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Attorney Marc Lopez recently spoke to certified public accountant Patrick Wanzer about newly-approved forgivable loans for small businesses. What follows is a lightly edited transcript of their conversation. 

Marc Lopez
I’m here with my good friend and CPA Patrick Wanzer with Somerset CPAs and Advisors. Hello!

Patrick Wanzer
Hi, Marc. How you doing? 

Marc Lopez
Oh, man, it’s a little bit crazy out there, but— 

Patrick Wanzer
It sure is. 

Marc Lopez
I asked Patrick to come and do a meeting with me about the Small Business Administration (SBA). Basically the forgivable loan that’s available to—I don’t want to say small businesses, it sounds like a lot of people are included—but I had some questions, and Patrick and I were emailing over the weekend, and I thought, Hey, if I have questions, other folks have questions, too. So we’re gonna do a little Q&A here. Thanks again for being here, Patrick. 

Patrick Wanzer
Oh, happy to do it. 

Marc Lopez
Focusing on the forgivable loan—what is this? 

Patrick Wanzer
Well, it’s a new loan that was just passed by the $2.2 trillion legislation that got signed by the president late last week, and the forgivable loan—it’s an SBA loan called a 7(a) loan. The SBA has partnered with SBA-preferred lenders banks, and basically they’re creating a loan to help with payroll, so you can maintain and keep people on your payroll staff. The idea behind it is, it’s better for the business to keep the employees on payroll than have them go on unemployment, because once this ends, the jobs will still be there, and the people will still be there. 

Remember: This is a health care crisis, not a financial crisis. So the economic impact isn’t because the fundamentals of the economy are terrible—it’s health care issues. So the SBA wants to make sure you can keep your employees on staff for—you know, the next few months that we’re in this situation. And then, once it ends, we can just jump back and it’s as if the jobs are still there. 

Marc Lopez
So, Patrick, who’s eligible for this forgivable type of loan? 

Patrick Wanzer
Sure, who’s eligible is any small business under 500 employees. Businesses that have over 500 employees may still be eligible if they have no more than 500 employees at an individual location, but this will mostly focus on small businesses. If you have your small business, and you’re able to keep them on payroll, you’re eligible. Basically, if you were in business as of January 31, 2020, and you had employees, you’re eligible to apply for this loan. There are a lot of things that go into a loan—a lot of aspects to it—but it’s very broad eligibility to be able to apply for that loan.

Marc Lopez
That’s awesome. And then what about law firms that may have only one employee—the owner? Are those people going to qualify if they’re on payroll? 

Patrick Wanzer
Absolutely. Sole proprietors will qualify. Independent contractors—they qualify, as well. You know—not to get too much into the weeds, because there’s the application process where some of that will be vetted out in the process—but absolutely, you don’t have to have a huge staff of 45 people in order to be eligible. If you’re a solo attorney, you still may be eligible for this loan to cover that payroll. 

Marc Lopez
Does anybody who’s gonna apply for this need to put up any type of collateral? 

Patrick Wanzer
No, not at all. If you don’t mind, I’ll just get into the quick particulars on a loan. What’s available? The 7(a) loan—you can borrow up to $10 million, but the way they’ll calculate what you can borrow is—2.5% of your average monthly payroll from February 15 through June 30 of last year. I know that sounds a little complicated, but basically you take those three months, you take your average monthly payroll times 2.5%—that’s the amount of money that you can borrow, and it can cover up to eight weeks of payroll. 

But here’s the thing—if you use the money to cover payroll to keep people on staff, then the loan potentially could be completely forgivable. Basically, the government turns it into a grant, and it’s yours. You can use the loan for other items, but it just wouldn’t be forgivable—for example, if you paid utilities or rent. But you have up to 10 years to pay the loan back, an interest rate no higher than 4%, and you can get deferral on payments up to six months, so it’s still a pretty good deal. But basically it’s to help maintain people’s payrolls to keep people working for the firm. 

Marc Lopez
So I texted quite a few of my friends who own small businesses, and one of the other questions was, What if a person has terrible credit? Is this still an option for them? 

