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Guest Post by Alan R. Sasserath, CPA, MS, Sasserath & Zoraian, LLP

On Friday, March 27, the President signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) into law. There are a myriad of tax changes and economic stimulus provisions in addition to unemployment, health care, health system as well as other stimulus and stabilization provisions.

Cash flow is critical right now for all businesses, especially small businesses. We are still at the point where it is the most critical issue and will continue to be the most critical issue for at least the short term. In our estimation, the most significant business provision in the CARES Act is the Paycheck Protection Program (“PPP”) which falls under the U.S. Small Business Administration’s (“SBA”) 7(a) loan program.

Because it is so significant from the cash flow perspective, we have spent the better part of the last few days analyzing the PPP. The tax and other cash flow provisions in the CARES Act are important and we expect to take a deeper dive into those this week; however, they don’t come close to comparing to the cash flow significance of the PPP.

The most significant provision of the PPP is the provision that it is a loan that can be forgiven under certain circumstances.

Here is a high-level overview of the PPP:
• It generally applies to businesses with fewer than 500 employees.
• The amount of the loan is the lesser of (1) the average monthly payroll (salary, wage, commission, tips, vacation, group health benefits, certain other payments, etc.) up to $100,000 on an annualized basis per employee/payee for the 12 months preceding the date of the loan multiplied by 2.5 plus the balance of any pre-existing emergency loan, or (2) $10,000,000.
• The loan proceeds may only be used for payroll as defined above, interest on any mortgage obligation, rent, utilities and interest on any other debt obligations that were in place before February 15, 2020 (“Covered”).
• In evaluating the eligibility of a borrower, the lender shall consider whether the borrower was in operation on February 15, 2020; had employees; or paid independent contractors as reported on Form 1099-MISC.
• No personal guarantee requirement.
• No collateral requirement.
• Forgiveness: The amount that can be forgiven include the amounts paid by the borrower during the 8-week period following the loan origination date for:

• Covered payroll costs – Generally including payroll as defined above up to $100,000 per employee/payee on an annualized basis. In other words, the amount of loan forgiveness available is limited to $1,923.07 per week or $15,384.56 over an 8-week period per employee.
• Interest on a “Covered” mortgage obligation.
• “Covered” rent obligation.
• “Covered” utility obligation.
• Any amount not forgiven will become a term loan for up to 10 years with a maximum interest rate of 4%.

The loan forgiveness can be reduced either based on a reduction in employees or a reduction in salaries of certain employees if their salaries are less than $100,000 on an annualized basis.

Even if you have laid people off, you are still entitled to the loan based on prior year payroll. If you lay people off during the period February 15, 2020 – April 26, 2020 and hire them back by June 30, 2020, then you will not be penalized as discussed in the paragraph above. Remember, even if you are penalized, the penalty is that the term loan remains in effect and is not forgiven. Please note that the penalties related to the forgiveness of the loan is a complicated area of this program and beyond the scope of this writing.

We are suggesting that everyone should analyze this loan as it pertains to their circumstance. If you aren’t sure, take it. There is no penalty to prepay it.

It is going to take a little while for the banks to gear up to be able to make these loans. We don’t know how long. As of Friday, one banker mentioned that they were waiting from the SBA for guidelines. Treasury Secretary Mnuchin said that he wants loans to start by Friday. We’ll see.

With the program’s dependence on banking relationships, those businesses who lacked strong relationships prior to the coronavirus pandemic may get left behind if they don’t act quickly. We can help you with this. In the meantime, if you do have a banking relationship, call your bank and make sure they know you are on top of this and want it as soon as it is available.

Here is a workbook to assist in the calculation of the amount of the loan. Please call us if you need assistance and we will walk you through it.

It’s the start of a new week, and we are now one week closer to getting through this ordeal. Keep moving forward. Look at the shovel, don’t look at the mountain.

Thank you for your time.

Note: This workbook is provided by Sasserath & Zoraian, LLP and is intended solely for general informational and educational purposes. It is not intended in any way as financial, securities, insurance, tax or legal advice or services, or as a solicitation for any financial, securities, insurance, tax or legal product or service. Please consult with your financial, securities, insurance, tax and/or legal advisors for advice regarding your specific circumstances. The calculations herein are estimates based on our interpretation of the bill signed into law on March 27, 2020 under the CARES Act.

As the coronavirus pandemic continues to spread around the world and particularly in New York, business owners are being challenged like never before to keep their companies, employees, and their own families afloat. As we shared in a recent article, litigants must reach an extraordinarily high bar to be able to “pierce the corporate veil” of a business and shift a company’s liabilities to the owner personally. One notable exception to be aware of, however, concerns unpaid wages for New York employees.  This issue is of particular concern as business owners grapple with challenging decisions in light of business shutdowns and other challenges brought on by the deadly COVID-19 virus.

Pursuant to changes to the Limited Liability Company (LLC) Law and Business Corporation Law (BCL) enacted about five years ago, the 10 LLC members with the largest membership interest, as well as the 10 largest shareholders of a foreign (non-New York) corporation with New York employees, may be held jointly and severally liable for “all debts, wages, or salaries” due to “any of its laborers, servants or employees… for services performed by them for [the entity].” (The 10 largest shareholders of New York corporations were already on the hook for such wages under the BCL prior to the other law changes five years ago.)

Such imposition of liability on the 10 largest shareholders/members creates an exception to the general shielding of a shareholders/members for claims made against the corporate entity. The definition of “wages or salaries” includes all compensation and benefits payable by an employer to an employee, such as overtime, vacation, holiday and severance pay, employer contributions to pension funds, and insurance payments. 

A New York employee seeking payment for unpaid wages must first seek payment from the business itself. If payment is not made, the top 10 shareholders/members may be held liable for any unsatisfied judgments. Note, the employee must provide notice to the shareholders/members within 180 days after his or her employment terminates.

As many business owners are facing harsh realities and extremely difficult business decisions in light of the deadly COVID-19 virus, it is important to keep some of these issues in mind.  Asking employees to work without pay, or even where employees volunteer to work without pay still creates potential financial exposure (including penalties) to the employer and its principals in these trying times.  Any decision regarding reduced or no pay should be carefully evaluated in light of applicable law.

With today’s economic uncertainty, business owners should be aware of any potential liability they may face so they can plan accordingly and take steps to mitigate. Please call us for guidance on your specific situation. We are here to help your business get through these challenges.

Governor Cuomo’s Executive Order 202.8 requires that, starting March 22 at 8 p.m., all workers stay home, unless they work for essential businesses.

• Defining essential businesses: In a companion document, the Governor identified 12 categories of essential businesses. Some are obvious, such as healthcare operations (including hospitals, labs, and nursing homes); essential retail (including grocery stores and pharmacies); and financial institutions (including banks). Others leave more room for interpretation, such as “essential services necessary to maintain the safety, sanitation and essential operations of residences or other essential businesses” and “vendors that provide essential services or products, including logistics.”

• How much of a business’s functions are essential. Some businesses might serve both essential and non-essential functions. Only essential functions are exempt from the in-person restrictions.

• Whether a business needs to apply for designation as essential. Businesses that fall under the 12 categories identified by the Governor do not need apply to be designated essential. Other businesses may submit a request to Empire State Development. Businesses with only one on-site employee are automatically exempt and also do not need to submit a request.

• Penalties: Any business that violates the in-person restrictions is subject to the same penalties imposed by Section 12 of the Public Health Law, which provides for a fine of between $2,000 and $10,000 per violation.

Please contact us for guidance on your particular situation.

Links courtesy of the New York State Bar Association