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Paycheck Protection Program Loan

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April 02, 2020

Watch the video above for more information on the Paycheck Protection Program

NOTE from April 2nd 6:30pm Pacific: The SBA has delayed rolling the program out (no specific guideline has been given), but still prime yourself on the details so you are ready once applications open.

What is the Paycheck Protection Program & CARES Act?

The Paycheck Protection Program is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act which is a $2 trillion stimulus package in support for small businesses and individuals.

The Paycheck Protection Program is an approximately $350-billion program intended to provide small businesses with eight weeks of cash-flow assistance through 100% federally guaranteed loans.

What are the Paycheck Protection Program Application Opening Dates?

Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders. 

Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders. 

Here is the Paycheck Protection Program Application.

Benefits of Paycheck Protection Program

    1. MOST small businesses are eligible with less than 500 employees, but there are restrictions for Cannabis Businesses that are detailed later in this post.
    2. The loan has a 2 year term and an interest rate of 0.5% (some loans are up to 4%)
    3. You can pay off the Paycheck Protection Loan early with no prepayment penalties or fees
    4. The max loan amount 2.5x payroll costs, but no more than $10MM
    5. There is no need to make loan payments for the first six months
    6. No collateral or personal guarantees required for a Paycheck Protection Loan
    7. The loan covers expenses dating back to February 15, to June 30 2020
    8. Loan can be used for a variety of expenses including:
      • Payroll and commission payments (including fees to GreenGrowth CPAs in most cases)
      • Group health care benefits/insurance premiums
      • Mortgage interest payments
      • Rent and lease payments
      • Utilities
      • Interest on any other debt obligations that were incurred before the covered period
    9. The Paycheck Protection Program loan can be forgiven and essentially turn into a non-taxable grant. The loan amounts will be forgiven as long as: 
      • The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and 
      • Employee and compensation levels are maintained

How Much of My Loan Will Be Forgiven?

Up to 100% of your Paycheck Protection Program loan can be forgiven as long as you meet the criteria from above (Point #9).  You must also make sure that you understand the additional details below.

You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan. 

Due to likely high volume of loans, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. 

You will also owe money if you do not maintain your staff and payroll. 

  • Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount. 
  • Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019. 
  • Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020. 

What Counts As Payroll Costs?

Payroll costs for corporations include: 

  • Salary, wages, commissions, or tips ($100,000 cap on an annualized basis for each employee)
  • Employee benefits including:
    • Costs for vacation, parental, family, medical, or sick leave
    • Allowance for separation or dismissal
    • Payments required for the provisions of group health care benefits including insurance premiums, and
    • Payment of any retirement benefit
  • State and local taxes assessed on compensation

For a sole proprietor or independent contractor

  • Wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee. 

How to Apply for the Paycheck Protection Program?

It is imperative that you get this done right the first time because the demand for the loan will be incredibly high due to the forgiveness aspect of the loan.

Note: You don’t need anyone to do the application for you.  Apply directly with a lender and allow them to help you through the process.  In times where there are new programs or Federal Aid money available, scammers come out to try and grab a share.  Be wary of firms that will ask for a percentage of the funds that they get for you. You can consider engaging firms to help with tax returns, gathering documents, creating legal documents or to review loan documents.

Understand that the SBA itself doesn’t lend you the money, rather, they just “back” the loan that the SBA-approved lender provides. 

You can apply for the Paycheck Protection Program through any SBA-approved lender.

Here is the Paycheck Protection Program Application.

As part of your application, you’ll be asked to verify four statements:

  1. That the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.
  2. That funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.
  3. That the business does not have a SBA loan pending for the same purpose and duplicative of amounts applied for or received under a covered loan.
  4. During the period beginning on February 15, 2020 and ending on December 31, 2020, the business has not received amounts under the Paycheck Protection Program for the same purpose or duplicative amounts applied for or received under a covered loan.

Once you agree to those, then first, you will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020….BUT DO THIS ASAP. DO NOT WAIT!

Documents & Info Needed for Paycheck Protection Program Loan

You will need particular information and documents to back up that information when applying for this loan.  Each lender will vary on what documents they will need, but a list of common documents and information is below.

