SBA Disaster Loans Update from SBDC

This following information was provided by Luke Kempen, Director of the Eau Claire SBDC office. 
 715-836-5902 or kempenls@uwec.edu

Update on SBA Disaster Program Funding
Congress passed and the President signed a new PPP Loan and SBA EIDL Loan bill that extends funding for the two programs.  

Paycheck Protection Program (PPP)
The bill includes more than $320 billion for the Paycheck Protection Program, PPP, created by the CARES Act, which was passed late last month. The program, which quickly ran out of money because of heavy demand, provides forgivable loans to small businesses that keep their employees on the payroll.
About $60 billion of the additional PPP funding will be set aside for businesses that do not have established banking relationships, such as rural and minority-owned companies. Expanding access to the aid was a priority over concerns that some businesses were being shut out of the fund. According to an SBA press release on late Friday, April 24, the SBA will begin processing PPP loans again starting at 9:30 am on Monday, April 27.  Many banks continued to take PPP loan applications right through the shut down and this backlog will likely go into the pipeline starting at 9:30AM on Monday.  I recommend that if you have not already applied for PPP loan and want the loan that you take action immediately as indications are that the new funding will go fast too.
Also we are getting a lot of questions on how to calculate the PPP loan amount for small businesses that are LLC, Sole Proprietors and Partnerships.  My email sent on April 15 walks through this for individual owners.  Partnerships are a little more complex.  I include a discussion on Partnerships applying for PPP loans below.
 
Additional $60 Billion For Economic Injury Disaster Loans 
The new funding also includes an additional $60 billion for the Economic Injury Disaster Loan (EIDL) program. EIDLs are typically issued in the aftermath of natural disasters such as hurricanes, fires or earthquakes and provide a $10,000 immediate grant to small businesses that have been financially impacted, as well as low-interest loans up to $2 million. Given the overwhelming demand for the $10,000 grant and EIDL loan, the SBA last week limited the $10,000 grant to be paid to businesses based on a $1,000-per-employee formula up to 10 employees.
By moving to a per-employee calculation, the SBA left out many small landlords and rental-property owners from the grant portion of the EIDL program who do not have payroll and could not participate in PPP and were counting on some assistance from an EIDL. However, it does appear they are eligible for an EIDL loan.   It is unclear at this point how the SBA will use the additional $60 billion for the EIDL program… will it be grants only or will they also continue to offer the EIDL loan too.  Presumably, they will use it under the same $1,000-per-employee methodology put into place last week for the Grant, but there have been no announcements yet.
The bill also provides loans and grants from the Small Business Administration's disaster relief fund with  $75 billion for hospitals and $25 billion for coronavirus testing.
According to an SBA press release on late Friday April 24, the SBA will begin processing PPP loans again starting at 9:30 am on Monday April 27.    However the announcement did not mention the SBA Economic Injury Disaster Loan (EIDL) at all.   A check on the SBA website at 8 am on Saturday showed the SBA had not yet opened the EIDL loan application portal. However the site stated, “With the additional funding provided by the new COVID-19 relief package, SBA will resume processing EIDL Loan and Advance applications that are already in the queue on a first come, first-served basis.  We will provide further information on the availability of the EIDL portal to receive new applications (including those from agricultural enterprises) as soon as possible. “  If you want to apply for the EDIL grant and loan I recommend you check the SBA sight on Monday after 9:30 AM and see if they are accepting applications.    I will continue to monitor any information provided by the SBA in that regards.    You can access the SBA application and other detail information on the EIDL Loan program at our SBDC website  
https://wisconsinsbdc.org/services/covid-19/

Also you can call or email me if you have questions at 715-836-5902 or kempenls@uwec.edu

Applied for the SBA Grant Already, But I Have Not Heard Anything. Should I Apply Again?
If you applied for an EIDL loan on March 30 or after and received a confirmation # upon submitting your application the SBA says you do not need to apply again so you should be good.   I continue to get many emails and calls about the status of the caller’s application.   Unfortunately, I do not know the status nor can I check for you .   The SBA continues to ask for patience.   The SBA website says applications are processed on a first come first serve basis.   I do not know what the SBA’s process is for approving applications.  The SBA has provided the following to check on status… Contact the SBA disaster assistance customer service center at 1-800-659-2955 (TTY: 1-800-877-8339) or by e-mail at disastercustomerservice@sba.gov  .   Every day this past week I have had clients report that they have received the EIDL grant so I know the process was still moving forward.
 
