The Paycheck Protection Program under the Coronavirus Aid, Relief, - - PDF document

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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

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

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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”

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”

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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?)

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

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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

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

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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

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
• n 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
• bligation, rent, and utilities
• Forgiveness is tax exempt!

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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)

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

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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)

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)

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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”

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 $

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Paycheck Protection Program – Key for Brokerages

• Definition of Payroll Costs includes:

Paycheck Protection Program – Loan Forgiveness Reduction – FTE Count

• Loan forgives reduction for FTE headcount
• Or: Alternative selection by the business/borrower

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Paycheck Protection Program – Loan Forgiveness Reduction – Salaries and Wages Reduced

• Forgiveness reduced by the amount of reduction of salaries or wages of any

employee that is in excess of 25% during the covered period, compared to the most recent full quarter

• Excludes employees with annualized pay greater than $100,000
• Can rehire employees within 30 days of enactment

Paycheck Protection Program – Other Notes

• NEW: Due to anticipated high demand, SBA anticipates allowing not

more than 25% of the forgiven loan amount to be used for nonpayroll costs (utilities, rent and interest on a mortgage).

• SBA Disaster Loan Overlap
• Economic injury disaster loans are also available from the SBA
• A recipient of a disaster loan is generally not barred from participating in the PPP
• Unclear if guaranteed payments to partners are eligible for inclusion in

the loan calculation and use of proceeds

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Paycheck Protection Program – Potential Pitfalls

• Changing regulations – interplay of language
• Check your math in your calculations
• Use of loan proceeds for non-qualified expenditures only
• Reporting/certification requirements
• Basis considerations (S corps and partnerships)
• If you use a PEO for payroll, your payroll most likely will need to be a

CPEO to qualify.

• Mind double dipping!
• Document, document, document

Paycheck Protection Program – Insight from Banks

• Opens tomorrow, Friday, April 3, 2020
• Key Bank: requiring the below info at current
• SBA has issued initial guidance to their lenders

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ACTION ITEMS

• Determine if your current bank partners are preferred SBA lenders. If

so, find out if the bank has a registration process in place for PPP

• Engage your Finance and Accounting Team – CPA / Advisors:
• To begin gathering all required information to calculate your

Brokerage’s loan size (note the measurement period 12 months)

• Forecast qualified expected expenditures
• Mind the qualified expenses for the loan proceeds!
• Be prepared to track/trace usage of the PPP proceeds
• Request from your lender the automatic 6-month deferral (push for 12

months)

• Conduct your own analysis

Opens tomorrow with the deadline June 30th…. SPRINT to your SBA lender

Other Considerations for Brokerages

• Evaluate staffing changes considering PPP
• Remote closings, wiring of disbursements checks, promote direct

deposit, use e-payment and 3rd party bill payment services

• Re-negotiate vendor contracts
• Lean ops
• Leverage tax planning
• Your 2020 Q2 estimated income tax payments are still due June 15,

2020

• Tax year 2019 Form 1040s are now due July 15th including any balance

due

• Goodwill impairment from acquisitions
• Cash is king: draw down revolvers as warranted, debt refinance
• pportunities
• Mind fraud

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Godspeed and Feel Free to Contact Me

Kevin Walsh, CPA Principal Atrox Partners, PLLC Tampa, Florida 703 909 9999 Direct Cellular kwalsh@atroxpartners.com

This Presentation was for Informational Purposes Only

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

• ther entity, investment plan or arrangement to any other party.

CONFIDENTIALITY NOTICE: This message is being sent by Atrox Partners, PLLC. It is intended exclusively for the individuals and/or entities to which it is addressed. This communication, including any attachments, may contain information that is proprietary, privileged, confidential, including information that is protected under the HIPAA privacy rules,

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