrowers the opportunity to secure PPP loan forgiveness.

Below are some of the key provisions of the legislation:

  • The covered period (the timeframe for the borrower to pay or incur forgivable PPP loan expenses) has been extended to the earlier of 24 weeks or December 31, 2020. Pre-PPFA borrowers can choose to retain the original eight (8) week period.
  • With regard to the reduction in forgiveness due to the reduction in full time equivalent (“FTE”) employees, there are additional exceptions not previously discussed in the law or Treasury guidance. There are exceptions to the FTE reduction calculation if the borrower can document in good faith that: (1) the business could not rehire terminated employees and find qualified employees for unfilled positions by December 31, 2020 or (2) the business was unable to restore business operations to February 15, 2020 levels due to COVID-19 related operating and compliance safety standards.
  • The payroll cost requirement was lowered from 75% to 60%. Based on our reading of the law, the 60% is the minimum amount that must be spent on payroll costs, otherwise there would be no loan forgiveness.
  • With regard to loan forgiveness reductions, the deadline for rehiring has been changed from June 30, 2020 to December 31, 2020.
  • Borrowers are permitted to defer the payment of 2020 employer payroll taxes until December 31, 2021 (50%) and December 31, 2022 (50%).
  • The loan is deferred until the date on which the amount of forgiveness determined under the CARES Act is remitted to the lender. Originally, the period was six (6) months. If the borrower fails to apply for forgiveness within 10 months after the covered period as described above, then the borrower will begin to make payments at that point.
  • The term of all PPP loans issued after the date of enactment of the PPFA (the date President Trump signs the bill into law) shall be a minimum of five (5) years and not the current two (2) years. The interest rate remains at 1%. Lenders are not prohibited from modifying loans made prior to the date of PPFA enactment to a five-year term instead of their current two-year term.
Generally, this means that almost all that received the loan will receive full forgiveness if the forgiveness application is properly submitted to the lender. There will most likely be cases where all is not forgiven, but most should receive full forgiveness.
From this point, there are still some unanswered questions and we find ourselves in a familiar spot regarding the PPP: waiting on guidance. Some of the questions are:

 

  1. Was the “cliff” effect of not spending 60% of PPP loan funds on payroll costs resulting in no loan forgiveness an intended consequence or the result of rushed legislation?
  2. Will an updated loan forgiveness application be issued, or will we have to work with the application that is currently in existence?
  3. Does the extension of the covered period to 24 weeks also increase the forgivable, per-employee wage amount to $46,154 from $15,385? We believe it should be increased.
  4. Will the expenses related to loan forgiveness be tax deductible? This was not discussed in the PPFA.
Once we see how this unfolds over the next few days, we will update our forgiveness workbook and make it available.
Thank you for your time and please let us know if we can be of assistance.

PPP Loan Update – June 1, 2020

We hope you are all well and getting back up and running in a safe manner.

As you know, there is more to this pandemic than the Paycheck Protection Program (“PPP”).  Things have been and continue to change rapidly.  If you are not ahead of the curve, you are behind.  Keep vigilant.

In late March and April, many businesses lived off existing receivables and made tough changes to their businesses.  As the calendar turned to May, PPP money was a temporary life preserver.  Now, as we stare at June, some are looking at PPP loan money being exhausted and opening for business or continuing their businesses amid a lot of uncertainty.  In a lot of respects, for many, it is like starting your business all over again – only with a bigger (albeit uncertain) customer base, more established relationships, new rules that are constantly changing, and bigger overhead.  Just like in Rocky III, we all need to get back to our roots and find the “Eye of the Tiger.”  We have built a business before; now we must do it again with a head start and within a different set of rules.

The primary principles and planning points we discussed early on still hold true: (1) Monitor your cash flow as closely as possible, as it is your life blood; (2) Look for opportunities and jump on them quickly; (3) Keep in close contact with your customers, vendors and team/staff, as communication is key; and (4) Fortify your IT and security measures.  We will expand on these in a series of emails over the coming weeks.