“Big” Companies and Businesses that Don’t’ Need PPP Loans”
We all heard the stories last week about large companies getting huge PPP loans.  One other item of interest is the Treasury came out with a new guidance statement as of April 23, 2020 regarding the PPP loan. This appears to be to address the issue of large companies getting the PPP loans.    Here is the statement…
31.Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer:  In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary.
Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
It appears this “guidance” has already had an effect as several large companies have decided to repay or not take the PPP loans that were offered to them given the SBA May 7 deadline for “no questions asked …mulligan”.
Calculating the PPP Loan Amount for Partnerships
First, for the record….. I am not a practicing CPA for hire in public accounting.   Your choice to make decisions based on the information presented in this email is at your discretion and neither I nor the Small Business Development Center attests to its accuracy or completeness.    
 
On April 14 the SBA provided details on how to calculate PPP for self employed LLC’s and Partnerships both with and without employees.   However, the guidance for partnerships only states that one PPP loan is available one per partnership.  It does not mention nor provide any explanation on how to calculate  the PPP loan for partnerships. 
 
Given we do have guidance for Schedule C filers, It would seem the proper way to calculate PPP for the partnership would be to take and “equate” the amount to its equivalent on the Form Schedule C line 31 business net profit or loss which is used for single member LLC’s and sole proprietors.    Therefore, using “Guaranteed Partner Payments” may not be accurate because frequently the amount of the partner guaranteed payments is less than partnership net income.
 
From what I have read about how to calculate this is to take the amount on the partnership return Form 1065 Schedule K page 4 line 14a Net Earnings From Self Employment and subtract from it the amount if any on Line 12 “Section 179 deduction” from this same form.  This calculation would give you the “equivalent” of the Form Schedule C line 31 Net profit or loss from and LLC or sole proprietor business.  Also remember the $100,000 limit per partner.
 
 
For those of you who like to analyze, love tax rules or need more details on this read on….others you got what you need above…Another way to confirm this on your part is to look at each partner’s Form 1040 Schedule SE line 2.     Assuming this partnership is the only business activity the partners have, then the total of each partner’s line 2 added together should give you the same amount you calculated above.   You will also note when you look at the form SE, that any partnership K-1 Line 14 (a) information (after subtracting Line 12 mentioned above) goes on the same line as a Schedule C  ( line 31 amount…the amount used for PPP for Schedule C filers). This seems to validate this approach as being the proper calculation for partnership PPP.
 
I discussed this approach with a local CPA and they concurred that this would seem to be the way to calculate the amount.     However, please note on the internet there seems to be some people saying online to use the amount from Line 14 a and they do not mention the subtraction of Line 12.  Often there is no amount in line 12 so then their explanation yields the same amount.  However if there is an amount on line 12 such an approach would seem to be overstating the self employed earnings because the amount on line 14 a is before Section 179 depreciation.   Subtracting arrives at a smaller more conservative number that seems to mirror how this is reported for a regular Schedule C business with Section 179 Depreciation being part of the expenses considered in arriving at the Schedule C Line 31 net profit.  
 
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April 15 update:

Summary of How to Calculate the PPP Loan Amount for Self- Employed Business Owners filing Form 1040 Schedule C or Schedule F (farmers).
 
Late yesterday the Treasury and SBA issued an update on PPP loans for the self-employed.  The update clarified how self-employed business owners who file a Form 1040 Schedule C return are to calculate the Average Monthly Payroll amount for the PPP loan application.  It also spelled out the expenses allowed for the PPP loan to be forgiven.   Yesterday I sent out my understanding of how to do this calculation and fortunately what the Treasury/SBA stated in their update yesterday is consistent with what I presented regarding business owners filing form Schedule C.
 
