In this virtual chat, attorney Michael Zahrt of Foster Swift Collins & Smith, PC talks about the CARES Act & Paycheck Protection.
Mike is a Business Lawyer who helps businesses start up, grow, overcome challenges and seize opportunities. Mike works with clients to prioritize their goals and works with others within the firm to provide a solution custom-tailored to achieve those goals. He understands his clients are best served by counsel who addresses legal issues and also helps further business objectives. One without the other is of little utility in today’s lightning-fast marketplace.
Learn more: fosterswift.com
Legal resources for COVID-19: https://www.fosterswift.com/f-coronavirus-legal-resource-page.html
Julie: Good afternoon and welcome back to our special Facebook live series called Expert Connexions where we are working to connect you with experts who have answers to questions and resources during the COVID-19 pandemic. My name is Julie Holton, I’m the Founder and Principal Strategist of mConnexions Marketing Agency. Feel free to connect with us using the comments, to ask questions, and join the conversation. I hope you have your legal questions ready today because joining me is an attorney from Foster Swift law firm Mike Zahrt. Mike thank you so much for joining us today.
Mike: Hi thanks for having me.
Julie: So Mike is a business attorney and of course Mike a lot of questions about the paycheck protection program, so that’s where I want to start today. What is this paycheck protection program? What do we need to know about this?
Mike: Yeah the Paycheck protection program loan it has a bit of a mouthful, we’ve been calling it the PPP loan. It is part of that big two trillion-dollar stimulus package that got passed about a week and a half ago and it falls under the 7a SBA loan umbrella. So a lot of small business owners are probably familiar with that anyway. Your typical SBA loan is a good financing vehicle for folks that might not be able to get bank financing or want to seek it on a little different terms so this falls under that lending umbrella, but it’s geared especially toward small businesses and their ability to respond to the coronavirus pandemic and you want to think about it in broad strokes. It’s essentially meant to be an eight to ten-week bridge loan that lets people make payroll. So the nutshell version is that you can get a loan that is up to two and a half times your payroll costs and that’s a defined term it’s got a bunch of stuff in it so it’s not just the wages we pay employees, but it’s health insurance premiums, employer contributions to retirement plans, that kind of thing. That all goes into the pot, multiplied by two and a half and that’s your loan amount and the federal government wants you to use that to keep your employees employed. Once you’ve laid them off bring them back to work and if you do these things if you keep these folks employed, they’ll forgive the loan. So it could be free money if you use it the way they want you to use it.
Julie: Okay free money always sounds good especially as business owners are dealing with trying to figure out how to keep businesses up and running when so much is up in the air right now. Who would be a good candidate for this program?
Mike: Well we’re advising all of our business clients to at least give us a call and talk about it because this is the closest thing that we’ve ever seen to free money. Forgiveness aside if you don’t get the forgiveness for some reason it’s a two-year loan very interest at one percent. So worst case scenario you’ve got the cheapest line of credit I’ve ever seen for two years. That’s not bad, but everybody should be looking at this. The SBA lending requirements for this are small businesses which are defined very broadly it’s anybody who’s got less than 500 employees. Nonprofits can apply for this too. There’s no carve out for religious organizations so I just did one for my church last week they applied and they were you know thrilled about it. So there’s a whole slew people who’d should at least be looking at this. It might not be a good fit for everyone. The stimulus package has a whole lot of other good programs they can do it. If you do lay people off and what keep doing that there are good incentives to do that not feel badly about your employees, not be able to make a living wage. There’s the eid a long program that’s out there too. So there’s options, but we may everybody take a hard look at the PPP long for this little reason that it’s free money. You use it to cover payroll expenses. It’s forgiven and it’s that easy. So yeah anybody regardless of size, whether you’ve got one employee or 499 you should be taking a look at that.
Julie: Okay for those who are just joining us we’re talking about this paycheck protection program or the ppp loan as attorney Mike Zahrt is talking about here. Mike what should applicants know before they apply?