Patrick Wanzer
Yes, it is. As a matter of fact, you can apply just on your credit score alone. That could get it for you, if you have sterling credit, that might be great, as well, but you still may be eligible for it. Now—There is no guarantee than any one application will be accepted, obviously, so there are some caveats to that. But just because the credit rating may be not good? Also, it’s—if you have a firm, and you’re showing payroll, and you’re showing a good business, that’s gonna figure into it a lot, as well. There’s a lot of documentation that is gonna be asked for, and the application process isn’t the easiest on the planet, but that’s where Somerset CPAs comes in, because we have the ability to really navigate that process and facilitate a way for the people taking out loans to get that application in, and then work with you to say, Hey, this is where we may we may need to go or This the documentation that we need

Marc Lopez
And so you said, if you use it towards payroll costs, it’s potentially forgivable as a grant. Are they interpreting payroll costs broadly? Narrowly? What is your understanding at this point? 

Patrick Wanzer
That’s actually an excellent question, because when I was doing my research on some of the specifics this weekend, I thought that, as well. When it comes to eligible costs, it’s compensation, it’s vacation sick family leave, it’s payments for provisions of group health care benefits and retirement plans, and it’s payment of state and local tax assessed on employee compensation. So if you have a local affiliate that taxes compensation, it can be used for that, as well. 

So those are eligible costs, but there are a few costs that are not eligible. Compensation over $100,000 is not eligible. Now, what is unclear is—let’s say your compensation’s at $120,000. Can you get 100 covered and not the 20, or can you get none of it covered? That’s a little bit unclear, so we’re still kind of trying to figure that out. But also compensation for people whose principal residence is outside the US—just something just to keep in mind. 

I’d be surprised if somebody is at $105,000, and they say, You can’t get anything. That doesn’t sound great, but if you’re making $350,000, they’re not gonna cover all of that. It’s still kind of a fluid situation. As a matter of fact, there was a 7(b) loan available prior to the 7(a) loan, and that was directly through the SBA, and you could borrow up to $2 million, you didn’t need a personal guarantee over 200,000, a 30-year amortization rate—but she had to pay it back. For some businesses, it may be better to get that loan, and that’s where Somerset will step in and evaluate and work with you and say, Which one would be better? Looks like the 7(a) is the better way to go. But each case is individual, and each case has its own set of facts—which you know, as an attorney. 

Marc Lopez
The purpose of the 7(a) loan is for payroll, but rent, mortgage, utilities, interest—those are not included. You can pay it, but it’s not gonna be forgivable. Is that the understanding right now? 

Patrick Wanzer
Yes, that’s absolutely right. So if you use the money for items other than maintaining payroll, what they’re gonna do is—we’re gonna basically say is, Did you keep your people on staff? Did you maintain your staff level and your salary level? Now, whether or not they’re gonna say, This particular dollar was from the loan and This dollar was from a client—there’s no indication on that. If you take the loan, and you pay your rent, but you still have to lay off people or something, that’s where that loan would not be forgivable. But the idea is to maintain your staff, help you for eight weeks, cover the payroll for your staff so you can keep them on—even if your workload drops for over a month, you’re still able to cover the payroll for that.

Marc Lopez
It’s important for anybody watching this—we’re filming this the first business day after this has been signed into law. Things are changing, and I really appreciate you putting yourself out there. You’re on the front lines with me. I appreciate that. Once a person applies, how fast are they talking about getting this program going and getting money in people’s pockets?

Patrick Wanzer
Well, that’s the thing—they’re still a little unclear on how quickly the money will actually get to people, but what we’re anticipating is kind of a rush to apply for these loans. Unfortunately, anybody can apply for a loan from between now and June 30, okay? Up to June 30, you can apply for the loan, but there’s no guarantee that the total pool of money provided by the government is going to last if everybody on the planet is applying for the loan. The sooner you get the application in, the sooner you’ll get your money, and the sooner you’ll be eligible and be able to take a piece of that pie. How quickly will you get the money? I don’t have a specific time frame on that, but I would assume it’d be pretty quickly, because they don’t want to have to wait months and months to get the money to you.

Marc Lopez
Oh, that would be horrible.

Patrick Wanzer
Yes, that defeats the whole purpose. Obviously, the money will be gotten to you quickly. Just—an exact day? We obviously don’t know that. But just really quickly—that’s where Somerset is able to put the application in the process. We have a whole team dedicated specifically and solely to the application process for the SBA loans. We have a whole queue, and they’re just cranking through them, working with the clients, getting these applications filed. We have great relationships with a lot of SBA-preferred banks in the area that we have contacts with already. They are up-to-date on what’s going on. We’re helping them be able to get ready to handle the influx of applications. The sooner you go, the better. Using a company like our firm, Somerset, can really make sure the application is correct and get to the money fast.

Marc Lopez
Anybody listening to this, Patrick has been doing my taxes for about three, maybe four years at this point. I am so grateful I met you at that association function four years ago, because I know for a fact my stuff is all ready to rock and roll. Literally, I slept really good the last two nights, knowing that you guys are ready to move on this.