  • Tax ID Number
  • 2017 & 2018 Tax Returns 
  • 2019 Tax Return or year-end financial statements
  • Average monthly payroll based on:
    • Paid time off, sick pay, and family medical pay
    • You will need the monthly payroll summary documents to back this up and You can obtain this information from your payroll providers.  You cannot just estimate these numbers.
    • Make sure you have your payroll tax filing documents
    • These are your 1099-MISCs
    • Employee wages (excluding costs over $100,000 on an annualized basis for each employee) for 2019, including:
    • Withholding for state and local taxes on employee compensation
    • 1099’s paid to independent contractors of the core business that provide employee type functions. 
    • Documentation regarding amounts paid for employee health insurance for the 2019
    • Documentation regarding the amounts paid for retirement plan funding for the 2019
  • Number of employees in your business or organization
  • Specific uses of funds
  • List of owners who hold at least 20% ownership

Who Can Apply for the Paycheck Protection Program?

Applying doesn’t mean getting approved.  This program will be available to corporations, small businesses, sole proprietorships, independent contractors, and self-employed individuals.

Can Cannabis Businesses Apply for the Paycheck Protection Program?

In short, the answer is no, not yet.  But that may change.  

The cultivation, distribution and sale of cannabis is illegal under Federal law which means that cannabis businesses and some ancillary businesses are not able to take advantage of some of these Federal Aid programs.

Though cannabis businesses are still impacted just as much as any other ordinary, tax-paying business, the SBA will not allow them to access any programs including the Economic Injury Disaster Loans Program.  There has been no specific guidance on the Paycheck Protection Program, but it would suffice to say that cannabis businesses will not be allowed to take part.

This could also impact indirect cannabis businesses as well.  In 2018, the Small Business Administration said that cannabis businesses (even those that don’t touch the plant), but service the cannabis industry, will not be eligible for aid including Federally backed loans because “financial transactions involving a cannabis-related business would generally involve funds derived from illegal activity.”  

Below are a few terms you need to be aware of.

Direct Marijuana Business: a business that grows, produces, processes, distributes, or sells cannabis or cannabis products, edibles, or derivatives, regardless of the amount of such activity. Please note that this applies to personal (recreational) use and medical use even if the business is legal under local or state law where the applicant business is or will be located.

Indirect Marijuana Business: a business that derived any of its gross revenue for the previous year or start ups that project to derive any of their gross revenue for the next year) from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to support the use, growth, enhancement or other development of cannabis. 

Examples include businesses that provide testing services, or sell grow lights or hydroponic equipment, to one or more Direct cannabis Businesses. Also, businesses that sell smoking devices, pipes, bongs, inhalants, or other products that may be used in connection with cannabis are ineligible if the products are primarily intended or designed for such use or if the business markets the products for such use.

Hemp Businesses - Yes, the SBA clarified that businesses that produce or sell hemp and hemp-derived products that are legal under the 297A of the Agricultural Marketing Act of 1946 (the 2018 Farm Bill) may be eligible for SBA loans.

This means that CBD companies where your product is derived from hemp and can surely be traced back to that source, you will likely be eligible for the Paycheck Protection Program.

Ancillary Services: There are some businesses that provide ancillary services to the cannabis and/or hemp industry and they may qualify for the Paycheck Protection Program through the SBA, but this must be evaluated on a case by case basis. 

If you are a multi-entity cannabis business, and depending on the relationship of the entities, how revenues are derived, how funds flow, and many other nuances, then you may be eligible for relief, but these need to be evaluated on a case by case basis.  Ask your lender for more info on this.

What Do Cannabis Businesses Qualify For?

Several industry trade groups worked diligently to have cannabis businesses included in this relief package, but it was unsuccessful.  There is a bill pending (H.R. 3540, Ensuring Safe Capital Access for all Small Business Act of 2019), which is trying to remove cannabis from the list of controlled substances and stop the Small Business Administration from withholding loans to an entity simply because it is a “cannabis-related legitimate business” or “service provider.”

There are potentially more rounds of stimulus coming which could include access for cannabis businesses.  So all is not lost, you can tee yourself up for this and get prepared. If relief does become available for cannabis businesses, it’s going to be a mad dash, and if you’re not ready with all of your documentation, you could be left out.

If you need help with your tax preparation for required documents needed to apply for a Paycheck Protection Program loan, then please reach out to us today.

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Post Tags: Taxes, Finance, Accounting

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