Unfortunately, the Treasury/SBA update made no mention of farmers and Schedule F.  However, it appears highly probable that the Schedule F filers (Farmers) should follow the very same process and guidance provided for self-employed Schedule C filers when completing the application for the PPP.   If you are a Schedule F farmer you can read the Summary below and literally substitute the letter “F”  for the letter “C” and you will have what for right now appears to be the PPP loan calculation process for Schedule F filers.  In a couple spots in the summary below, I added the specific line number for Schedule F since it is different than Schedule C.  (Note …the process spelled out below for Schedule C filers does NOT allow a Depreciation expense addback so it appears a Depreciation addback is NOT allowed for Schedule F farmers either.)
 
Also, while health insurance and retirement plan expenses for employees are to be included in calculating payroll costs for employees and are forgivable amounts for the PPP loan,  the Treasury/SBA update specifically states that owner health insurance and retirement plan benefits are not forgivable amounts for PPP loans.
 
The update from the Treasury/SBA is 19 pages long.  I took the key sections of the update and summarized below.  If you want to see the full text of the update go to the link below:
 
https://home.treasury.gov/system/files/136/Interim-Final-Rule-Additional-Eligibility-Criteria-and-Requirements-for-Certain-Pledges-of-Loans.pdf
 
 
Individuals with Self-Employment Income who File a Form 1040, Schedule C.
You are eligible for a PPP loan if: (i) you were in operation on February 15, 2020; (ii) you are an individual with self-employment income (such as an independent contractor or a sole proprietor); (iii) your principal place of residence is in the United States; and (iv) you filed or will file a Form 1040 Schedule C for 2019.  However, if you are a partner in a partnership, you may not submit a separate PPP loan application for yourself as a self-employed individual. Instead, the self-employment income of general active partners would be reported together combined as one partnership PPP application.
 
In addition, you should be aware that participation in the PPP may affect your eligibility for state administered unemployment compensation or unemployment assistance programs… (Wisconsin PUA unemployment Assistance Program).
 
SBA will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.
 
If you have no employees, the following methodology should be used to calculate your maximum PPP loan amount:
Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 (Schedule F line 34) net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan. 
 
Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12).
 
Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.
 
Regardless of whether you have filed a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C with your PPP loan application to substantiate the applied-for PPP loan amount and a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed. You must provide a 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020.
 
If you have employees, the following methodology should be used to calculate your maximum PPP loan amount:
Step 1: Compute 2019 payroll by adding the following:
 
a. Your 2019 Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value), up to $100,000 annualized, if this amount is over $100,000, reduce it to $100,000, if this amount is less than zero, set this amount at zero;
 
b. 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c- column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; subtract any amounts paid to any individual employee in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States; and
 
c. 2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14…Schedule F line 15), retirement contributions (Form 1040 Schedule C line 19…Schedule F line 23), and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).
 
Step 2: Calculate the average monthly amount (divide the amount from Step 1 by 12).
 
Step 3: Multiply the average monthly amount from Step 2 by 2.5.
 
You must supply your 2019 Form 1040 Schedule C, Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish you were in operation on February 15, 2020.
 
How can PPP loans be used by individuals with income from self-employment who file a 2019 Form 1040, Schedule C?
The proceeds of a PPP loan are to be used for the following:
 
i. Owner compensation replacement, calculated based on 2019 net profit from 1040 Form Schedule C as described above.
 
ii. Employee payroll costs (as defined in the First PPP Interim Final Rule) for
employees whose principal place of residence is in the United States, if you have employees.
 
iii. Mortgage interest payments (but not mortgage prepayments or principal
payments) on any business mortgage obligation on real or personal property (e.g., the interest on your mortgage for the warehouse you purchased to store business equipment or the interest on an auto loan for a vehicle you use to perform your business), business rent payments (e.g., the warehouse where you store business equipment or the vehicle you use to perform your business), and business utility payments (e.g., the cost of electricity in the warehouse you rent or gas you use driving your business vehicle). You must have claimed or be entitled to claim a deduction for such expenses on your 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the first disbursement of the loan (the “covered period”). For example, if you did not claim or are not entitled to claim utilities expenses on your 2019 Form 1040 Schedule C, you cannot use the proceeds for utilities during the covered period.
 
iv. Interest payments on any other debt obligations that were incurred before
February 15, 2020 (such amounts are not eligible for PPP loan forgiveness).
 
Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
 
What amounts shall be eligible for PPP loan forgiveness?
The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on:
 

1. payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);

 

1. owner compensation replacement, calculated based on 2019 net profit as described above with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit…

 

1. payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments);

 

1. rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and

 

1. utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments).

 
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March 23 update:

The Wisconsin Small Business Development Center (SBDC) has been receiving many questions regarding assistance to small business owners.   I am sure you too have been inundated with emails about Covid 19 and things to do.  While I have purposefully not sent out a lot of “stuff”  I now want to provide you with a couple things I think you may be able to take advantage of based on the questions I have been getting.   
 
Small Business Administration SBA Disaster Loans
On Saturday March 21 the Small Business Administration (SBA) declares all of the counties in Wisconsin an SBA Economic Disaster.   The SBA will be offering disaster assistance loans for small businesses impacted by COVID-19.  Disaster assistance loans will be offered up to $2M. These loans are working capital loans designed to sustain your business in the way it could have existed if the disaster had not occurred (assessing your ability to pay accounts payable, payroll, paying fixed debt, and other operating expenses). These loans are not intended to be for equipment, expansion or to cover past lost profits or make up for an already struggling business before the disaster.    
 
Applications and loans are made directly through the SBA…not through a bank.  

To Learn More
Below is a link to more detail description and FAQs about these SBA disaster loans on the Wisconsin SBDC website.   I recommend you read through the information at this link first.  Once you understand the loan program you can assess whether it will fit your business and you want to apply for the loan.    (Note: when you go to the link below you will also see on that website page a link to WEDC Small Business Grant program…WEDC’s program sounds good on paper but few if any of you are eligible to participate in this program unless you have an existing loan from a “Community Development Financial Institution” (CDFI).   In our area Royal Credit Union, Hayward Community Credit Union,  WWBIC and Impact Seven are CDFI’s.  These are the only CDFI’s that are on the list provided to the SBDC.    I recommend you focus on the SBA Disaster Loan info unless you have a loan with a CDFI.) 
 
https://wisconsinsbdc.org/services/covid-19/
 
To Apply and/or Get Assistance From SBDC
Many of you will be able to work through the application on your own.  However, if you need assistance or have questions the SBDC is here to help. The SBA has asked the SBDC to focus efforts on this disaster loan program and to be the SBA’s boots on the ground locally to provide technical assistance to applicants and businesses.   To apply for the loan and/or request SBDC assistance you need to go to the link below.  At this link if you want to try to complete the application on your own, find and click on the blue button “Apply Online”.   This button takes you to the SBA application portal and you work to complete the application.    If you want SBDC assistance with the application, find and click on the blue button “Loan Inquiries”.  This will take you to a short online form to gather your contact information and the SBDC will contact you in the order we receive the inquiries and work with you to complete the application.  While we cannot meet in person for safety and social distancing reasons, we can assist by phone meetings and through online meetings.   Also see the “List of Materials to Gather Now” below and work on that.
 
 https://wisconsinsbdc.org/services/covid-19/disasterloans/
  
List of Materials to Gather Now
While no one can apply for a loan until the declaration for Wisconsin Counties is approved by the SBA, you can get started right now with forms you'll need and be ready to go when the portal opens. These are all links to the forms online in PDF forms that you can edit and save.  When you apply for the loan you will need to attach these completed forms to the application.
 
