Written by Live Oak Bank 

During the sale of a business, both the seller and buyer must follow a certain legal process. After signing a letter of intent and completing due diligence, a business purchase agreement marks the official start to the legally binding transaction of a business. This agreement requires the buyer to purchase the business according to the terms and price outlined in the agreement. These documents can be lengthy and full of legalese, which is why an experienced attorney should create the purchase agreement.

Purchase agreements are complex but typically have several standard sections. The biggest takeaway on purchase agreements is this: while it’s ideal to let an attorney handle the terms and conditions it’s not a bad idea to have a general understanding of each section, as we’ve outlined below. Both parties should understand what they’re signing, so leverage your professional team to help you translate some of the legal jargon and technical language.

To read the full article please visit:

https://www.liveoakbank.com/small-business-resources/the-basics-of-a-business-purchase-agreement/

Companies Will Find Shelter with Group Captives

An Eye to the Horizon

The insurance industry is facing a variety of forces which catastrophically threaten its fundamental mechanics and the financial strength upon which our economy is dependent.  Insurance companies comprise of some of the largest, and most valuable companies in the market. These critical financial institutions maintain the health and wellbeing our nations businesses, employees, families, and overall economy.  Due to the impacts of the COVID-19 pandemic, their role is quickly being brought to center stage in our country’s socio-political conversation.   The intent of Business Interruption coverage is the primary precipitating factor.

Lawsuits are being filed against insurers regarding the intent of Business Interruption coverage, and associated denied claims.  Simultaneously, legislators are attempting to compel insurers to retroactively pay claims where coverage may not exist, was not intended to exist, and premiums were not actuarily contemplated to offset the risk. 

Consider that small businesses alone are losing between $255 billion and $431 billion of monthly income as a result of the pandemic, against $6 billion in total monthly premiums for commercial property insurance, according to the American Property Casualty Insurance Association.

It is believed if some individual lawsuits award the plaintiff, precedents would be set, and trigger a wave of class action.  In some form, this would necessitate government intervention and subsequent bailouts of the insurance industry.  Despite the insurance industry maintaining an $800 billion surplus to cover all U.S. home, auto, and business insurance claims, it would not sustain the industry against the onslaught of class action suits or legislative intervention. 

Understanding the Influences

With Insurance companies beholden to their shareholders, they look to generate and maintain profits in the following primary ways:

• Collecting more premium than the sum of claims paid out and their general business costs; The Combined Ratio
• Investment income from the invested premium and surplus funds

Irrespective of the legal issues threatening the industry, in an unforeseen manner, businesses are sweepingly reducing sales and payroll figures applied to the rates which generate their premiums, thus significantly reducing forecasted revenues of insurers. Further, the new, unforeseen, and uncertain economic headwinds facing our economy will reduce the forecasted investment income they also depend upon for profitability. This alone can be reason for insurers to look for rate increases.  However, if these factors are coupled with potentially unfavorable legal and government action which will jeopardize their significant surplus funds, and flip the scales of their combined ratios, the insurance industry would crater under the magnitude of the opposing forces.

A Benchmark

With some distinct differences, the current commercial insurance environment is not too dissimilar to post 9/11 circumstances: catastrophic actuarily unjustified losses, legislative action, economic pullback and uncertainty.  A significant primary difference being the losses then were concentrated to specific areas and insured groups, rather than blanketed across effectively every commercial policyholder in the country.  With that in mind, reference the chart below which outlines the rate changes over the past two decades.

The large spike, post 9/11, identifies the hardest insurance market in nearly half a century.  If insurance could even be obtained by a companies seeking a policies during that time, rate increases approached +30% on average across the marketplace.  With the current situation facing more dire and catastrophic influences, the industry is primed to experience a perfect storm of factors which lead into a hard market unlike ever before.

The Captive Solution

The value proposition of the captive insurance industry is inherently distinct from their counterparts in the retail insurance industry.  The primary difference being the only shareholders, or members, of any captive insurance company are also the owners of the businesses insured by the captive. Another way of stating this, captives are 100% owned by the member group of businesses it insures. This insular group of captive member companies satisfy their insurance requirements, yet at the end of the year receive 100% of the captive’s underwriting profits, returned to them as a dividend. 

