How US Companies Can Use PPP Loans & the CARES Act to Survive
In recent weeks, the federal and state governments have revealed a range of options to help US businesses struggling during Covid-19. Some of these, including provisions under the CARES Act, gives companies a real opportunity to slow their losses during this difficult period.
But naturally, any new financial law leads to questions and confusion. Plenty of finance teams don’t know how to access these funds, or even if they should.
To help, we asked the Certified Public Accountants and Financial Advisors at Squar Milner to share what they’ve been telling their own clients. The conversation went into the specifics of PPP loans, several other tax initiatives to investigate, and some broad principles for companies in financial hardship.
Watch the full replay of this webinar here.
About our speakers
Larisa Rapoport is a partner at Squar Milner, a full-service accounting firm on the West Coast of United States. The firm provides a full array of services to clients, mostly middle market to upper-middle market and some publicly traded companies as well. Squar Milner has eight offices in California, including San Francisco where Larisa is based.
Stephen Landsman is a tax partner at Squar Milner. He also helps with a range of challenges for his clients which include public- and privately-owned companies, and high-net-worth individuals.
Disclaimer: Our experts offered great, practical advice for struggling businesses. Before relying on the content of this article, seek assistance from a CPA. It’s not a good time to get into legal and financial trouble.
Here are the five biggest takeaways from this fascinating discussion.
1. Manage cash more closely than ever
“Working capital management is the key,” explains Larisa. “Taking positive cash flow and positive working capital should be your goal. Reduce your inventory levels, and discuss and increase your borrowing base with your lenders. Look for cash opportunities everywhere.”
Finding cash streams is obviously tricky at the moment. But it’s the best thing you can do to keep your business afloat.
“Where does cash come from? Nowadays, we don’t see regular operations where you have your usual sales, and the economy is doing wonderful, and all the customers are paying on time. So look for lending opportunities and loans.” We foresee the credit environment growing increasingly tight, so it is best to try to secure these loans now. There are a lot of loan options available now, including the Paycheck Protection Program (PPP) loan which just received additional funding.
2. Do everything possible to contain costs
“It's imperative to contain those costs,” continues Larisa. “So, anything that you can limit and defer will help, going back to basics. I'm not necessarily saying, 'don't spend any money on marketing,' but be very diligent about what you're spending your money on.”
“Set a cap on spending. In particular, limit spend on capital expenditures. It's not the right time. You might also freeze pay.” It is likely that your employees are not expecting a huge pay raise in the given environment. We also suggest you eliminate any unnecessary spending. For example, paying for travel and entertainment does not make business sense at this time.
Larisa went on to provide further ways to make your cash last. “Prioritize your suppliers. Suppliers that are instrumental for your business are necessary to keep the business alive.” For example, if you are purchasing raw materials because you produce your own products, it is important to maintain that relationship through the current economic crisis. Once this financial turmoil slows down, you do not want to come back to a frayed relationship.
But she also provided a warning. “When you negotiate the contracts and defer payments, make sure that you address your credit risk rating. If you're a big organization where you enter into contracts with others, and they check your credit rating, and you're deferring a lot of payments, that could create some deterioration of your credit score.”
3. Get a PPP loan (if necessary)
The conversation then went into the specifics of the CARES Act, and how it applies to businesses. Long story short: our experts see the new provisions as hugely helpful for businesses. If you’re looking for a loan during this period, this is the place to start.
“The biggest and the most effective loan is the PPP loan - the Paycheck Protection Program loan,” explains Larisa. “It covers your payroll, utilities, rent, mortgage interest, and other eligible expenses for the next eight weeks. So, instead of laying off people, businesses that have revenue coming in can go to their bank.”
“It’s available to privately held companies with less than 500 employees. You have to certify that you really need the funds to cover payroll and other eligible expenses - rent, mortgage interest, and utilities. The amount of the loan is 2.5 times the average monthly payroll over the last 10 periods. So, you have to calculate that. And it cannot exceed $10 million.”
What makes PPP loans so attractive? According to Larisa, “Number one, it's forgivable to some extent, depending on how your company behaves. That includes whether you retain the employees that you have, whether you keep the same salary levels and don't make reductions, and whether you spend the funds that you receive on eligible purposes.”
Loan forgiveness relies on several conditions. “Let's say you apply for a loan of a million dollars. The entire million dollars can't be forgiven if you missed some criteria that has to be met. 75% of that million dollars has to be spent on payroll, so that would mean that $750,000 has to be spent on payroll, and the other 25% can be spent on something else. If you spend less than that, let's just say you spend $700,000, then the $50,000 gets reduced, and you don't get that forgiven, meaning that in a normal loan - you pay it back.”
Why these specific rules around payroll? As Larisa explains, it’s because the size of the loan depends on the number of employees. “Let's say before you took the loan you had 100 employees. But eight weeks later, the average number of employees was 80. Then you would get 80% of the payroll portion that you applied for forgiven. You're not going to get the 100% because you reduced your employees by 20%.”
4. Revisit your tax situation and investigate carrybacks
Under the Trump administration, the rules for net operating loss (NOL) carrybacks changed. Generally speaking, you can no longer carry losses back - only forward. But, as Stephen explains, the CARES Act has temporarily changed the rules.
“Now, not only can you carry them back, but you can carry them back to higher tax years. Remember the tax rates under President Obama were higher than under President Trump. So, if you can carry back a loss from 2018 to 2013, there may be an extra push on that in terms of receiving monies back.”
And it’s in your best interest to investigate this topic as soon as possible. “The legislation also allows for quick refunds if you do it before July 2020 (this depends on the date you’re carrying back from). You can do a tentative refund, which is a much quicker process. So, you want to review your returns in '18, or if you've prepared them for '19, let's see if you can carry back any losses to 2013 or the years in between then and now.”
“Just like with PPP loans, the better your details are, the more likely your application is going to get processed. This is going to be similar for the Form 1139, which I'm calling the quick refund versus the amended returns. Some of those are paper filings. We've been told the IRS isn't even looking at paper filed returns, or they're not processing them. So, you want to get in the queue as quick as possible.”
5. If you miss out on PPP, look for other loan or credit options
While Larisa and Stephen called PPP the best loan available, it’s not your only option. One specific example is the Employee Retention Credit (“ERC”):
“We'll call this a cousin of the Payroll Protection Program,” says Stephen. “This is for people that don't qualify, and it has to do with employer retention credits. This is cash, available to employers with 100 employees or less. And all your employees are qualified. For employers with 100 or more it's a little bit different who qualifies.”
How do you claim these? Stephen suggests you work with your existing payroll provider. “Have your payroll company assist you in claiming the credit on the quarterly payroll tax filings. The eligible amounts are up to $5,000 per employee, because it's based on $10,000 of wages for eligible employees. Eligible employees are usually those with 30 or more hours per week. So, think about this. If you get a $5,000 credit per eligible employee, that's a lot of money per quarter.”
Stephen and Larisa discussed several other options, some of which depend on the type of business you run. If you’re a commercial landlord, for example, there are new rules for Qualified Improvement Properties.
And naturally, the rules and benefits will vary state to state.
As mentioned at the top, talk to your CPA to find the best option for you. And as our experts emphasized repeatedly, do so as soon as possible. The money in some of these schemes is very limited.
With sales down, optimize cash in from other sources
Larisa began this conversation with the statement we’ve heard in countless discussions lately: “cash is king.” The CFO’s chief concern right now is to make sure that the company has money on hand. Without it, there is no company.
As we’ve seen, this means two key things for finance teams. First, make the money you have last longer. That means cutting costs, re-negotiating with suppliers, and adjusting team budgets.
But second, take advantage of new programs and schemes that put more cash in the bank account. The United States government has put exceptional measures in place to support struggling businesses.
Start with the obvious - a PPP loan might be just what you need. But also talk to your CPA, revisit your tax filings (with them), and see if there aren’t other creative (and legal) steps you can take.
We’re all hoping for a fast recovery. Any cash injection you receive now may be the difference maker.
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