In this unusual time that we are experiencing, Veritas is doing everything it can to support our clients, employees, and other businesses. We have shut our office and are encouraging Stay Home, Work Safe. We are supporting charitable causes such as food donation programs for front-line medical service and critical services personnel. And we are participating in federal business assistance programs that are intended to provide small business and employment continuity.
Most of you are probably familiar with the CARES Act, which was passed in late March to aid small businesses. The CARES Act involves multiple assistance programs, but the Payroll Protection Program (PPP) has received the greatest attention. The PPP officially went live on Friday, April 3, and our account was funded on April 10, only one week later.
In this blog, we want to share our experience with the PPP process, in the hope that it may be helpful to other small businesses.
What is the Payroll Protection Program (PPP)?
The PPP is a loan intended to enable businesses to continue payroll and employment through the difficult times associated with COVID-19. Businesses are able to qualify for loan amounts equal to 2.5 months of payroll and associated payroll costs (more detail below). An important feature of PPP is that the loan amount can be completely forgiven if proceeds are used for qualifying expenses and the business is able to maintain its workforce (and associated compensation). Under these conditions, the loan becomes a grant.
Another important feature of PPP is that it is non-recourse and does not have to be personally guaranteed by the business owners, thus streamlining the approval process. It is overseen by the Small Business Administration (SBA), who guarantees PPP loans made by individual banks.
We prioritized the PPP application but will also investigate other programs to determine if we have eligibility. Let’s take a look at the steps we went through and what we learned when applying for the PPP.
Step 1: Selecting a Bank
We began our application process by contacting several banks. These ranged in size from small local or regional banks to global financial leaders. Some of the larger institutions seemed to have more delays implementing the PPP process, perhaps due to the complexity of their systems. Although Veritas conducts its primary banking with one of the largest U.S. banks, as of this writing their PPP program is still not live. The smaller banks appeared to be more adaptable and days or weeks ahead of the larger institutions.
We ended up processing and obtaining our loan through Spirit of Texas Bank, one of the top 3 Houston-area community banks and an experienced SBA lender. We found them to be nimble and very responsive. The president, Tom Danek, of a branch near our office was personally involved in our process and worked through the weekend to get our loan (and I’m sure countless others) processed.
Step 2: Determining the Loan Amount
There seem to be a wide variety of interpretations of the PPP rules, without much standardization by the SBA. We received different instructions and interpretations from the banks we worked with.
Some required more extensive documentation, e.g. past tax returns and financial reports, which seemed more appropriate to a secured loan application. Others focused on documenting payroll and associated payroll costs which determined the amount of PPP eligibility. The calculations of allowable PPP loan amount started to converge toward the end of the process, when we received several variations of a spreadsheet, adapted from a version originally developed by the SBA. Here’s what determined our PPA loan amount:
- Total salaries, wages, and commissions – this is based on a 12-month period that you can document with IRS Form 941 payroll reports. In our case, we used 2Q 2019 – 1Q 2020, rather than the calendar year 2019.
- Salaries in excess of $100,000 – for the same period, you need to identify employees that received more than $100,000 and reduce the eligible wages by that amount.
- Group health insurance – the amount of health-related insurance that your firm paid during the same period, substantiated by billing statements. In our case, this represented medical, dental, and disability insurance paid by Veritas.
- Retirement benefit costs – this is the amount that your firm may contribute to retirement plans, e.g. matching contributions.
- State and local taxes – we only included State Unemployment Tax.
These amounts were summed, divided by 12 to convert to monthly average costs, and finally multiplied by 2.5 to determine the maximum PPP loan amount.
Step 3: Loan Forgiveness
Although we haven’t gone through this process yet, this is how we understand that it works. You are able to apply 8 weeks of payroll and benefit costs (as calculated above) plus other qualifying expenses against the value of the loan. Other qualifying expenses include rent, utilities, and certain mortgage costs.
There is also a test to ensure that you have not reduced your workforce below a prior reference period (either February 15 to June 30, 2019 or the first 2 months of 2020, at the borrower’s discretion). Any percentage reduction in the workforce decreases your loan forgiveness proportionately. Decreases in compensation can also reduce the portion of loan forgiveness.
Given these guidelines, many firms will be able to have all or most of their loan forgiven.
In addition to PPP, the CARES Act provided several other programs:
- Economic Injury Disaster Loan (EIDL): secured loans up to $2 million which are intended to help businesses that have experienced economic damages. Since these are guaranteed by the owners or firm, the loan approval process is more complex. An important feature of EIDL is that applicants are also able to request a $10,000 emergency relief grant which does not have to be repaid. EIDL is also administered through the SBA. Recent reports indicate that these loans may be rationed and limited to smaller amounts, i.e. $15,000.
- Payroll tax deferrals: FICA taxes can be deferred starting on March 27, 2020, and repaid at the end of 2021 and 2022 (50% each). There is some question about whether firms that receive PPP loans are also eligible for this tax deferral, but the latest guidance appears to be that you can defer until/if the PPL loan is forgiven, and that the same repayment timeline would still apply to deferred amounts.
We plan to investigate the EIDL, payroll tax deferrals, and other programs aimed at supporting small businesses during the COVID-19 emergency. Watch this space for further updates as we have important findings.
Please reach out to us if you have any questions about our PPP experience. We are in this together.
Most importantly, we wish that all of you, your family, friends, and work colleagues are safe through this pandemic and economic crisis. We are in a battle for survival, but we believe that we will come through this adversity better and stronger than we were before.
At Veritas, our commitment is to our clients, employees and the broader community. We hope this information is useful to others as we navigate uncertainty. We will share more as we learn more and are happy to answer any questions. For more information, please connect with us or subscribe to our blog to stay connected.