Mike: Well I’ve got a bit of a three-point sermon here. The first is you should expect some ambiguity and it’s not something that you should DIY. It’s okay to DIY the loan application and work with your loan officer, but before you do that you should either be talking to your lawyer or your accountant to kind of dig through the statute and exactly what’s included in this payroll cost definition because the maximum loan you can get is two and a half times payroll costs. If you think that would be easy but in drafting this statute Congress intended it to be incredibly broad, they wanted to help as many people as possible and the side effect of that is a lot of ambiguity in defined terms. So we’ve had our statute which took a plain language reading of it and thought we knew what it said and then the SBA issued a set of interim final rules. I have an interim final rule, but that’s what they called it. That clouded the water a little bit and then the IRS issued a fact sheet which was contradictory to the SBA rule. So even right now there are certain issues where banks and lawyers we’re kind of just taking our best guess at it and the SBA is doing better. They keep releasing FAQ’s. They had a recent one out last night that clarified some of the big issues but because one takeaway is to be prepared for some ambiguity. What I’ve had to tell a few clients that fell into one of those ambiguous areas is we’ll just prepare the application two ways, contact your lender, we’ll see how they’re interpreting it and whichever way they fall will have an application that matches their procedure. That’s point one. Point two is to expect some uncertainty. You know this is brand-new legislation and we’re still getting a lot of the clarifying rules. So the unfortunate part of this is that there’s a limited amount of funds right. They want only three hundred and fifty billion dollars allocated to this. Which sounds like a lot but if every small business in America applies for this, it could be gone rather quickly and that’s kind of the driving force behind this feeding frenzy of loans people are so concerned that if they wait for the clarity they’re going to miss out and the funds are going to be gone and we can’t really advise anyone any different. So what we’re advising is let’s just seek the maximum amount available working with the lender that you have and you know see what falls out. There still ambiguity and uncertainty around the loan forgiveness program, how that will be calculated, which costs are permissible for loan forgiveness, and which are not and you know all the time people is look even if you don’t qualify it for full forgiveness because the rules clarify the ambiguity opposite of how we think they should, you still have a loan at one percent for two years and that’s really cheap money that you might need to keep the business going anyway. So that’s the second part of my three part sermon. The third is to work with your advisor to get your ducks in a row. We’ve noticed that a lot of lenders are just you know swamped. I know Huntington hired a bunch of temporary bankers for the sole purpose of feeling these applications. There are very few banks out there that will take an application from someone who was not a pre-existing client of their bank even if you are a pre-existing client you’re not going to get a ton of face time with your lender. Most people only get responses from their lender if their loan is denied for some reasons and you don’t want to be in a position of having to resubmit or refine this documentation and get it resubmitted. The better strategy is to just have your ducks in a row have it in a nice tidy little loan package in a single PDF. You’d be surprised I had a few banks kickback applications just because we uploaded the document more like PDFs whether the loan application on one file and all the supporting documentation the other I said nope the all-in-one resubmit. So if it’s nice and tidy and clean the idea is you want to submit it in accordance with their checklist and exactly that order and make it easy as you can for them to breeze through and go check on to the next part of the approval cycle. So having somebody who’s familiar with the acts, familiar with your books, and where to find those records. Telephone, every bank seems to be different with what substantiation requirements they have. Some want a nine forty, nine forty-one, some people want your payroll register. Yeah it’s the same type of information, but looking for different documents – Making sure you are working close with your advisor.
Julie: Absolutely and I know Mike this is a perfect example of what we’re talking with small business owners or any business owner and talking about having your kind of kerosene in place. Your team of trusted advisors that work together when the time comes certainly that time. So for those who are watching and may be feeling a little overwhelmed and there’s been a lot of, Mike and I were talking beforehand there has been so much information coming at business owners. I feel you, as a business owner, I am right there with you. A lot of when we get me coming out and being able to turn to some of these trusted advisors to help us sort through especially you know the ambiguity like you’re talking about Mike. It’s so to be able to turn to and if you don’t have an attorney, if you don’t have a CPA that we’ve been working with regularly, it’s okay. There are people who are available to help. So Mike I really appreciate you talking through this. What other financial assistance is available for small business owners?