Patrick Wanzer
Absolutely.

Marc Lopez
I’m going to throw some curveballs at you, Patrick, and I want to keep you on your toes here. The condition to have the loan forgiven is: Keep employees employed.

Patrick Wanzer
Yes.

Marc Lopez
That’s the goal of this program.

Patrick Wanzer
Yes.

Marc Lopez
What about if there’s a situation where a small business is forced to reduce pay, can they still qualify for forgiveness?

Patrick Wanzer
Sure, it’d be a portion. It would be proportional to the amount of payroll or people that you are able to keep on the payroll. If you have 10 staff, and you’re forced to lay off three for some reason, you would still be able to get forgiveness. But we’d have to calculate the forgiveness, and it would be a portion. Now, the forgiveness is a separate application. At the end of the loan, you have to apply for the loan forgiveness and provide more documentation to see how much is actually forgivable. But, there’s a calculation to determine how much of that loan can be forgiven.

Marc Lopez
What about situations where, say, we have 10 employees, or a company has 100 and—Hey, everybody has to take a 10% reduction in pay across the board. No one’s getting laid off, but hey, times are tight. Tighten that belt. Is that going to mess with the loan forgiveness?

Patrick Wanzer
It’s not going to mess with the loan forgiveness. Basically, what will happen is, you’ll take your average monthly payroll from February through June of last year and then that times 2.5% is what you’re going to borrow. You can increase the pay back to the original level for those eight weeks. It won’t impact your ability to apply for the loan, because like you said, this is the first business day since the law’s been signed into the law. If three weeks ago, you reduced pay on your staff by 10%, you’re not going to be ineligible because of that, because you didn’t know this was coming down the pipeline.

Marc Lopez
That was my next question. Well, some people have already reached out to me saying, Hey, I’ve already laid people off. Is there any point in me applying for this? Sounds like the answer is yes.

Patrick Wanzer
Yes, because the loan is retroactive to February 15. Let’s say you laid off people on the first of March, but they were employed on the 15th, they’re considered employed. Bring them back on staff, bring them back on payroll, and they’ll consider it retroactive back until then. You still can bring those people back from being laid off.

Marc Lopez
Patrick, you said there’s a separate application process for forgiving the loan. Is June 30 when people start applying for forgiveness?

Patrick Wanzer
I think there’s a six-month window to start applying for forgiveness. Most likely, if you’ve fulfilled all the requirements for forgiveness, you’ll want to get that application in early, just because you don’t want to have to start making payments and that sort of thing. But I believe there’s a six-month lag. Even if you have to make payments, you can defer for six months before you start making those payments. In that time frame, you’ll apply for forgiveness, because here’s the thing—let’s say you borrow $20,000, and you can forgive $15,000. You don’t want to make payments on a $20,000 loan. You want to make payments on a $5,000 loan. Getting that forgiveness application in earlier allows you to get a good idea of what you would have to pay back if you do.

Marc Lopez
Patrick, that’s fantastic advice. Always seems to benefit you to act early and act fast, especially with proper guidance.

Patrick Wanzer
Yes.

Marc Lopez
The taxes—are there any taxes on the forgiven parts?

Patrick Wanzer
No, it’s like a grant. You get the money. It’s a grant and the government just—you just go on with the business there. It’s not taxable income. Again, remember—the point is to keep people on payroll. It doesn’t benefit the government to give you that money and then tax you for it, because in essence, it’s just reducing the amount of money they gave you to cover payroll. The intent is for you to keep your staff employed.

Marc Lopez
The SBA loan is not counted as income for the small business. Now as the small business pays their employees, the payments would still get normal tax—

Patrick Wanzer
Of course, yes. It’s normal payroll. You’ll have your withholding tax, you’ll have your FICA taxes taken out, your state and local income taxes—those things, all of that stuff. Any deductions you have for your 401(k) or your health insurance, all that stuff—it’s like a regular payroll. The government has given you money to cover it for eight weeks.

Marc Lopez
You’ve addressed some of this—what happens if a portion of the loan is not forgiven? You have 10 years at a 4% interest rate. 

Patrick Wanzer
Mm-hmm.

Marc Lopez
Are there any prepayment penalties that you can see?

Patrick Wanzer
No. Not only are there no prepayment penalties, there are also no SBA fees. No loan fees to apply for the SBA loan. In a normal SBA—obviously with any loan process—there’s always fees to the loan application process. The SBA has waived all loan fees for this particular loan.

Marc Lopez
Say you have to spend some of this money on non-payroll. When does repayment start?

Patrick Wanzer
That’s a good question. I’m not exactly clear, because I think it’s more of an individual basis. For each particular client, when they apply for the loan, they’ll get a set amortization schedule of when repayment would have to occur. Again, it goes back to—most likely—you’re not going to have to even start repayment until you’re able to apply for the forgiveness and know how much you actually have to repay.

Marc Lopez
Patrick, we talked about going back to February 15. This eight-week period—does it have to start on February 15, or is it a moving period?

Patrick Wanzer
Oh, no. It’s a moving period. The eight weeks is basically—that’s the amount of payroll assistance you’re going to get. You can make payroll for up to eight weeks. The 15th of February—that’s just the date to which it’s retroactive. If you had employees then, you can bring them back. That’s where you are calculating your average monthly income. But the eight weeks—it’s not eight weeks from then. It’s going forward. It’s to cover the eight weeks going forward, because this is when we need the money the most—because you’ve already paid them. If you have people on staff already through mid-March, you’ve already paid them since February. What you want to do is bring them back and keep them going forward.

Marc Lopez
I talked to some of my friends, and they’re saying, Hey, we know that new business isn’t coming in the door. We’re still getting some payments for old business. March isn’t going to look as terrible as we know April is going to be. Any kind of proof that a business has to show? Like, Hey, I’ve been impacted, and the numbers for this month don’t necessarily mean too much, because next month and the month after. Does that make sense?

Patrick Wanzer
It does. Absolutely makes sense. What I’m hearing you ask is—basically the loan is for COVID-19 damage. You’ve been damaged by the coronavirus. How do you prove that? What if you didn’t lay off any staff? Have you been damaged? Well, its very, very, very broad understanding of this is—basically, everybody has been impacted by this. What we’re doing is saying, Yeah, you can apply for it. Yeah, you’re going to get it. Just because you had a good March—again, they’re anticipating maybe your April isn’t going to be as good. That really shouldn’t impact the application process.

Marc Lopez
That’s awesome to hear. A couple of my friends—I’m friends with a lot of owners of small businesses, a lot of law firms or other mom-and-pop places. One of the issues—when you first met me, I was kind of in this boat. My books weren’t as good as they have been. A couple of people have been reaching out to me like, Well, there’s no way I’m going to qualify. I don’t know if I could get payroll for the last year that quickly. I need to update things. I got a deferment on filing. I’m behind. To those people that just feel overwhelmed, like, There’s no way I can do this. I’m so far behind. Give them some advice—the first thing they should be doing right now.

Patrick Wanzer
Okay. The first thing that they should be doing right now is looking to get their books in order, if they can. If they need to retain the services of a CPA or any kind of professional, that might be helpful. But here’s the thing with payroll—if they have payroll, they have payroll tax returns. They have W-2s that they’ve given to employees. That information works, as well. Maybe they don’t have their books that show the payroll that’s paid every month, but they have payroll tax returns that have been filed with the IRS. Those have to be provided during the application process anyway. That information—the payroll information is easy to extract, especially if you use a payroll provider. Now, if you do your very own payroll—do it all on your own, which not very many people do, because it’s a complicated process—then, it may get a little more difficult, and you would definitely want an accounting professional to come in and help you with that. That’s just for the loan process.

For getting those books in order, though, going forward—this may be a great opportunity to reassess and say, Hey, you know what? I really do need to get my books a little bit in order. It doesn’t have to be immaculate. You don’t need an Oracle system or an SAP system. Something as simple as QuickBooks online works great, and it helps you get your books in order, and then you know exactly how well your business is running for yourself on a regular basis. But pertaining to the loan, your payroll tax returns should have the information that you need in order to get the payroll information that you need.

Marc Lopez
Patrick, thank you so much for coming here and talking with me about these questions. What is the best number to reach you, if someone has a question?

Patrick Wanzer
Good question. I have written it down because I’m still trying to remember my phone number. They can reach me at area code 317-472-2188. That’s my phone number at the firm. They can also reach me on my cell, 317-413-7120. You can also email me at pwanzer@somersetcpas.com.

Marc Lopez
I just want to let anybody watching this know—Patrick really cares. I’ve known him for about four years now, and he has guided me through some very fantastic times at my firm. He’s gotten my books in order, and he’s made everything as painless as possible. I know that you’re awesome at your job, and I really appreciate you being here, Patrick.