Unlike retail insurers, who do not distribute profits to the companies they insure, captive insurance companies retain the profits for the shareholders for whom they are beholden.  When those profits are threatened, the primary mitigation is through rate increases.  As evidenced by the factors expressed earlier, retail policy holders are facing the threat of hard market rate increases of a magnitude which is difficult to fully grasp at this time.  On the contrary, the shareholders of a captive insurance company are sheltered from those forces, they do not have the incentive to pass along premium and rate increases to enhance profits, only for those profits to be distributed back as a dividend after the policy term. 

With its more scrutinous underwriting practices and distinct ownership structure, the group captive insurance industry is an inherently sustainable model in comparison to the retail insurance industry.  More than 5,000 middle market American companies have left the traditional market in favor of group captive solutions, yielding a $3.4B business lines marketplace.  AM Best reports, between 2014 and 2018, captives added $3.1 billion to their year-end surplus and paid $1.6 billion in stockholder dividends and $1.9 billion in policyholder dividends. Therefore, $6.6 billion during this period remained with the captives or was paid back to their policyholders and stockholders instead of going to the commercial market.

The predictability, control, and safety found in the captive market can be shelter from the hard market forces we face in the years ahead.  If you are interested in further exploration of group captives, ensure you are aligning with experts experienced in captive placements.   The Risk Assurance Advisors at J.Krug are here to assist you along that journey.

Joe Emerich
J. Krug
Risk Assurance Advisors
One Pierce Place - 1250W
Itasca, Illinois 60413
Phone: 847-818-7510
jemerich@jkrug.com

Will the merger and acquisition markets be helped or hindered by the current environment? The answer is yes - and it is dependent on two major variables: the economics of the business sector and the mindset of business owners. Deals in sectors such as hospitality and brick and mortar retail will be renegotiated, postponed or crater altogether. Sectors such as software and medical products and services will generally continue on the course already set.

Active sellers in affected sectors will have a choice to delay or carry on. Those who keep moving their deal options forward will do so because the impact on their business is modest or absent or because their balance sheet is not strong enough to weather a recession. Those who delay the sale of their business may do so because they have a strong balance sheet or on the assumption that the pricing will be more robust in a year other than 2020.

Market dynamics have been disrupted and business owners must react to the specific impact the pandemic is having on their sector. Some owners will not have the necessary motivation to battle through what may be a prolonged recovery. Distressed investors will re-emerge in what has, up to this point, been a sellers market for a decade. Private equity firms will rethink their portfolio and adjust their acquisition targeting. All investors looking at new sectors should consider the value of broad outreach vehicles such as direct mail for the early discovery of businesses which are now approachable for the first time.

Contributing author: Ralph Dieckmann, Integre Partners
dieckmann@integrepartners.com

MBBI of Wisconsin Sponsor -  Sikich shares an article from Pattie Wagner, Managing Director, HRCS team.  Pattie has years of experience working in a variety of industrial, high-tech, consumer, and financial settings. She has also assisted both for-profit and not-for-profit organizations at the global, multi-national, and local levels. Among her many talents, Pattie excels at providing her clients with leadership development, program management, organizational design, and more. She is Prosci/ADKAR Change Management, DiSC and Hogan Leadership Certified and is a Six Sigma Black Belt. In the coming days and weeks, states will begin to initiate their COVID-19 reopening plans, bringing millions of employees, customers and vendors back into the workplace. While each state is responsible for establishing and communicating its own guidelines, we anticipate a number of important challenges and concerns that all employers will need to grapple with. Read more. Sikich LLP Cheryl Aschenbrener cheryl.aschenbrener@sikich.com 262-754-9400 13400 Bishops Lane, Suite 300 Brookfield, WI 53005

Founded in 1995, CCM is a full-service, business law firm that represents management, business owners, and aspiring entrepreneurs. Our attorneys bring their same entrepreneurial spirit to representing their clients and leverage strong subject-matter expertise into delivering efficient high-quality services.

Many of our clients are operating in a limited fashion pursuant to one of the many exemptions set forth in Governor Pritzker’s stay at home order. More employers will open up or expand their existing operations in the near future. The EEOC recently issued practical guidance to employers who are resuming operations.

The most relevant guidance from the EEOC is set forth below:

Q. During the pandemic, may employers ask employees specific questions about any illness the employee is experiencing?

A. Yes. During the pandemic, employers can ask employees if they are experiencing COVID-19 symptoms like fever, chills, shortness of breath, or sore throat. Employers should maintain this information in a confidential medical file. The file should be safe, secure, and accessible to HR professionals and supervisors on a need to know basis only.

