Two weeks ago I ran a post about What Doctors Need to Know About the CARES Act. It was written within hours of it being signed into law. I had not read the entire law and neither had anyone else on the planet, so I knew there would likely be errors in the post, which were corrected as soon as they were discovered. More so than a few minor errors, what readers really noticed about that post was that it brought up more questions than it answered, most of which revolved around the small business stimulus portion of the CARES Act. Perhaps the most interesting part, and certainly the part that generated the most questions for my readers, of this stimulus was the tax-free forgivable loan for small business owners known as the Paycheck Protection Program. Today, I'm going to try to answer as many of those questions as I can.

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What Stimulus Programs were Implemented for Small Businesses?

Small businesses are getting hammered in this recession. As an example, in my home state of Alaska, there have been fewer than 250 cases of coronavirus and only 7 deaths. But fully 1 in 7 restaurants in the state have closed and do not plan to reopen. Ever. As if the loss of these businesses for their owners was not bad enough, 48% of employees in this country work for small businesses. 18% work for businesses with fewer than 20 employees. So the loss of small businesses can have severe consequences for millions of American families. In an effort to assist them, Congress included a number of provisions for them in the CARES Act.

The main ones are the Economic Injury Disaster Loan and the Paycheck Protection Program.

What is the Economic Injury Disaster Loan?

The first of these is the Economic Injury Disaster Loan (EIDL) program run through the Small Business Administration (SBA). This program is a loan available to companies ranging from a significant company with as many as 499+ employees down to sole proprietor independent contractors. Non-profits are also eligible. There are a few odd exceptions–you can't be a farmer, a pornographer, a casino, a drug dealer, a lobbyist, or a member of Congress. The EIDL has been around for a long time. It isn't new for COVID-19, but has been expanded.

To qualify, you must be in an area declared a disaster area (occurred for the whole country March 13th) and have suffered some economic harm. You can borrow up to $2 Million (depending on how much economic harm you encounter), there are no upfront fees, there are no prepayment penalties, and the repayment term varies by your ability to repay it, but can be up to 30 years. The interest rate is 3.75% (2.75% for non-profits). There is no collateral required for loans of up to $25,000 and no personal guaranty is required for loans up to $200,000. You have until December 16th, 2020 to apply. The interesting part about this loan is that you can get a rapid advance within 3 days of applying of $10,000.  As much of that $10,000 that you use for paid leave, maintaining payroll, mortgage payments, or lease payments can be forgiven, tax-free.

So the big question is whether this $10K can be “free money” to an independent contractor physician. The short answer is, probably not. The reason why is are the following ineligible uses of the money:

  1. Payment of any dividends or bonuses;
  2. Disbursements to owners, partners, officers, directors, or stockholders, except when directly related to performance of services for the benefit of the applicant;
  3. Repayment of stockholder/principal loans, except when the funds were injected on an interim basis as a result of the disaster and non-repayment would cause undue hardship to the stockholder/principal;
  4. Paying down (including regular installment payments) or paying off loans provided, or owned by another Federal agency (including SBA) or a Small Business Investment Company licensed under the Small Business Investment Act. Federal Deposit Insurance Corporation (FDIC) is not considered a Federal agency for this purpose;
  5. Payment of any part of a direct Federal debt, (including SBA loans) except IRS obligations.

If, like most independent contractor physicians, you don't have employees and don't really have an office, you're pretty much out of luck. But if you are a private practice physician or dentist with employees and an office, there's a free $10K here.

What is the Paycheck Protection Program?

The EIDL is really designed to help with up to 6 months of business operational expenses. The Paycheck Protection Program (PPP) is designed to help with up to 8 weeks of business operational expenses. The most important aspect of the PPP is that it can be forgiven tax-free. This provision, however, is basically a bribe not to fire all your employees to stay in business. Keep them on the payroll, the government says, and we'll cover your payroll for 8 weeks.

Can I Get Both the EIDL and the PPP? 

Yes, yes you can. However, that $10K forgiven under the EIDL advance grant program will be subtracted from the amount you can get forgiven under PPP.

What Are the Terms of the Paycheck Protection Program?

The PPP is a loan where you can borrow 2.5X the average monthly payroll expenses of your business over the last year, with a maximum of $10 Million. It is a two-year loan with an interest rate of 1%. Payments are deferred for six months.

While that sounds good if you need a loan, there are two reasons the rush to apply for the PPP occurred:

  1. There is only a limited amount of money ($349 Billion). That sounds like a lot, but there are 30 million small businesses in the US. Divide $349B by $30M and you get $11,633 each. Even my tiny business is eligible for three times that amount, so there obviously isn't enough money to go around. I was unable to figure out how much money is left in the program from any reliable source, but a few days ago it appeared that at least $100 Billion of the $349 Billion had been distributed already and that's without most people understanding how it works. The government bureaucrats, bankers, accountants, or attorneys are still trying to sort all of this out, so do you think most small business owners know how it works?
  2. The money can be forgiven under certain conditions. So even those businesses which don't actually need a loan (like mine) want to get their free stimulus money. Almost all companies have lost revenue, but some are in a much better position to weather the storm due to not losing as much revenue, having lower expenses (especially if they've been operating debt-free), and by having a cash reserve set aside for a rainy day. But when you wave a 5 or 6 figure amount of free money in front of them, it's worth their time and effort to apply, and to do so quickly before the money runs out.

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Are There Ethical Concerns to Applying?

Some are threatening to publicly shame business owners who take out this loan but “don't need it,” but the only definition of need included in the law is that you need to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations.” Pretty vague.

Who really knows what the economy will be like or what will be needed to support operations a month or two from now? What does “support” really mean? How bad of shape do you really have to be in? And you better decide now before the money is gone!

Plus, if the idea is to keep businesses from firing employees, there are plenty of businesses that can make it through the crisis just fine (by firing or furloughing employees) who might not, given the prospect of the government covering their payroll for eight weeks. Is the goal to allow businesses to survive or to get businesses to maintain payroll? Is the goal really to preserve the most desperate businesses for 8 more weeks before they go out of business while stiffing those who ran their businesses better?

Lots of moral hazard and ethical questions here, similar to every credit and deduction in the tax code and all government welfare programs. I figure we've lost about 50X in revenue and additional expenses due to the pandemic what we will have forgiven under this program and I'm going to maintain employment and salaries over the next eight weeks so I'm okay with applying for WCI, LLC from an ethical perspective.

It also sounds like Congress is going to designate an additional $250 Billion to the cause in the next week or two.

What Are The Details of Forgiveness?

The loan can be fully forgiven if at least 75% of the funds are used for payroll costs and the other 25% is used for mortgages, rent, and utilities. You must maintain or quickly rehire employees and maintain their salary levels, otherwise, the entire loan will not be forgiven.

What About the Income Limitation?

2.5X payroll sounds like a ton of money to many doctors or owners of businesses that employ doctors. Unfortunately, there is a per-employee income limitation on both the loan and the amount of it that can be forgiven. Basically, you can only get enough to cover payroll up to $100K per year, so for 2.5 months, that's only $20,833 per employee. If you're the only employee of your business, that's the max you're going to be able to get no matter how much you made over the last year. I suppose you could reduce payroll to the equivalent of $100K/employee each year and still get the loan forgiven though.

Note that the $100K limit does not include benefits such as group health insurance and employER contributions to retirement accounts. See Question # 7 here.

Can Independent Contractors Get This?

Yes! Starting April 10th, sole proprietors, independent contractors, and the self-employed are specifically included, even if they are not incorporated and have no employees. Even if your business is a “side gig” and your main gig is as a W-2 employee of a hospital or physician group, you can still get this.

What Counts As Payroll?

Payroll includes salary and benefits such as health insurance premiums and retirement account contributions. It also includes “net earnings” for a sole proprietor.

Where Can You Apply?

Most people are seeking assistance from their accountants, attorneys, or bankers. But you can find a lender here. There are four banks within a mile of my house offering this program. Just don't be surprised if the lender puts you at the back of the line. Many banks are offering this first to their customers that already have a loan from them and then to their deposit customers before offering it to new prospective customers. We went to a local bank we were in the process of opening up new accounts with when the CARES Act was passed.

What Information is Needed to Apply?

Well, I'm not actually filling out the application (what are COOs for?), but our bank is asking for the following:

  1. A Deposit Account
  2. W-9
  3. Government ID
  4. Bank SBA Paycheck Protection Program Business Banking Application
  5. SBA Paycheck Protection Program Borrower Application Form 2483
  6. 2019 IRS Payroll tax reports (940, 941, 944, W3)
  7. Payroll reports for a twelve-month period
  8. Documentation showing the sum of all retirement plan funding that was paid by the company (exclude retirement plan funding of employee contributions that remitted by the company)
  9. 2019 IRS 1099 (applies only to independent contractors)

Notice that a 2019 tax return is not on the list. But if you're an independent contractor that doesn't file Form 941s, I'm not sure how you're going to show what your net self-employment earnings are for the last year to the satisfaction of a bank without a 2019 tax return.

What Does that Application Look Like?

It's two pages long and looks like this:

I thought one of the more interesting lines on the application is in the first section on page 2, where you certify you'll only use American-made equipment and products. I have no idea how that one is going to be enforced, nor whether my Macbook counts given it is sold by a US company but manufactured in China.

I Heard There Is Now a Max of $15K. Is that True?

People who qualified for the EIDL are now reporting that the SBA is telling them they will get an initial disbursement of just $15,000 and perhaps as little as $1,000 per employee. Whether they will get more in a second disbursement is not yet clear. It likely depends on whether additional funding is approved by Congress. As near as I can tell, neither of these caps apply to the PPP but things change rapidly and it is unlikely that there will still be funds available by the latest date to apply for the PPP (June 30th).

Are There State Programs?

Yes, some states have totally separate loan programs. For example, Utah has a 60 month (no payments for first 12) 0% loan of up to 3 months of operating expenses. It does not have a forgiveness component however.

Do You Think This is Good Policy?

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I think the 1% loan was a good idea, but I'm less convinced adding in the “free money” forgiveness aspect was as wise. Perhaps it should have been designed as a 6% loan if you didn't maintain payroll but a 1% loan if you did. Or perhaps just increase the stimulus payment to individuals while also providing a flat payment to businesses on a per-employee basis would have accomplished the same goals with less moral hazard. Too late now.

What do you think? Does your employer's business qualify for this loan/grant? Will it be applying for it? If you are self-employed, will you be applying for it? How much do you expect to have forgiven? Comment below!