For now, the focus is cash flow.  With that, let us start with the PPP and then discuss other measures.

Below is a link to an Excel workbook that will help you calculate loan forgiveness.  We have also linked a short instructional video to show you how to use it.  As the calculations are involved and we are accountants and not programmers, there are some limitations to the workbook (please see “Instructions” tab); however, it should give you a good picture of where you stand regarding PPP loan forgiveness.

As some of you may have seen, the House passed the Paycheck Protection Flexibility Act of 2020 last Thursday.  This is a separate bill that relaxes some of the PPP loan and forgiveness requirements as follows:

  • Extending the expense forgiveness period from eight weeks to twenty-four weeks
  • Reducing the 75 percent payroll ratio requirement
  • Eliminating 2-year loan repayment restrictions
  • Allowing payroll tax deferment for PPP recipients
  • Loosening the FTE reduction loan forgiveness provisions
  • Extending the June 30 rehiring deadline

As SBA and Treasury guidance has been issued, it has generally been borrower-friendly, and this is no different.  There is a similar bill in the Senate, and we are hoping to see this passed, reconciled, and signed into law shortly.  Again, this is NOT law yet, but are hoping that it will be as soon as this week.  For the moment, our advice is to continue to plan for the worst (the current PPP forgiveness rules) and hope for the best (Paycheck Protection Flexibility Act of 2020).

If these rules change, we will update our workbook and send it out when available.  At that point, for most of us, it should be more a matter of doing everything you need to do to ensure that the full PPP loan will be forgiven and less of a question of how much of the PPP loan will be forgiven.

With regard to cash flow, there are other Federal and New York State loan programs available which are not forgivable but have favorable terms.  They are listed here.

In addition to the programs above, continue to monitor your cash flow and adjust your revenue, expense, and cash flow budgets frequently.  With regard to receivables, a few ideas are to accelerate them where possible, review payment terms, give incentives for early payment where practicable, and ask for deposits up front.  With regard to payables, review your contracts and expenses, defer payments where possible, and prioritize suppliers and vendors that are critical to maintaining status quo and top line growth.  Keep in close contact with your bank and lending sources as they are an integral part of this process.

There is no one-size-fits-all answer to the many questions we have.  These paragraphs are meant to give you some ideas but are not a cure-all.  You should continue to work with your professional team to work through these issues.

The goal right now is to get through this critical period with as little debt as possible to get to a time when we can all make money again. Please let us know if we can help.

To download our updated workbook, click here.

View the video below for an in-depth tutorial on how to use our workbook.

 

COVID-19: Summary of Several Available Loan Programs

 

Covid-19 Small Business Administration and New York State

Summary of Several Available Loan Programs

  1. Economic Injury Disaster Loan (EIDL) – This program is currently only accepting applications from agricultural businesses but is expected to open again soon. Applications are completed directly with the SBA. Originally, this was supposed to be a loan of up to $2 million but due to the high demand, they have limited it to $150,000 per applicant. This is a 30-year term loan with a 3.75% interest rate. There is also a grant portion of this loan that is available. You can receive up to $10,000 as a grant ($1,000 per employee). The grant portion does not need to be paid back; however, if you received a PPP loan. it will reduce the amount of forgiveness. Personal guarantees are not required for all loans less than $200,000 although collateral is required for any loans over $25,000. To be eligible for the EIDL loan, you must be considered a small business with fewer than 500 employees (some businesses with more than 500 employees can also qualify, contingent upon SBA’s size standards for the industry).