Q. During the pandemic, may employers take employees’ body temperatures.

A. Yes. During the pandemic, employers may take employees’ body temperatures, but employers should be competent in the fashion that they measure temperatures, and employers should remember that some people with COVID-19 do not have a fever.

Q. May a temporary staffing agency that places an employee in an employer’s workplace notify the employer if it learns the employee has COVID-19?

A.  Yes.   The employer, in turn, should determine   who the temporary employee had contact with.

Q.  What kind of reasonable accommodations might an employer be required to grant a disabled (high risk for complications) employee if working from home is not feasible?

A. Accommodations for those who request reduced contact with others due to a disability may include changes to the work environment such as designating one-way aisles; using plexiglass, tables, or other barriers to ensure minimum distances between customers and coworkers.

COVID Infections and the Rebuttable Presumption that They Occurred at Work

On April 13, 2020, the Illinois Workers’ Compensation Commission passed an Emergency Amendment to their rules of evidence which provides that, whenever an employee claiming workers’ compensation coverage is a COVID-19 “First Responder or Front-Line Worker,” and the employee’s incapacity resulted from exposure to the COVID-19 virus during the COVID-19 state of emergency, there will be a rebuttable presumption that the condition was caused at work.

Further, the rule includes all employees employed by businesses that were deemed “essential businesses” by Governor Pritzker’s Stay at Home Order.

The amended evidentiary rule means that an employee working in any of the essential businesses who becomes ill with COVID-19 during the “state of emergency” will be likely to recover workers’ compensation benefits.

A variety of employer trade groups are opposed to this emergency rule. There are two important points to remember, however. First, Illinois’ worker’s compensation system is a legal bar to injuries that occur at the workplace. Presumably, if an employee suffers a COVID infection at work that is covered by the

worker’s compensation system, she will not be able to sue her employer under traditional theories of negligence.

Second, the Illinois Department of Insurance issued a letter on April 17th saying that COVID-19 worker’s compensation claims, during the pandemic, will be excluded from Illinois employers experience modification.

Employer Takeaway

Illinois employers will be going back to work. Employers should be planning the discrete actions they will take to keep their employees safe. When the inevitable COVID-19 infection arises, employers should be prepared to calmly and responsibly communicate the necessary facts to affected personnel and engage in whatever efforts are necessary to maintain a safe workspace.

Ross I. Molho
Clingen Callow & McLean, LLC
2300 Cabot Drive, Suite 500
Lisle, Illinois 60532
www.ccmlawyer.com
(630) 871-2614

The author, publisher, and distributor of this CCM Alert is not rendering legal or other professional advice or opinions on specific facts or matters. Under applicable rules of professional conduct, this communication may constitute Attorney Advertising.

Contributing Author: Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Tom Kastner is a registered representative of and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.

Most M&A transactions fall apart several times before closing, even during normal times.  When a major crisis occurs, whether internal or external, a deal can truly be stress tested.    

We hope everyone is healthy during the current corona virus pandemic.  During this time of lockdowns, almost all deals have at least caught a cold.  Even if the deal is solid, both buyers and sellers are scrambling to handle business and personal issues, so it is natural for the deal to be put on the back burner.  Both sides’ advisors will also be busy with internal and external issues, so their response time will most likely slow down.  One of the worst things for deals is uncertainty, and until the parties are able to have more visibility it may be difficult to set a clear timeline.

Here are some tips we have used (and are currently using) to keep deals rolling:

Keep communicating: set a time to talk once or twice weekly.  If you hit the ‘pause’ button, set a date a few weeks in advance to re-connect.

Make realistic changes to the deal schedule.  Pushing too hard or delaying too much will make it worse.

Make it clear early if either side needs to pause, change the deal, or walk away: although it might hurt the deal to do so, to cover up your strategy  or to ‘go dark’ will lead to lost trust.

Keep working:   don’t take eyes off the business.  The worst thing that can happen is that the business suffers more than it should because the owner and/or the executive team is spending too much time on the deal.  Be sure to also take care of yourself, your family, and others that need you.

Lean on advisory team for advice: most of the owner’s advisors have seen a variety of crises.  Each crisis and deal are a little different, but some of the available tactics are the same.

Disclose any issues early and clearly: keeping any secrets will not help.  Disclosing things early will help build trust, and the other side might be able to provide solutions.  Report both bad, good, and neutral news as soon as possible.

