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April 21, 2020

CARES Act Part Deux: New Funding and Additional Guidance

Stack of money representing the CARES Act.

The CARES Act allocated $349 billion in funding for small business loans under the Small Business Administration’s 7(a) Paycheck Protection Program (PPP). As of Thursday April 16, this funding ran dry. It took less than two weeks from the April 3 rollout of the SBA loan program for this to occur, with total loans averaging $29 billion per day. Critical guidance that clarified the manner in which self-employed individuals request PPP loans emerged only three days prior to the funding depletion. Fortunately, Congress appears to be on the verge of replenishing funds available for PPP loans, so eligible business concerns should continue preparations to take advantage of this loan program.

Status of Second Round for PPP Loan Funding

The ability to promptly enact funding legislation is complicated by the fact that Congress is not expected to return for regular sessions until May 4. The Senate passed the second round of funding on April 21. However, limited opposition from both sides of the aisle in the House mean that House members likely will have to travel to Washington D.C. for a vote, but this could occur as early as April 23.

As for the particulars of the funding legislation, the Republican contingent initially advocated to fund an additional $250 billion for PPP loans. Democrats in Congress first called for a more varied list of funding, including:

  • $125 billion for PPP loans
  • $125 billion in other small business loans
  • $50 billion for the Economic Injury Disaster Loan (EIDL) program (with an additional $15 billion for the related grant program)
  • $100 billion for grants to hospitals and other medical providers
  • $150 billion for state, local, and tribal governments
  • A 15% increase for SNAP (food stamp) benefits along with changes to make it easier to qualify for benefits

The urgent need for businesses to obtain funding from the PPP program put pressure on Congress to reconcile these differences prior to May 4. In light of that pressure, the outlines of a deal have come into focus. As of this writing, the funding legislation would include:

  • $320 billion additional funding for the PPP (with some portion of this likely to be set aside for businesses without pre-existing banking relationships)
  • $60 billion additional funding for the EIDL program
  • $75 billion for hospitals
  • $25 billion for virus testing

The most contentious issue, funding for state governments will likely not make the cut nor will the increases for SNAP benefits.

Press Forward with PPP Loan Applications

Even though funding for the PPP program is depleted (for now), businesses seeking PPP loans should continue to prepare applications, and in some cases can continue submitting them. One reason for this is that certain lenders are guessing that the second round of PPP loan funding could run out in as little as 48 hours. Wells Fargo, the nation’s third largest SBA lender, also stated that it is continuing to accept applications during the time that funding is depleted, in anticipation of the second round of funding by Congress. Bank of America also announced that it will continue to process applications to ensure that it is prepared. So businesses should continue to do everything possible in order submit a PPP loan application with certain lenders, or be ready to submit with others when the next round of funding legislation is enacted. Every organization should be clear how its bank is handling the new applications.

New Guidance Guarantees Free Money for Many Self-Employed Individuals

New guidance released April 14 provides critical instructions for self-employed individuals and how they may apply for PPP loans and obtain subsequent loan forgiveness. The guidance directs self-employed individuals to reference the amount of net profit reported on 2019 Form 1040, Schedule C, not to exceed $100,000, both for purposes of the maximum loan amount and to compute some of the loan forgiveness. Other rules are provided for self-employed individuals who have employees, but the thrust of this guidance is that a self-employed individual who is in business on Feb. 15, 2020 and who had any amount of 2019 Schedule C profit is guaranteed loan forgiveness (i.e., free money).

The new guidance dubs this an “owner compensation replacement.” For self-employed individuals with no employees, the owner compensation replacement is equal to 8/52 (15.38%) of the individual’s 2019 Schedule C income. The maximum loan amount essentially is 2.5/12 (20.83%) of this same reference. Assuming the maximum $100,000 for 2019 Schedule C income and no employees, this entitles a self-employed individual to a loan of $20,833 and an automatic loan forgiveness of $15,385. In other words, nearly 74% of the self-employed individual’s loan is automatically forgiven. And the remaining portion can be forgiven if the individual incurs qualifying expenditures during the eight-week period subsequent to the loan.

Take Away - Act Now

There clearly are pain points created as Congress was forced to move quickly in response to the coronavirus emergency. It is expected that further guidance and clarification will be issued as the CARES Act is implemented and as new legislation is enacted. Given the second round of funding that is anticipated and the short duration that it will be available, however, organizations should act quickly to finalize PPP loan applications, and submit them now if possible.

For the latest on coronavirus related news and updates, please contact your local CBIZ tax professional or visit our Covid-19 Resource Center.

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