Mike: Yeah so the PPP loan accounts for a 350 billion of the two trillion-dollar stimulus package. There’s other goodies in there too. One is that EIDL loan you hear a lot about. There were some rumors floating around when that first came out that you just fill the application online and three days later there’s going to be $10,000 in it business bank account. So everybody’s scramble to do that and I don’t ever know anyone who has $10,000 in the bank account. Part of the issue with that one is that the application for the loan does not give you the space that the Act contemplates you should have to tell them that you want the grant. So the statute says you may tell the SBA that you want a part of the loan as a grant you can tell them how much. The application doesn’t let you do that we think that was intentional because there’s only so much money for that when we go around too. So if you apply to the EIDL and haven’t seen the grant money yet don’t panic, but also don’t expect it to be $10,000 because there’s a lot of discretion that goes into that on the SBA end, but the rest of that can turn into a loan very beneficial turn and interest rates. You can refinance EIDL into a PPP loan which is eligible for forgiveness. So those are the two lending packages little and I touched on briefly was the unemployment stimulus. I’m sure a lot of people have seen that extra six hundred bucks a week that are going to unemployment benefits. So if you’re in a situation where it just doesn’t make sense to have the PPP loan, you got to lay people off instead you don’t have to feel as guilty about doing that. So those are the three federal programs available in the state of Michigan. The MADC has authorized the 10th out or a 10-million-dollar grant program and a 10-million-dollar loan program. The loans are obnoxious, their interest only for five years’ payment over another five years. I think the interest rate is like one-quarter of one percent which is just very low. You apply for those in the grant and the loans through your local economic development office. I’m in Grand Rapids so for Kent County it’s the right place. You can go to the MADC’S website and they have a full list with whatever County you’re in. They have a link to your economic development office and use your landing page with an application for the grant we talk to you about, your student’s programs are big options.
Julie: Okay excellent and I imagine again all of this coming fast and furious. Mike I want to point out that on your website fosterswift.com, your firm has set up a coronavirus Task Force and there’s a full page of resources including links to some of these programs this information about these programs that he’s talking about and more information and memos and write-ups from attorneys at the firm. We have a few questions coming in. I think there’s a little bit of a delay in these questions, so if you’re writing a question we’re not answering it right away be patient with us and I will get to it. So the first question Mike we have is coming from Christi. She wants to know you know what would you say is the likelihood of a small business being approved for loan forgiveness?
Mike: That’s a good question. The statute does not put loan forgiveness into the discretion of the SBA or the IRS. So, in other words, loan forgiveness mandatory the government has to forgive it, if you jump through all the hoops and there are three hoops you have to jump through and the whole point of this loan again is to keep people employees, the Paycheck protection programs. So that’s the idea we want to keep rank-and-file employees collecting those paychecks. So the three hoops are you have to have as many employees now as you did in the prior quarter. That’s just an employee by employee basis. You do a census of employees and if it’s a reduction in employees, the amount of loan that you have forgiven this reduced program. So if you know 80% of the employees used to do you qualify for 30 percent forgiveness. The second is based on employee compensation. This is just based on salary so it doesn’t take into account any other benefits like health insurance premiums and you know if you made in a discretionary employer contribution to your retirement plan this year and you know there’s no way that’s happening this year, that’s fine it’s based solely on compensation and it’s a seventy-five percent rule and that’s a dollar for dollar and its employee by employee. So each employee and you compare what they made, what they used to make, and if it’s less than 75 percent your loan is reduced on a dollar-for-dollar basis. So you have to pay attention to that and then the third thing is that you can only use up to 25% of the PPP loan proceeds or non-payroll costs. So the app lets you use it for things like mortgage interest, utility payments, interest increases and debt obligations, and it’s fine to use your loan on that stuff, but you can only use 25% of your loan on that stuff. The extent you exceed that 25% threshold that won’t be forgiven, but again this is non discretion. So as long as you jump through those three hoops the whole thing is forgiven. One other thing I think is important is most people think about loan forgiveness and they may think about discharge of indebtedness income. So the general rule of the tax code is if you owe somebody money and they forgive that debt, that’s treated as income to you. Another character you put in this legislation is that you’re not going to actually only income tax due to discharge of indebtedness so it’s truly free money.
Julie: Wow great info Mike. Christi thanks for that question. We have another question. This one is from Becky. She says hi Mike thanks for doing this, question if an employee files for and receives unemployment will this affect employer’s eligibility for loan forgiveness?
Mike: It probably will. The reason being is that if an employee is receiving unemployment benefits and necessarily means that they’ve been laid off. So you’ve reduced your workforce and your compensation to them is zero. So when you look at those two forgiveness formulas that we just talked about, you’re going to get dinged on both of them and the important thing to keep in mind with the first two forgiveness eligibility tests is that it’s not an either/or you don’t pick the best of the worst, they both apply. So if you lay off an employee they not only don’t count toward your employee sentences you get reduced for that, but it’s also a reduction in salary and you get further reduced by that so there’s a potential for double dipping here as far as the government’s concerned not forgiving you loan. So the whole point of this is bring people back to work and get them working, get them collecting their paychecks. So yes if you laid them off and don’t bring them back it will impact your loan forgiveness eligibility. The good news is you’ve got until June 30 to bring those people back. So if you’ve previously laid them off and think the PPP long is good for you, you can still apply as long as you bring those people back by June 30 it won’t impact your forgiveness eligibility.