 

  1. Main Street Lending Program – Applications are completed through FDIC-insured lenders. Businesses that have fewer than 15,000 employees or less than $5 billion in total revenues in 2019 qualify for this program. Certain industries such as non-profits, financial businesses, life insurance companies, passive businesses owned by developers and landlords, etc. do not qualify. This program includes 3 different loan options:
    1. Main Street New Loan Facility (MSNLF) – This loan has a 4-year maturity. Principal and interest payments are deferred one year. The interest rate is the 1- or 3-month adjustable LIBOR rate plus 300 basis points. The principal is amortized one-third in the second year, one-third in the third year, and one-third in the fourth year. The minimum loan size is $500,000.
    2. Main Street Priority Loan Facility (MSPLF) – This loan has a 4-year maturity. Principal and interest payments are deferred one year. The interest rate is the 1- or 3-month adjustable LIBOR rate plus 300 basis points. The principal is amortized 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at the end of the fourth year. The minimum loan size is $500,000.
    3. Main Street Expanded Loan Facility (MSELF) – This loan has a 4-year maturity. Principal and interest payments are deferred one year. The interest rate is the 1- or 3-month adjustable LIBOR rate plus 300 basis points. The principal is amortized 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at the end of the fourth year. The minimum loan size is $10 million.

 

  1. New York Forward Loan Fund (NYFLF) – This is a loan available to New York small businesses with 20 or fewer full-time equivalent employees and less than $3 million per year of gross revenues. There is no restriction on what industries can apply for this loan. Applications for these loans are completed directly through New York State. Companies that received either PPP or EIDL loans are not eligible. The loan amount is the lesser of $100,000 or the average monthly revenues in a 3-month period prior to COVID-19. This loan would need to be paid back over 5 years. The interest rate on these loans is 3%. Only interest payments are required for the first year and the loan balance is amortized over the remaining 4 years. No collateral or personal guarantees are required.

PPP Webinar Workbook: Updated

We hope you are all well and getting back up and running in a safe manner.

As promised, attached is our Paycheck Protection Program (“PPP”) loan forgiveness workbook. We have also attached a short instructional video to show you how to use it. As the calculations are complicated and we are accountants and not programmers, there are some limitations to the workbook; however, it should give you a good picture of where you stand regarding PPP loan forgiveness. Before using the workbook, please familiarize yourself with the limitations, which can be found on the “Instructions” tab.

As some of you may have seen, the House passed the Paycheck Protection Flexibility Act of 2020 yesterday. This is a separate bill that relaxes some of the PPP loan and forgiveness requirements as follows:

  • Extending the expense forgiveness period from eight weeks to twenty-four weeks
  • Reducing the 75 percent payroll ratio requirement
  • Eliminating 2-year loan repayment restrictions
  • Allowing payroll tax deferment for PPP recipients
  • Loosening the FTE reduction loan forgiveness provisions
  • Extending the June 30 rehiring deadline

As I mentioned in the webinar, as guidance has been issued, it has generally been borrower-friendly and this is no different. There is a similar bill in the Senate and we are hoping to see this passed, reconciled and signed into law shortly. Again, this is NOT law yet, but we are hoping that it will be law as soon as next week. For the moment, our advice is to continue to plan for the worst (the current PPP forgiveness rules) and hope for the best (Paycheck Protection Flexibility Act of 2020).

If these rules change, we will update our workbook and send it out when available. At that point, for most of us, it should be more a matter of doing everything we need to do to ensure that the full PPP loan will be forgiven, without the planning and scrambling going on now and potentially only receiving partial PPP loan forgiveness.

Thank you for your time and please let us know if we can be of further assistance.

To download our updated workbook, click here.

View the video below for an in-depth tutorial on how to use our workbook.

For a replay of the webinar, click here.

To download our PowerPoint, click here.

WEBINAR RESOURCES: Breaking Down the PPP Loan Forgiveness Application

Thank you for joining us for yesterday’s webinar, “Breaking Down the PPP Loan Forgiveness Application,” presented by Alan Sasserath. Below are links to our PowerPoint and a recording of the webinar. Our updated workbook will be posted here in the next few days.

View the webinar replay here.

Please contact us with your follow-up questions: