4/2/2020 The Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act What Broker-Owners Need to Know 2 April 2020 For Informational Purposes Only and Broker-Owner Edu-tainment 1 Disclosures Atrox Partners, PLLC has not been engaged by Realogy Holdings Corp, its franchisees, or any participant to this webinar to provide tax preparation, financial, or tax advisory services. Please consult with your tax advisor, attorney, or other qualified financial professional on these matters presented. INTERNAL REVENUE SERVICE CIRCULAR 230 DISCLOSURE: Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party 2 1
4/2/2020 Recent Macro Economic Developments • 6.6 million Americans filed for initial jobless claims for the week ended 28 March • COVID 19 impact could result in 47 million lost jobs, resulting in an unemployment rate past 32% (St. Louis Fed projections under President James Bullard) • Nearly 67 million Americans are at high risk of layoffs • While grim, the plunge is expected to be “short-lived” • Context… unemployment during the Great Depression peaked at nearly 25% • More states ordering “stay at home” / “safer at home” restrictions, real estate is considered an “essential” business by many states • April is expected to result in climbing infections and deaths “If you are going to go through hell, go through hell quickly” 3 Recently Passed Legislation • Coronavirus Aid, Relief, and Economic Security Act • Shorthand: CARES Act • Focus of the CARES Act • (1) keeping workers paid and employed • (2) assistance for American workers, families and businesses • (3) supporting America’s health care system in the fight against the Coronavirus; and • (4) economic stabilization and assistance to severely distressed sectors of the US economy • Estimated at $2.2T … largest economic relief package in our Nation’s history • An economic bazooka • Creates a new loan program under the SBA “Paycheck Protection Program” 4 2
4/2/2020 Paycheck Protection Program – General Info • Shorthand: PPP • Provides for $349B to support loans for a broader segment of small business than traditional SBA loans • Term: February 15, 2020 until June 30, 2020 (retro-actively applied) • Authorized Lenders: Current SBA-certified lenders such as banks and credit unions. Seek out “preferred” SBA lenders. Also, private sector lenders are expected to be added… think FinTech companies • Eligible Borrowers: Not more than (i) 500 employees; or (ii) SBA predetermined number of employees for the industry • Maximum loan size is the lesser of $10MM or a 2.5x “Payroll Costs” • There are affiliation rules (make sure you are “small” and qualify?) 5 Paycheck Protection Program – Key Features • Loan forgiveness provision (more to follow) • SBA fee: Waived for borrowers • Prepayment penalty: None • Term: Now set at two (2) years - not to exceed 10 years • Interest rate: Now set at 0.50% (1/2 percent) - cannot exceed 4% • Personal guarantee: None! • Collateral: None! • Payment deferral feature: Lender must provide for a period of not less than 6 months, not more than 12 months 6 3
4/2/2020 Paycheck Protection Program –The Math • Determination of loan size: • 2.5 times the average total monthly “Payroll Costs” incurred in the twelve-month period before the loan is made • Remember, the loan is not to exceed $10MM • What do “Payroll Costs” include? • Includes: compensation to employees, such as salaries, wages, commissions, cash tips, etc.; • paid leave; severance payments; • payment for group health benefits, including insurance premiums; • retirement benefits; • state and local payroll taxes 7 Paycheck Protection Program –The Math • What is excluded from payroll costs? • Individual employee compensation above $100,000 per year, prorated for the covered period; • Certain federal taxes; • Compensation to employees whose principal place of residence is outside of the US; • and sick and family leave wages for which credit is allowed under the Families First Act; 8 4
4/2/2020 Paycheck Protection Program – Allowable Uses • Payroll Costs • Group healthcare benefits • Retirement benefits • Payment of interest on any mortgage obligation • Rent • Utilities • Interest on any debt obligations incurred before the covered period 9 Paycheck Protection Program – Loan Forgiveness • Borrowers under the PPP are automatically eligible for loan forgiveness • The amount is not to exceed the loan proceeds • Measurement period for loan forgiveness: 8-week period commencing on the loan origination date • Reduction provision for drop in employment/salaries-wages • How does the forgiveness work? • You must apply through your lender • Provide various info and certifications • Qualified Expenses for Loan Forgiveness • Defined “Payroll Costs”, payment of interest on any covered mortgage obligation, rent, and utilities • Forgiveness is tax exempt! 10 5
4/2/2020 Paycheck Protection Program – Example A-1 • Assume, Brokerage with 100 employees with a last twelve-month gross payroll of $5.5MM (after the cap of $100k per EE) and $500k in employee health care and retirement benefits (ER paid); plus $3MM in annual branch office rent expense covering 5 offices. • An initial analysis yields: • Average monthly eligible costs are $500k • The rent is excluded for the loan size calc • The maximum PPP loan size is $1.25MM ($500k x 2.5) 11 Paycheck Protection Program – Example A-2.1 • Assume same fact pattern as Example A-1 • During the 8-week period post origination of the PPP loan, all EEs are retained and the expenses for the Brokerage are as follows: • Payroll of $916,666.67 • Benefits of $83,333.33 • Rents of $250,000.00 • All expense above are qualified expenses, incurred during the 8-week period and therefore eligible to be applied for forgiveness under the program 12 6
4/2/2020 Paycheck Protection Program – Example A-2.2 • What is the Net Result? Cash Flow Taxable Income PPP Loan Proceeds 1,250,000.00 - Qualified Expenses Paid (1,250,000.00) (1,250,000.00) Net - (1,250,000.00) 13 Paycheck Protection Program – Example B-1 • Assume, Brokerage with 100 employees with a last twelve-month gross payroll of $5.5MM (after the cap of $100k per EE) and $500k in employee health care and retirement benefits (ER paid); plus $3MM in annual branch office rent expense covering 5 offices; plus agent commissions of $30MM • An initial analysis yields: • Average monthly eligible costs are $500k – same as ex. A-1 • ***Add commissions paid to your agents capped at $100k*** • Assume the $30MM in commissions reduced to $24MM after $100k cap, which is $2MM average monthly • The rent is excluded for the loan size calc • The maximum PPP loan size is $6.25MM (($500k+$2MM) x 2.5) 14 7
4/2/2020 Paycheck Protection Program – Example B-2.1 • Assume same fact pattern as Example B-1 • During the 8-week period post origination of the PPP loan, all EEs are retained and the expenses for the Brokerage are as follows: • Payroll of $916,666.67 • Benefits of $83,333.33 • Rents of $250,000.00 • Commissions of $4,000,000.00 • All expense above are qualified expenses, incurred during the 8-week period and therefore eligible to be applied for forgiveness under the program. Under the language of the CARES Act, commissions qualify as “Payroll Costs” 15 Paycheck Protection Program – Example B-2.2 • What is the Net Result? Cash Flow Taxable Income PPP Loan Proceeds $ 6,250,000.00 $ - Qualified Expenses Paid (5,250,000.00) (5,250,000.00) Net $ 1,000,000.00 $ (5,250,000.00) Balance of PPP Loan $ 1,000,000.00 Debt Service (2 year) Principal per Year $ 500,000.00 Interest per Year $ 2,500.00 16 8
4/2/2020 Paycheck Protection Program – Key for Brokerages • Definition of Payroll Costs includes: 17 Paycheck Protection Program – Loan Forgiveness Reduction – FTE Count • Loan forgives reduction for FTE headcount • Or: Alternative selection by the business/borrower 18 9
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