This content was originally published in March 2020. It was most recently updated in February 2021.
Table of Contents
- Is PPP Forgiveness Taxable?
- Fast Facts on The Employee Retention Credit (ERC)
- What is the Update on the PPP2 Loans?
- PPP Forgiveness Calculations
- What is the Update on the CARES Act Programs that Get You Money?
- Fraud cases (related to the CARES Act, PPP, EIDL)
- Taxes (related to the new filing and payment deadlines and related to filing taxes during this time)
- Ways for businesses to save money during this time
- Alternatives to laying people off
- What your business can do to help
- PPP1 and EIDL Update
- Marco Rubio PPP tweet
- PPP affiliate rules
If you’re running a business during the outbreak of COVID-19, here’s your first step: Remember, you’re an entrepreneur. Triage time is over; it’s time to start being intentional and “next stepping” your business issues.
We learned a lot from the last recession, and while this one is different, breaking down some of the issues with what we learned in the 2000s is an excellent place to start. As always, we are focusing on the business side of the house with this coronavirus small business guide, so we’ll leave the health advice to the CDC and WHO.
Is PPP Forgiveness Taxable?
The short answer is no, after flip flopping over the last 9 months, we all finally got to the best place for business owners. Forgiveness is NOT taxable AND expenses ARE deductible!
Here’s what you should know:
- Congress flexed on the IRS and now businesses that had their PPP forgiven will be given tax-free treatment for forgiveness and deductibility is appropriate for the expenses you paid for with the proceeds.
- So what do you need to do? What you should have been doing all along….getting your forgiveness application knocked out with your bank. The deduction is moot if you don’t get it forgiven first.
Fast Facts on the Employee Retention Credit (ERC)
The Employee Retention Credit is the best option for businesses who were not able to get a PPP or EIDL loan. Here’s what you should ask yourself:
- In 2020, did any quarter show a reduction of 50% in revenue from the same quarter in 2019? In 2021 the rule decreased the impact requirement to 20%, so is Q1 showing a 20% decline in revenue compared to Q1 of 2020? (While we’re still in Q1 of 2021, if your financials are already trending at least a 20% decline, you can go ahead and apply for the ERC mid-quarter.)
- Was I using a PPP loan to pay expenses during that quarter? (You may still qualify for the ERC with respect to wages that are not paid for with forgiven PPP proceeds.)
- Do I pay a significant amount in payroll expenses? (If you don’t have a lot of payroll expenses, the ERC might not be worth pursuing.)
However, the ERC was basically an ignored part of The CARES Act last year after the PPP loan stole the spotlight. That’s changing in 2021 because the ERC just got a serious upgrade. On December 21, 2020, Senate Finance Committee Ranking Member Ron Wyden, D-Ore. announced an expansion of the ERC to keep people on the job and small businesses running.
Again, there are two disclaimers here:
- Keep in mind that if you’re planning on taking PPP2 during this time, that will disqualify you from receiving the ERC.
- If you don’t have a lot of payroll expenses, this credit probably won’t be very large.
If you’re seeing any of these things for 2020 or 2021, talk to an expert. Reach out to our team at Acuity, and we’d be happy to help. Schedule a call with one of our CFOs today.
What if you were unlucky and haven’t gotten the PPP, EIDL, or ERC?
The SBA isn’t the only source of funding during the COVID-19 crisis. A multitude of government and private sources have emerged to help small businesses with funding needs. Our tech stack partner, Gusto, has created a fantastic list of funding sources by state that they are updating on a continual basis. There are 2 tabs in the spreadsheet, so make sure to check out the Private Resources tab.
What is the Update on the PPP2 Loans?
First, are you eligible?
You can apply for your second PPP loan if these things apply to you:
- You used all of your first PPP loan.
- Your business was operational before February 15, 2020, and it remains open and operational.
- You have 300 employees or less per location of business.
- You can prove at least a 25% revenue reduction in gross revenue in any quarter.
There are lots of similarities to PPP1, but PPP2 has more latitude in use of funds and an easier forgiveness process. But first, get clear on whether you’re eligible.
If eligible, where can I apply for a PPP2 loan?