Julie: Excellent. Great question Becky, thank you for that. Mike, my next question for you is kind of a loaded question. What else should business owners be doing and is there anything that we should have already done by now?
Mike: Yeah good question Julie. The first goes to your point earlier, make sure you’re staying in touch with your advisors. I’d recommend and encourage all my small businesses, especially the very small ones, folks on Main Street. Think of your attorney and your CPA and your insurance agent. Think of all those people as kind of your external board of directors and you should be you know frequently communicating with them about what’s going on with your business, the problem that you have. Between all those people those industries add your banker to that list too. They’re going to have some good advice for you to help your kind of weather this and pick what’s best for you. So that’s advice number one. Advice number two I guess determine if your critical infrastructure or if you have employees that are necessary for minimum basic operations those are two defined terms in that stay home order. If you haven’t given them the written designation as you should have by now. There was a midnight at March 31st deadline is midnight the morning of April 1st, but they need to have the written designations. So if you haven’t done it, do it. If you have a question about whether you need to or not contact your attorney and they’ll help you work through that. Two other quick points. Renew your contracts. If you need to declare force majeure you know you’re unable to perform because of events outside your control you likely need to give written notice of that even if it’s not a requirement you still should do that. Again give that to your attorney they should be able to help you determine if you even have that option and if so how to exercise it. Even if you are still performing and it’s on a limited basis or maybe you just you know had a phone call with a vendor or a customer and said you know let’s just suspend everything for a month and let’s see how this shakes out. Get it in writing, if it’s not written down it didn’t happen. So do that and then the third is we really look at your days cash this not something that we typically look at in the ordinary course of business, but in a situation like this where there’s a lot of uncertainty you want to know how many days you can make it on the cash flow you have and if it’s not a number of big enough you know reach out to your CPA and really take a hard look yet know what invoices are due on the seat, what are not, what you normally pay immediately that you can put out a few weeks. Try to stretch that day’s cash number a little farther and hopefully if you do all that we’ll see infection rates decline and hopefully things will turn back around.
Julie: Excellent. Mike and I’m going to kind of cross promote too, an interview that you did last week with one of your colleagues Patricia Scott talked more in depth about some of those day-to-day business operations and for those you know as we try to continue this business that’s normal and abnormal however, we want to phrase that certainly some great advice from Patricia last week. For those of you watching you can catch that in our videos on our Facebook tab. Mike thank you so much for sharing your insights. Anything else that we should cover before we let you get back to work?
Mike: I feel like we’ve dumped a lot of information on people and there is a lot of it out there it would promote our one-stop shopping our website it’s our coronavirus resource page and the firm is a full-service law firm. So we have people in a variety of niche areas and we try to stay in our lane and only look at stuff we absolutely know. So I hear PPP guy along with two other people. I don’t know anything about unemployment benefits for independent contractors that’s a big issue, I know nothing about it. It’s on our website with a link to someone who doesn’t know something about it. That’s all to say you know be sure to check that out. If there’s you know business issue that’s impacted by this pandemic the person you should contact support answers will be on that page.
Julie: Absolutely and that’s what’s so helpful about having a firm like yours, where it’s like you said one-stop shop so we can get those resources. So for those of you watching the website he’s talking about is fosterswift.com and I’ll go ahead and on through the link in our comment section. Mike, thank you so much for taking the time today to really appreciate it.
Mike: Thank you. Thanks for having me.
Julie: Yes, and those of you I’m tuning in, if you have more questions for Mike, feel free to reach out with him to him directly through his website and then join us back here at three o’clock in about an hour and a half we are going to switch gears a little bit and we’re going to talk to a local nonprofit about how they’ve been able to shift and what we’re able to do as far as passing it forward with kindness. Really cool things happening with ePIFany now, so I’m excited to talk with Bob Hoffman about that that’s coming up today at 3:00 and again thank you for joining us if you have questions for our guests today please feel free to comment here or find him at fosterseift.com. Thanks everyone will be back here at 3 o’clock.