·         Tax Information Authorization (IRS Form 4506T) for the applicant, principals and affiliates.
·         Complete copies of the most recent Federal Income Tax Return.
·         Schedule of Liabilities (SBA Form 2202).
·         Personal Financial Statement (SBA Form 413).
·         Profit and loss statements
·         Monthly sales figures (SBA Form 1368)

• Contact information and social security numbers for all applicant/ 20% or more owners.
• Employer Identification Number (EIN) for business applicants

  
Other Considerations
Like any downturn in business, your goal is to maximize cash inflow and minimize cash outflow.  Here are things to consider:
 
Grow Cash Availability
 ·     Consider Drawing on your available business or home equity line of credit.  Even if you do not plan to use this credit, it can provide you with additional options in the future. Draw on it and put the proceeds into a savings account at a bank for now.  Be aware that for most lines of credit from a bank, the bank can stop you from accessing the available credit on the line at anytime before you draw it out of the line.  Consider that in your decision to access the line now even if you do not need it now.   If you do not have a line of credit you can seek that from your bank now but be aware the bank may not be willing to extend more credit to you now given the economic uncertainty.  Credit cards are also a potential short term tool, but be mindful of the high interest rates associated with this action.
 ·     Explore your ability to enter a short term loan arrangement with friends or family. Carefully document the terms of any such agreement, and make sure all parties sign off on those terms.
 ·     Check with your insurance agent to see if you have Business Interruption insurance and if some benefit is available to you on that insurance.
  
Minimize Cash Outflow
Minimizing cash outflow may be your best or only option.  In order to preserve as much money as possible within the business, start by determining where you have the opportunity to reduce your expenses.
 ·     If you have existing bank loan(s), reach out to your banker to explore what options may be available to you for temporary relief. Potential relief may include interest-only loan payments for the short term, or extending the term of the loan to reduce monthly payments.   I recommend you consider drawing on your bank line of credit before reaching out to the bank to discuss your desire to modify existing debt payments because you are having cash shortfall. 
 ·     If you have any debt through a private lender(s), like family or friends, or a land contract seller financed loan,  reach out to discuss potential available relief. Private lenders may have more flexibility than a bank to defer payments short term, lower an interest rate, etc.
 ·     If you are renting space, reach out to your landlord to request a short-term rent deferral or a temporary reduction of rental costs.
 ·     Carefully consider your staffing plan. Potential options include:
·     Reducing business hours in order to decrease payroll costs.
·     Staff layoffs. These are really difficult decisions.   However, remember if you can’t pay your employees then I think your next goal is to work to be there when the downturn is over so your employees have a place to come back to work.   Also, it appears the Government may provide additional disaster relief to the unemployed so laying employees off and having them file for unemployment may give employees access to these additional benefits should they occur.
 ·     Cut Operating Expenses:  Carefully review your past monthly expenditures, and project those for the upcoming few months. Note mission-critical expenditures and defer or eliminate those that are not.  
 ·     Reduce inventory, including selling off current inventory - even at a discounted rate - and/or cancelling orders for inventory that has not yet been received
 ·     Slow or stop payment to vendors.   While no one wants this as the vendor is likely struggling too, contacting your vendors and seeing what they may be willing to do may help.
 
I know what we are seeing now is unprecedented.  While I know that it is hard to swallow taking on more debt, I think the SBA Disaster Loan program should be considered if your business is viable and you feel with the loan you can come out on the other side of this downturn and thrive again.  This is one opportunity to take a working capital cash infusion and stretch the payback over a very long period of years.   This loan can take the effects of today’s unprecedented downturn and spread it over time.   However, if before the downturn your business was already struggling taking on the SBA Disaster Loan may not be a good decision and fit. 
 
I encourage you to read the information here and online before contacting me.  If after you read the information and you have questions, please do not hesitate to contact me if you think I can be of some assistance to you or if you want to discuss your own situation.   Also, I will provide you with email updates on SBA Disaster loan and any other SBA initiatives and other things that I think are of value, relevant and important as we move forward.  I do not plan to send you the “same thing everyone else has sent to you five times over”.   You can also monitor the Wisconsin SBDC website at https://wisconsinsbdc.org/  .   The SBDC is purposefully trying to keep our website focused and on point.
 
Take care and good luck.
Luke      
 
Luke Kempen
Director
Wisconsin Small Business Development Center at UW-Eau Claire
7 South Dewey Street,  PO Box 4004
Eau Claire, WI 54702-4004
Email:  kempenls@uwec.edu
Phone:  715-836-5902
http://www.wisconsinsbdc.org/eauclaire
 
Working to support your success!
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