We recommend that you apply through your first PPP loan lender for a simplified and faster process, but it’s up to you. If you qualify, your banker can provide you with the second PPP loan. In the event that the bank that you used for PPP1 is not issuing PPP2 loans, reach out to us here at Acuity, and we’d be happy to connect you with someone that we recommend.
For Lucky PPP Recipients, Focus Should Shift to the Forgiveness Calculations
If you received funds, according to the Cares Act your 8 week clock started on that day you received a funding installment. In simple terms, if you use the loan to fund payroll (for employees only and at least 75% of the proceeds) or use it to pay your rent, then 8 weeks of those costs are eligible to be removed from your loan principal balance. The clear message here is that the Treasury Department wants to incentivize small businesses to continue operating during this time and are willing to go to lengths never seen before to do so.
Based on the way banks calculated loan availability, we expect massive inconsistency in how each of the banks handle loan forgiveness.
So we are recommending two things:
- Talk to an expert, we are offering our CFO’s time for free.
- Stay in constant contact with your banker. If the application process is any indication, we are shortly going to see bank-specific forgiveness guidance.
- Start to gather information. It is important to gather payroll data, health care bills, 401(k) matching data, rent, and utilities. All of these can contribute to forgiveness.
And here is a video to walk you through how to use the calculator and some basics.
What is the Update on the CARES Act Programs that Get You Money?
The PPP Flexibility Act was passed because we needed another acronym PPPFA during this global shutdown. It eases quite a few of the rules on forgiveness, here are the highlights.
- Covered Period – The most significant change we saw was extending the 8 week covered period to a 24 week period. This is basically a move to convert the loans to grants. This move in conjunction with the new EZ Forgiveness Form will make the forgiveness process much simpler than first feared.
- Allowable Costs – Companies are now allowed to use up to 40% of the loan proceeds on rent, utilities, and mortgage interest which should assist most of the highly affected businesses affected by the shutdown.
- Loan Maturity Date – Loans not forgiven will now be due in 5 years instead of 2 years; however, there is uncertainty if all loans are eligible for the 5 year term or just loans issued after the PPPFA. Hopefully your loan is forgiven and it is a mute point.
- Loan Payment Date – Instead of making payments after month 6, the PPPFA now allows for the first payment to be made either 10 months after the covered period or when the business is notified about forgiveness.
- Employer Payroll Tax Deferral – Businesses can now defer payroll taxes even if they received a PPP Loan.
- Business Owner Compensation – Business owner compensation limits have been increased to 2.5 months (2.5/12) of 2019 net profit (up to $20,833) for the 24-week covered period.
What should I watch out for?
Fraud Cases Are Up
While it’s unfortunate but probably shouldn’t be of surprise, scammers are jumping all over these SBA loans as a way to try and take advantage of small businesses. We’ve already seen spoofed emails and fake robo calls claiming to need more information for loans that may be in process. Keep your guard up and keep these things in mind:
- The SBA will not call you, so if someone claiming to be from the SBA does call it’s probably a scam.
- Never give bank logins, credentials, or account numbers to anyone. Your bank already has this information and should never ask for it again.
- Beware of those telling you they can expedite your loan and avoid anyone charging you for up front fees. An approved SBA lender will not do either of these.
Keep your employees on their toes and talk to them about how hackers are taking advantage of employees during a time like this. Our friends at Curricula built a phishing simulation software to run a free test with your employees and learn how to defend against the hackers.
What do I do about taxes?
If you think you are getting a refund, file now! Cash is king, so get that in the doors.
If you are a c-corporation with losses in 2019, ask your tax advisor about the new tax carryback rules passed in the Cares Act. It could mean cash today for taxes you paid in the past.
Ways For Businesses To Save Money During This Time
Improve Your Collections
Adverse economic conditions always negatively impact your ability to collect payments from customers. Some customers are legitimately going to experience financial distress, and their ability to pay you will become impaired. Others will use an economic downturn as a means to slow-pay you out of fear or extreme conservatism. If you carry customer Accounts Receivable, please do the following now:
- Get clarity. Make sure your Accounts Receivable Aging is accurate and make sure you are reviewing it weekly (at the very least).
- Escalate sooner. You should have a standard collections process in place to follow up with clients using messaging and actions that escalate as their Accounts Receivable balance grows older. Go ahead and move clients a step ahead in your escalation process so that you are taking action sooner than you would have during more favorable economic conditions.
