By Robert Nichols, Andy Liu, Terri G. O’Brien, and Adrian Wigston

April 3, 2020

Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, the U.S. Small Business Administration (SBA) will manage the Paycheck-Protection Program loans for qualifying organizations with fewer than 500 employees.  The loan amounts are the lesser of 2.5 times average monthly payroll costs or $10 million.  Application for these loans starts on April 3.

Paycheck-protection loans can be applied to qualifying expenses incurred in an eight-week period between Feb. 15 and June 30.  Qualifying expenses consist of payroll costs, health care premiums, rent, the interest portion of mortgage payments, utilities, and other business debts entered into prior to February 15, 2020.  More guidance is expected from the SBA within 30 days.

In a recent article, we discussed the likelihood of increased audits and investigations in the wake of COVID-19.  We expect these loans to be no exception; use of the SBA funds must be tracked carefully and contractors should consult expert advice to ensure the most important risks, exceptions, and caveats are known in advance.  We’re writing this article together with KWC Certified Public Accountants, a firm with extensive experience in SBA loans.  KWC recently deployed a new program in lightspeed to assist clients with CARES Act financial planning.

Although banks will provide the primary administrative push of getting loans submitted and approved, the government contracting community should consider several key points when evaluating strategy for utilizing these funds.

  1. The SBA has not finalized guidance and standards completely, but plans to do so within 30 days. This presents a clear timing risk. For example, the SBA is “anticipating” that some portions of the loan used for costs other than payroll will not be forgiven.
  2. There are interpretation conflicts between Treasury, the SBA, and the CARES Act. Treasury has stated the loan is due within 2 years, with payment deferral options, while the act allows for payment across 10 years.
  3. Contractors must certify that current economic uncertainty makes the loan necessary. This might expose some contractors to risk or possible fraud allegations if they obtain the loan but do not lose any contract revenue or they actually increase contract revenue through new awards to fight COVID-19.
  4. By receiving the paycheck protection loan, you lose eligibility for two helpful provisions in the CARES Act: the employee retention credit ( 2301) and deferred payment of employer payroll taxes (§ 2302).
  5. We anticipate a significant administrative workload for loan recipients to accurately calculate and support the amount of the loan eligible for forgiveness. Planning in advance to prepare systems and processes could help track these costs more efficiently. For example, we recommend depositing loan proceeds to a separate account such as a payroll account to clearly document how funds are spent.
  6. KWC CPA can assist with other technical points such as requirements and definitions for full-time equivalents, restrictions on the use of loan proceeds for sick leave and FMLA leave, etc.

Nichols Liu is tracking all of the developments, guidelines, and regulations relating to the CARES Act, and will continue to post updates on our blog.  We are available to discuss any needs or questions you may have.

KWC Certified Public Accountants is providing services related to the tax and financial issues clients face during the COVID 19 outbreak.  KWC’s website includes a COVID-19 resource and updates page with relevant information on the SBA loan and application process.  For more details please contact:

Terri G. O’Brien, CPA
Principal
[email protected]