Jan. 19, 2021 COVID Round Tables (Part 3)

Returning today is Gene Marks from the Marks Group PC. He is an author, a speaker on small business expertise, and a CPA. He has presented at Scaling New Heights. He was one of our guests on the Round Tables back in March for the CARES Act when we were trying to figure out what was happening with coronavirus relief, and previously spoke at our January 5 Round Tables. He writes regularly for The Hill, the Philadelphia Inquirer, Forbes, Entrepreneur Magazine, and The Guardian, and appears regularly on MSNBC, CNBC, Fox Business and Fox News. He’s the author of six books on business management and comes to us today compliments of our friends at Patriot Software, a leading payroll provider which works with QuickBooks Integrated Payroll.

Joe Woodard: A business that started in December 2019 didn't have payroll until October and its initial payroll run was in October 2020. Prior to that it was owner-operated. Now it’s struggling. Is it out of luck for any funding?

Gene Marks: That's going to be a tough one. The rules say that you must start your business on or before February 15, 2020. The business started before then, but you must go through that payroll calculation. If you didn't have any employees, it's going to be tough to come up with that 3.5 times number if you're in the restaurant business to justify a PPP loan. So it sounds like the business is probably out of luck for PPP, but it may be in luck for an economic injury disaster loan (EIDL).

If you're in a low-to-moderate-income area, you would also be eligible for a grant.

Joe Woodard: Tell us about that grant.

Gene Marks: I want to make sure that we are clear about this low-to-moderate-income area thing. And two weeks ago, I was calling this minority grants for minority-owned businesses. I think that what I said was racist. The rule is that the grant is for businesses in low-to-moderate-income areas. I was suggesting that these are minority grants. That's not the case at all.

If your business is in a low-to-moderate-income area, regardless of who owns the business, you are eligible for priority loans and then special grants. Your banker is going to have more exact data. But if the median income of the people that live in your area is anywhere from 50 to 80 percent of what the median income is around you, then you're in a low-to-moderate-income area like North Philadelphia. You know that there's poverty in North Philadelphia. The income levels were absolutely 50 to 80 percent of the income levels in the Main Line outside of Philadelphia. Regardless of who owns them, the businesses in those areas are businesses in low-to-moderate-income areas.

They get a few special things. If you apply for a PPP loan you get moved up to the front of the line. The banks themselves have been given billions of dollars to get first and second loans out there. If you have less than 10 employees and you're located in that area, the banks can automatically give you a loan of up to $250,000 with very little due diligence required. And finally, if you apply for an economic injury disaster loan if you're in a low-to-moderate income area, you can immediately get a grant of $10,000. It’s not even a loan or per employee. You get a $10,000 grant. And if you are in one of those areas and you previously applied for one of those loans but you didn't get the full grant because they ran out of money, then you’re a priority borrower. The SBA will lend you the balance if you notify them. And if you're in a low-to-moderate income area, you should absolutely be searching community investment banks and CDFIs. There are minority loan organizations that focus on those areas. You need to reach out to all those institutions.

Joe Woodard: Thank you so much, Gene, for that clarification and valuable information.

For a second PPP loan, what documentation is required for the 25 percent reduction? I think we just covered that, it’s just internal financial reporting. Correct?

Gene Marks: Correct. It can be internal financial reporting. Your banker might require external documentation. It's up to the banker, but your bank statements will be your best source of documentation.

Joe Woodard: A lot of people have asked about gross receipts and gross revenues. They've heard a lot of different terms. Can you speak to which number they should use?

Gene Marks: I don't know why there's an issue about that. Is there confusion between receipts and revenues? The easiest answer is that on a cash basis, it's whatever makes up your cash receipts. It’s the items included in your tax return that have been classified as revenues, whether on the cash or the accrual basis. That’s your definition of revenues. So that’s what you would use for revenues when applying for the loan and to show whether you’ve suffered more than a 25 percent reduction.

Joe Woodard: So it is indeed straightforward. Don't overthink it.

Gene Marks: Yes. It's interesting to me. Maybe that's because if you look at the legislation, it interchanges the words receipts and revenues.

Joe Woodard: And I think that is the source of the confusion.

Is the PPP loan automatically forgiven when it’s under $150,000, or do we have to file the short form?

Gene Marks: You must file the short form. Right now, as we're speaking, the banks are getting that form within the next week from the SBA. I know you certainly can reach out to your lender. But my understanding is that lenders are very anxious to notify their customers. These banks do not want to go through the forgiveness process with people. They would rather just sign off in the form and be done with it, you know.

Joe Woodard: An LLC partnership has two owners, each of whom owns 50 percent. Neither of the owners is salaried, and the intent when this LLC was formed was that the LLC be a supplement of wages for one of the business owners. Is there any way for the PPP to include the intended salary? Would it just be any withdrawals they've made?

Gene Marks: Yes.

Joe Woodard: I wonder if there have been no withdrawals, and it's just 50-50 owners with a business agreement that says that the owners can take this much out of the company when it's healthy for the company to do so. So, if the payments to the owners are on the K-1, then yes. But if the agreement doesn't indicate that, then no.

Gene Marks: It's exactly the right answer. So it's K-1 driven. If it's not a partnership and it's just a regular passthrough, or through your Schedule C income, then it's the same pretense. So your K-1 income is what generates your compensation.

Joe Woodard: And advances under the EIDL are totally forgivable even though the EIDL is not.

Gene Marks: Yes, so the advance that you get under the EIDL now plays no part with the PPP. Before you had to subtract it from the forgiveness. Now you don't have to. The advance is a grant. You keep it and that's that.