- Get customers to communicate. When you see a client slowing their payments, get them talking. You need to get a response from them on how (and when) they are going to pay. If they do not communicate back or you get an unfavorable response, take immediate action. This might mean discontinuing work or developing an agreed-upon payment plan with the client.
Manage Cash Flow
Even though the SBA lending programs have absorbed most everyone’s focus, you can’t be distracted from knowing exactly what your cash position is and what it will be in the coming months. There are plenty of Excel and Google Sheet cash forecast templates available, but there are also some pretty good tools out there that are relatively inexpensive. We like Helm and CashFlowTool.
Deal With Rent Expenses
Rent is likely your second largest expense after payroll, and using the new SBA loan to help cover it is only one option. If you don’t go the route of an SBA loan what else can you do to offset expenses? What do you do when you’re paying for an office or retail space that you can’t even use? Can I make changes to my existing lease contract? Acuity spoke with our friends and clients, Transcend, real estate experts, about the steps they recommend taking:
- Talk to your real estate broker and ask them to thoroughly review your lease contract for existing provisions that may help you during this downturn.
- Ask your broker to recommend a strategy for approaching your landlord with concessions for both parties. This could be rent relief or deferment in the short-term for you, but extending the overall lease term or adding a higher lease rate later for the landlord. Remember, your landlord has a business to maintain, too, so treating them as a partner in this will yield better results for both of you.
What Should I Know Now?
Focus on the break-even point.
Time to get familiar with your fixed costs. Start with your headcount, add your rent, and any other fixed costs (software subscriptions, regular bills, etc.).
Split the costs into three buckets: essential, nice-to-have, and first-to-go.
Now determine what revenues and margins you need to be able to sustain the essential and nice-to-have scenarios.
Now think through the leading indicators for those scenarios. Information is power right now for entrepreneurs, so start really thinking about how to see one month ahead in your business.
Alternatives to laying people off
Have you thought about a part-time option from your employees’ perspective?
Likely, you’ve now moved your team to remote working or will do so soon. With the realities of remote work, your team may have additional unforeseen responsibilities, like supervising children that cannot go to school or assisting elderly family members. Have a conversation with your team this week about what this change means to their work schedule.
A couple of questions to follow-up with: Do they even want their work hours to stay the same? Will they need to scale back due to other responsibilities now?
Understanding what is best for your team might mean moving some to a part-time role that allows them to manage their new situation best.
Have you thought about partial pay reduction versus layoffs?
I have learned a ton from my father over the years who has been through a few more of these cycles than I have. During one recession, he needed to cut payroll by 20%. He actually got the team he was planning to retain (the 80%) together, and he told them what the choice was, we can fire the people not in the room or everyone take a pay cut. He was overwhelmed with the team’s response. They unanimously wanted to take the pay cuts, and no one ended up getting laid off. They also really appreciated the transparency and having input on the choice.
If you are going down this road, I would encourage you to do pay cuts in tiers vs. an across the board. Consider something like:
|$60,000 – $100,000||20%|
|$40,000 – $ 60,000||10%|
Employees get it — these are tough times. My dad ended up only needing 60 days back then, and then everyone’s salary went back to normal. Who knows how long this new normal will last, but I bet your employees are ready to stick it out with you.
I’ve Exhausted All My Options How Should I Do Layoffs?
Check and recheck your break even calculation above and most importantly only cut once!
What your business can do to help
Do what you can to help others.
While we believe the above items are helpful to all small businesses, it is likely that you’ll still have specific financial questions about your own company. Our entire CFO team has allocated time to support you right now, so please take advantage of the free Acuity CFO Office Hours. Please remember that there is no charge for these office hours, and we would be honored to help.
We can also take over from a full-time staff person that you had to let go. We are all hunkering down, so if you need to understand what a part-time or interim solution might look like, let us help you figure that out. Schedule a call, and let us help with those two things right now.
I know the byline says Matthew May, but at this point please know our whole team is contributing to this blog post. Special thanks to Janet Mulroy, Derrick Williams, Graham Wood, and Kenji who is drafting all our clients weekly communications (I steal the good parts).
