Category: Timely Opportunities
The Coronavirus Aid, Relief and Economic Security (CARES) Act was passed on March 27, 2020.
This bill was passed to provide relief to small business owners, independent contractors and self-employed individuals. The realtor who is having difficulty earning commissions on real estate sales due to the Covid -19 may use the loan proceeds as a substitute for compensation they would normally be earning.
The CARES Act includes several loan programs to benefit those whose business has been negatively impacted by the coronavirus pandemic. The loans are administered by the U.S. Small Business Administration (SBA). The CARES Act makes the following loans available to realtors:
Paycheck Protection Program Loans (PPP) - The PPP loans have very favorable terms and may be the best option for realtors. The primary purpose is to assist with payroll costs and self-employment income.
Economic Injury Disaster Loans (EIDL) - The EIDL loans are also a good choice as they can provide immediate relief. The primary purpose is to assist with working capital.
SBA Express Bridge Loans (EBL) – Likewise the EBL loans can provide immediate relief but have additional application requirements. The primary purpose is to provide cash while waiting for the EIDL loans to be processed.
If you applied for an EIDL loan prior to April 2, 2020 that related to COVID-19 and used those proceeds to cover payroll costs, you may refinance the EIDL into a PPP loan. You can apply for both the PPP and an EIDL, but not for the same purpose.
Your Kerkering Barberio Team Member can assist you with the analysis of these loan options as well as other CARES Act provisions to see what the best fit is.
Paycheck Protection Program Loans (PPP)
The great news about these PPP loans is that they are offered on highly favorable terms. They may qualify for loan forgiveness, they are guaranteed by the government and payments are deferred. There is no personal guarantee and no collateral is required.
Businesses with less than 500 employees all qualify for the PPP loans. This includes real estate brokers and agents. Borrowers are required to make a good faith certification that their business has been affected by COVID-19 and they will use the money for payroll and to cover other business expenses.
The calculation of the actual loan amount will depend on whether you file a business tax return or file as a self-employed individual on Schedule C of your 1040. Those filing a Schedule C will use net earnings from self-employment as payroll costs.
If you file a business return, the loan amount will be determined by a formula based on your average total monthly salaries paid during the calendar year or over the most recent 12-month period and then multiplied by 2.5. The resulting number will be your maximum PPP loan.
The calculation for realtors filing a Schedule C as a self-employed individual will be based on real estate transaction income less expenses during the 2019 calendar year or over the most recent 12-month period (or January 1 to February 29, 2020 for brand new agents). This is the income you pay self-employment tax on. The net income is limited to $100,000 for this calculation. You then divide the net income by 12 to determine the average monthly income and then multiply by 2.5. The resulting number will be your maximum PPP loan.
It should be noted the real estate brokers will be applying for PPP loans and real estate agents under them will then file for their own PPP loans as independent contractors.
Once the loan proceeds are received, the loans may be used for payroll costs, rent, mortgage interest expenses, health insurance premiums and interest on other debt obligations during the covered period. The covered period runs from 2/15/2020 to 6/30/2020.
Loan forgiveness means you are not required to repay the loan if certain conditions are met. Under the CARES Act any loan forgiveness amounts under the PPP program will not count as income for the borrower for tax purposes.
Borrowers are eligible for loan forgiveness in an amount equal to what the borrower spent during the covered period for the following expenses.
1. Payroll costs
2. Interest on any mortgage (relating to your business) in place prior to 2/15/2020
3. Payment of rent on any lease in place prior to 2/15/2020
4. Payment on any utility for which service began prior to 2/15/2020
Per the SBA, no more than 25% of the forgiven loan may be for non-payroll costs. Any loan amount not spent on the above expenses will be subject to repayment. Be sure to carefully document your use of the loan proceeds. There are specific documentation requirements which must be submitted to the lender when applying for forgiveness.
If the full amount of the PPP loan is forgiven, the borrower is not responsible for the interest accrued during the covered period. The remainder of the loan that is not forgiven will be repaid according to the loan terms agreed upon by you and the lender. PPP loans will have a 1.00 % fixed interest rate and a maturity term not to exceed 2 years.
You can apply for the PPP loan at any lender approved by the SBA. Hopefully your current bank is an eligible lender as some banks have chosen to give preference to existing bank clients. The expectation is the PPP loan process will be expedited as it otherwise normally takes the SBA about one month to process a 7(a) loan.
Economic Injury Disaster Loans (EIDL)
The Economic Injury Disaster Loans (EIDL) are targeted, low interest loans to small businesses that have been severely impacted by the Coronavirus. They are currently available to small businesses with less than 500 employees including sole proprietors, independent contractors and other self-employed individuals. Severely impacted means you have been unable to meet your obligations, and this includes the ability to pay ordinary and necessary business expenses.
The CARES Act established an emergency grant to allow an eligible applicant who has applied for an EIDL to request an advance of up to $10,000. The applicant would not be required to repay this advance even if they are subsequently denied an EIDL. In the application grant, you must certify the funds will be used to provide sick leave for those affected by COVID 19, maintain payroll during business interruption, meet increased costs due to interrupted supply chains, or make rent or mortgage payments due to revenue losses. An SBA official has stated the size of the business may dictate how much of the $10,000 grant you may receive. If you have less than 10 employees, you may not get the full grant.
Although an emergency grant does not need to be repaid, the remainder of the loan is not eligible for loan forgiveness. The full amount of the loan can be up to $2 million with a fixed interest rate of 3.75%. Repayment terms of up to 30 years are available as determined on a case by case basis. The EIDL may be used for working capital purposes, including payment of fixed debt, payroll and accounts payable.
Even though the emergency grant may be released in as quickly as 3 days of receipt of the application, it is unknown as to how long it will take for the application to be fully processed.
A streamlined online application for EIDL has been made available by the SBA at the following link: https://covid19relief.sba/gov/.
You will need to provide substantial information as part of this process. Your Kerkering Barberio Team Member can assist you with the application requirements.
SBA Express Bridge Loan (EBL)
The third loan program is the SBA Express Bridge Loan (EBL). The EBL program authorizes SBA express lenders to provide guaranteed bridge loan financing on an emergency basis for disaster purposes to small businesses while these small businesses apply for and await long term financing. Independent contractors who have been impacted by COVID-19 are also eligible.
But the SBA express lenders can only work with clients who had a previous relationship with that bank and the clients must meet all other 7 (a) loan eligibility requirements. Under the EBL, you can borrow up to $25,000, which can be used for disaster related purposes to support the survival or reopening of your business. The maximum EBL term is 7 years. The lender may require the EBL borrower to repay the loan in part or in full if the borrower is approved for long term disaster financing (such as the EIDL).
Because it is a bridge loan, the first disbursement of the EBL loan must occur within 45 days of the lender’s receipt of an SBA loan number. If the first disbursement is not made within 90 days of the receipt of the SBA loan number, the EBL loan will be cancelled.
Please let your KB Team Member know if you have any questions about these loans, the tax relief under the CARES Act, the economic impact payment for individuals or any other Covid-19 legislation.
Disclaimer: The information provided is brief in nature. For further information and questions specific to your situation, please contact Kerkering, Barberio & Co. at 941-365-4617
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