We are starting this Archive section since are we updating this post frequently in case we need to retain some information for you all who are referring back here for updates:
PPP and EIDL Open … For Now?
An additional $310 billion for the Paycheck Protection Program (PPP), $50 billion for Emergency Economic Injury Disaster Loan (EIDL), and $10 billion for EIDL grants will be available for a short time.
Here are some tips from the first round of funding on getting your application in:
- There are massive inconsistencies in how each of the banks handle the PPP loan. But almost all require a depository account, so open an account at a bank participating in the PPP immediately.
- Once you have a bank you know is participating in the PPP, stay in constant contact with your banker. They need to know you and your business by name and you need to demand both a clear understanding of how their PPP program works and where you stand within it. You obviously can and should treat them with respect, but this may be your business’s life on the line. Make them work for you and be sure that they’re going to get you into the application process.
- The math for determining your PPP loan amount was supposed to be simple… 2.5 times your average monthly payroll. Unfortunately, there was confusion from the SBA about what could be included in payroll. Just use your payroll company’s average payroll calculation. All of the big reputable payroll companies have improved these reports dramatically over the past weeks, and they’ll end up being the simplest source documentation for proof of the calculation. Banks can’t handle complexity so simplify as much as possible.
- Combine all loan docs into one PDF. Because this situation is so fluid, having all of your loan documents combined into one PDF package that you can easily and quickly access may be important. Hopefully your bank doesn’t drop the ball on this application process, but if they do and you need to apply elsewhere it’ll be good to have all documents in one place. This package should include a completed SBA Form 2484 and your average payroll calculation with support.
- Don’t forget about the EIDL loan . So much attention went to the PPP loan these last weeks that many may be overlooking the EIDL loan that is available to apply for directly from the SBA. While it doesn’t have the same forgiveness provisions as the PPP, it has a longer term, the funds can be used more broadly.
- Don’t forget about the EIDL grant, there’s an immediate $10k available when eligibility is proven.
We are generally recommending that you apply for payroll relief through the PPP and everything else through the EIDL loan program. But because of the fluidity of the rules changing and the case by case nuances, we are opening up our CFOs for free 30 minute consultations to help with your specific use case.
Here is a tip from the first round of funding after you get your application in:
If you have already filed, ask your banker if you have an eTrans #, if you have one you should have funds allocated to your loan (usually 10 days to fund from application approval).
Marco Rubio PPP Tweet
No wonder frustration reigned when everyone had hoped to be celebrating these loans. For an interesting insider’s take on the PPPs goals and challenges, have a look at Senator Marco Rubio’s PPP tweet thread on the day after the program launch.
PPP Affiliate Rules
We discussed this on a recent episode of Acuity’s “Drink While You Think” with two of our CFOs who work in the startup space. As of last week, it seemed the answer was “Yes” as we were hearing from numerous startups, venture capitalists, and lawyers who work in the space that startups should apply. The Treasury Department made an update to their “affiliate rules” that likely would make the PPP much more difficult to attain for startups. If you’re a startup, here are the steps we recommend:
- Unless Your Investors Say Otherwise, Prepare To Apply For The Loan. It’s best to get in line for the loan. If your Board and management team determine that you can’t, drop out of the loan process, but get prepared to be on the starting line.
- Talk With Your Board and Investors. Expect more debate and, hopefully, clarification on this topic in coming days. While politicians and lawyers will try to hash out the “Affiliation Rules” under the SBA and it’s various interpretations, the practical application of this is how much control do your investors wield. When they have a majority percentage ownership, that’s easy to determine as control. But when minority investors hold Board positions that may give them the ability to block corporate actions, they may also infer control. Talk with investors, your counsel, and try to understand where there may be control issues. When you sign up for the PPP loan, you are having to certify that you are eligible for the program and that carries a serious obligation, so make sure everyone is comfortable with that.
Here are the potential gotchas to watch out for:
- Are the 20% owners going to be willing to share information and disclose affiliates to the SBA?
- Is having a 20% owner going to make you ineligible if their affiliates collectively have >500 employees?
- Are investors going to waive control rights central to the affiliate rules.
- Is the treasury or congress going to interpret VC and PE backed companies as ineligible by default and make examples of them?