Keep executive team, partners, stakeholders informed: they may assume the deal is dead, or going fine, so you don’t want to surprise them.  They may have good ideas or at least be a good sounding board.

Sellers must perform augmented due diligence on buyers:  Although most of the due diligence is usually done by the buyer on the information provided by the seller, in times of distress the seller must make sure the buyer can complete the deal.

Company videos, video conferencing, data rooms: A lot of work can be done remotely, and the trend even on normal deals is for more remote working.  Nothing can truly replace a face-to-face meeting, but just because we cannot meet does not mean that the work on the deal has to stop.

Don’t forget about outside factors:  Banks, CPAs, government regulators (antitrust, CFIUS, etc.), landlords, other consent providers may take longer, so anticipate these delays and contact these parties as soon as possible.

Be careful about reps and warranties, earnouts, and other aspects of the deal.  Both parties must agree to the extent that the company has been affected by the crisis.  The seller might assume that the buyer understands that the business has suffered, but that needs to be reflected in the agreements so that there are no misunderstandings later.

Keep an eye on the big picture:  Do not get too focused on problems, look for opportunities.  Be sure to pull back a few times a day to think about the overall picture, including your personal life and family.  Try to be a positive influence on the company, customers, employees, and the partners in the deal.  Many aspects of the crisis will involve coordinating individual efforts, but as a leader, you must focus on the big picture.  Be wary of negative thinking, which can snowball and effect your team and the other party.

In times of crisis, leadership is critical, both for the deal and the business.  If both sides of the deal are committed to the deal and to making progress during tough time, the deal can still go forward (at least to some extent).  Although things will certainly be delayed, it is important to keep your eyes on the goal with the belief that some day things will get better.

Tom Kastner
President, GP Ventures
1320 Tower Road
Schaumburg, Illinois 60173
Phone: 847-431-3993
TomK@gp-ventures.com

Contributing Author: John B. Weber, Vice President, Water Street Advisors, LLC. a boutique Merger and Acquisition firm serving businesses in the Midwest.   John provides turn key sell side services for business owners looking to exit their companies.  He is located in Naperville, Illinois, and brings many years of expertise to his clients as a former commercial banker, board member, and former Executive Director of a non-profit public/private partnership that assisted minority owned businesses in accessing capital.

During this time, we start by first extending our hopes that you and your family, employees, associates, and friends have remained healthy, safe, and secure during this most tumultuous time.

We also hope that you have adapted to working from home.  Some, like myself and my partners at Water Street Advisors do this every day.  Whether you are a veteran at it or just finding your way, the change of pace offers a time of catching up, prioritizing, and contemplation.  Those of us in the Mergers & Acquisition industry are trained to stay abreast of breaking news affecting the economy.  The last few weeks have been a veritable sea swell of information from well-meaning experts offering amazing opportunities for learning and enrichment to chart a course through this crisis.  We have seen the assistance of leaders from all branches of Government, who refreshingly have come together to try to offer solutions. 

Whether you believe that this will be a “U” or “V” shaped downturn in the economy, at some point we must start focusing on getting back to normal, whatever the ‘new’ normal will be.  I have never snow skied, so I have no idea what it would be like to perform a ski jump.  But, I have jumped some things (on either a bike or a sled when I was a much more flexible kid), and there is a point that you can sense when to push downward against gravity just before you are about to become airborne.  Thinking positively, perhaps we can successfully launch once we sense we are near being airborne again.  Some things to consider:

• If you are in the process of accessing the funding made available under the CARE Act, or if you are in the process of selling your business, it will be important during this time to keep detailed records of expenses incurred and revenues not realized as a result of the Covid-19 virus actions.  This information will be important to have to document the reasons/uses for the loan proceeds, and reasons why this was a complete anomaly in your business.
• While it may not be as robust of a Seller’s market as it was prior to this March, there will still be a large amount of cash looking for investments when things begin to return to normal.  Remember, this is not a replay of 2008 – banks are much stronger financially and the US Government has just pumped trillions of dollars into the economy.
• If you want to sell your business but have been waiting for the perfect time, when things rebound it may be a very good time to revisit a sale.  Consider that buyers will be more willing to accept explainable poor performance during this time especially if the business bounces back quickly when the economy picks up again.
• Get your house in order.  This is a great time to make sure that your corporate records are correct, that you have a succession plan in place, that you have a funded buy-sell agreement, and that you have talked through your plans with your family.  Those things that you did not have time for when you were busy - now is a good time to tackle them. 
• Need advice or advisors to help you with the items in that last bullet point?  We are ready to listen and help.  Being ready to go to market when the clouds clear will put you ahead of what could be a big crowd.

The Water Street Advisors Team

Leanne Foster, Director, CPA lfoster@waterstreetadvisors.com 262.210.6637

John Kielich, Principal, CPA jkielich@waterstreetadvisors.com 414.899.0565

John Weber, Vice President jweber@waterstreetadvisors.com 630.201.0348

Alan Hill, Consultant ahill@waterstreetadvisors.com 262.344.4284

Gary Les, CEO Services gles@waterstreetadvisors.com 414.243.3885

John B. Weber
Water Street Advisors
270 E Highland Ave
Milwaukee, WI 53202
Phone: 630-201-0348
JWeber@WaterStreetAdvisors.com

Founded in 1995, CCM is a full-service, business law firm that represents management, business owners, and aspiring entrepreneurs. Our attorneys bring their same entrepreneurial spirit to representing their clients and leverage strong subject-matter expertise into delivering efficient high-quality services.

On April 23, 2020, the House of Representatives passed the Paycheck Protection Program and Health Care Enhancement Act and sent the bill to President Trump, who is expected to sign it today. The bill provides an additional $310 billion of funding for the PPP Loan program. The initial funding of $349 billion was exhausted on April 16. With timing that likely was not a coincidence, the SBA issued additional guidance in connection with PPP loans in the form of Frequently Asked Questions, found here. Many of the questions reiterated prior guidance, including reminders about the SBA affiliation rules. Last but not least, Q&A number 31 addressed whether large companies could access PPP Loans:

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP Loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should carefully review the required certification that “[c]current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request.

Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

This SBA guidance clearly targets those public companies that previously obtained PPP loans, including large, publicly-owned restaurant chains like Shake Shack and Ruth’s Chris Steakhouse. Shake Shack previously announced that it was returning $10 million in proceeds from a PPP loan in connection with raising capital through a sale of its Class A common stock.

This additional SBA guidance places borrowers, particularly those that are privately held, in an interesting dilemma about whether their original good faith certifications are in doubt, what they can do to support their original certifications and, whether they must consider returning PPP Loan funds to their PPP lenders prior to May 7, 2020.

If you have questions about the PPP Loans, please contact CCM.

Kenneth W. Clingen
Clingen Callow & McLean, LLC
2300 Cabot Drive, Suite 500
Lisle, Illinois 60532
630-871-2608
clingen@ccmlawyer.com

Kelleher & Buckley, LLC offers their clients a wide range of legal services including corporate representation, estate planning & administration, litigation services and tax wealth & structuring. Since 1997, they have been dedicated to protecting individuals, families and businesses alike.

Tremendous losses are being suffered by businesses during this COVID-19 pandemic. Many businesses have already begun to file Business Interruption Insurance (BII) claims with their commercial insurance carriers, and some have even filed lawsuits against carriers denying coverage. Moreover, some states have introduced pro-business legislation intended to override policy exclusions for communicable diseases and mandate that insurance companies pay out claims.

The claims, litigation and pro-business legislation are expected to increase, placing extreme economic hardship on the commercial insurance industry. This trend could lead to federal and/or state government intervention in the form of bailouts and cost-sharing stopgaps. A potential wave of class action lawsuits could also be on the horizon. Are you ready for the possibilities?

Business owners should immediately consider having their commercial insurance policies reviewed by an attorney to evaluate any BII coverage. With or without communicable disease or similar policy exclusions, BII coverage may present opportunities to recoup actual or expected lost profits during these unprecedented times.

Kelleher & Buckley, LLC can help you assess your options regarding any one or more of filing a claim, filing a lawsuit and/or preparing you to participate in any possible future bailouts and class action lawsuits.

Please contact Andrew J. Kelleher (akelleher@kelleherbuckley.com), Robert Krug (rkrug@kelleherbuckley.com) or Samuel Weyers (sweyers@kelleherbuckley.com) at 847-382-9130 for a FREE initial consultation.

Andrew J. Kelleher
Kelleher & Buckley, LLC
102 S Wynstone Park Drive 
North Barrington, IL 60010
847-382-9130 
akelleher@kelleherbuckley.com

Contributing Authors: Gene Barinholtz, CPA, Paul Wilkin, CPA, Lauren Clawson, CPA, Mitch Knopoff, CPA.
KRD - Kutchins, Robbins & Diamond, Ltd. is a CPA firm that offers a full range of client services: outsourced accounting, audit and assurance, tax strategy and preparation, business valuations and financial planning advisory services. Their team of 80 members has been serving clients in Chicago, the surrounding areas and nationwide for over 30 years.

Over the past two weeks, the SBA has approved and guaranteed over 1 million PPP loans to small businesses. Much attention and clarification was focused on determining eligibility for the loans and calculating the appropriate loan amount. Now that loans have moved to the funding stage, it makes sense to review the parameters for use of the loan proceeds and the loan forgiveness provisions. The information contained in this document is current as of April 20, 2020.  The CARES Act says the SBA has until 30 days after enactment, or April 27, 2020, to issue final guidance regarding loan forgiveness, although many banks are telling customers the date will be April 30, 2020.  

Can I Still Apply for a PPP Loan? 

• The Paycheck Protection Program is authorized to run through June 30, 2020. Small businesses are supposed to be able to apply up to that date.
• The initial appropriation in the CARES Act was $349 billion. As of this update, loan approvals under the program have reached that limit, and the SBA is no longer accepting loan applications from the approved lenders until additional appropriations are made to the program.
• The federal government has indicated a willingness to appropriate an additional $250 billion for the program. It is likely that funding for this program will be extended this coming week.  However, at this time, it is unknown when that appropriation will happen.  If you did not receive a PPP loan from the initial funding we urge you to be proactive with your bank to ensure they have your application and documentation ready when additional funds are appropriated.

Is the Program As Confusing As People Make It Sound?

Yes – but don’t worry, we are going to unpack all the details below. First, there are a few key terms that everyone who has either received or wants to apply for a PPP loan need to understand.

Key Definitions

Payroll Costs 

• Payments to U.S. legal residents for:
• • GROSS salaries, wages, commissions, tips, vacation pay, family or medical or sick leave pay, separation pay and bonuses;
  • Group healthcare benefits including insurance premiums (employer’s share only);
  • Retirement benefits (employer’s share only);
  • State and local taxes assessed on employee compensation (generally these are state unemployment taxes);
  • Self-employment income of partners in a partnership;
  • Owner Compensation Replacement for a sole proprietor or independent contractor, also known as net earnings from self-employment.
• Compensation, such as gross salaries, wages, net earnings from self-employment and partner self-employment income, is capped at $100,000 on an annualized basis for any individual, prorated for the eight-week period. This works out to 8/52 times $100,000, or $15,385 per person.
• Payroll costs do not include any amounts used to claim the Emergency Paid Sick Leave Credit or the Emergency Family and Medical Leave Credit.
• For a sole proprietor or independent contractor, healthcare insurance premiums and retirement benefits are not included.

Full-Time Employees and Full-Time Equivalents (FTE) 

• The definitions are the same as they were for determining Obamacare era penalties.
• Full-time employee:  an employee who is employed on average at least 30 hours per week or 130 hours per month.
• Full-time equivalent employee (FTE):  a combination of employees, each of whom individually is not a full-time employee because they are not employed on average at least 30 hours per week, but who, in combination, are counted as the equivalent of a full-time employee.
• • For example, two employees, each of whom works 15 hours per week, are the equivalent of one full-time employee.
• To determine total FTEs, take the aggregate hours worked by non-full-time employees in a month and divide by 130, then add that result to the number of full-time employees.

So I Received a Loan - What Can I Use the Money For?

During the eight weeks immediately following the initial loan disbursement, PPP loans can be used to pay:

• Payroll costs;
• • We recommend that any payments to partners made from the loan funds should be classified as guaranteed payments, so that there is no question that they constitute self-employment income to the partner.
  • We recommend that actual checks are written to partners in a partnership and that self-employed individuals write themselves checks over the 8 week period to prove payroll.  It is likely that a “book entry” will not qualify as sufficient documentation.
• Group healthcare continuation costs for employees on paid sick, family or medical leave.
• Mortgage interest on loans incurred prior to February 15, 2020.
• • Includes real or personal property.
  • Property must be used in the business.
  • Includes loans for vehicles and other equipment used in the business.
• Rent or leases in existence prior to February 15, 2020. This appears to include non-facility leases such as machinery and equipment leases and copier leases.
• Utility payments for services begun prior to February 15, 2020, which includes:
• • Gas, electric and water;
  • Telephone and internet;
  • Fuel for business vehicles.
• Interest on any other debt obligations incurred prior to February 15, 2020. Keep in mind that loan proceeds used for this purpose will not be forgiven.
• Refinance an Economic Injury Disaster Loan made between 1/30/20-4/3/20.
• At least 75% of the loan proceeds MUST be used for payroll costs. Stated another way, no more than 25% of the loan proceeds can be used for mortgage interest, rent and utilities and interest on any other debt obligations
• No prepayments are allowed on these costs.
• These costs must be incurred and paid during the 8 week period.  Therefore arrearages are not eligible expenses.
• Sole proprietors and independent contractors can only claim mortgage interest and utilities for their home office space if these are deductions taken on their Schedule C filings (Form 8829)

Will My Loan Be Forgiven?

• PPP loans will be forgiven to the extent that the proceeds are used to pay the above expenses during the eight weeks following the date of the loan, with the exception of interest on debt obligations other than mortgages.
• Borrowers will have to submit an application for forgiveness and related documentation such as payroll tax returns, cancelled checks, payment receipts and account transcripts, to their lender, who will be required to calculate the amount forgiven within 60 days. If you don’t apply for loan forgiveness, you won’t get it.  Forgiveness is a proactive process and not automatic.
• Reductions to the amount of loan forgiveness:
• • The amount forgiven is reduced based on the failure to maintain the average number of FTEs during the covered period (the 8 week period) when compared to a base period that the borrower gets to choose. (See below for the exception to this.)  The choices are:
  • • February 15, 2019, to June 30, 2019, or
    • January 1, 2020, to February 29, 2020.
  • The amount forgiven is reduced to the extent compensation for any individual making less than $100,000 per year is reduced by more than 25% when measured against the most recent full quarter that individual was employed.
  • If you have reduced your FTE’s between 2/15/20 and 4/26/20 as compared to your FTE’s on 2/15/20 there is no reduction in the amount forgiven if there is restoration of full-time employment and salary levels by June 30, 2020.
  • • You can re-hire or replace individuals to get back to the needed FTE headcount.
    • You must increase the compensation of the same individuals who took pay cuts back to pre-pay cut levels.
  • Payments for non-payroll costs in excess of 25% of the loan will not be forgiven.
  • Grants received under the EIDL program will reduce the amount forgiven to the extent of the grant amount.
  • Amounts used for interest on debt other than mortgage obligations will not be forgiven.
  • Any amounts used for any expenses not listed above will not be forgiven.

Forgiven PPP loans will NOT constitute taxable cancellation of indebtedness income for federal income tax purposes.

How Do I Prove What I Spent the Money On?

• We recommend you open a separate bank account for the loan funds.
• • Keep clear records of all checks written from the account – date, payee, purpose.
  • Keep receipts for items such as fuel for business autos and other utility payments.
  • Keep detailed records of payroll payments.
  • • If you have a separate payroll account into which you normally transfer funds for payroll from a general checking account, transfer only the exact amount of the pay needed on the pay date from the separate loan funds account, so that you have a clear trail of the payroll costs paid.
    • If you use a payroll service, the transfers should match the cash requirements reports they provide.
    • Payment of the employer portion of FICA and Medicare taxes is not a permissible use of the funds. If you have a separate source of cash, you should transfer the funds to cover those federal taxes to the payroll account from the cash not in the loan funds account.
  • Keep detailed records of changes in your workforce.
  • You may be able to set up and run special reports from your accounting software for the 8-week period.
  • Submit copies of all records along with bank statements to your lender.
  • It is possible that the forgiveness process will involve an audit verification.  It is unclear at this time what is involved in an audit verification.

If A Portion Is Not Forgiven - What Are the Terms?

• The interest rate will be 1% per annum.
• The term is two years.
• No payments of principal or interest for six months – interest still accrues during this deferment.
• No personal guarantees needed.
• No collateral required.
• No SBA or bank fees.

The documentation requirements for loan forgiveness are going to be extensive, and some of the calculations may be complex. This is not a time when you want to attempt to go it alone, only to find out that your lender refuses to forgive a significant amount of your loan because you don’t have proper documentation, or you didn’t understand the spending requirements. KRD has the expertise, the processes and the procedures to guide you through the PPP loan maze. Rely on KRD to help you get the maximum forgiveness on your loan.  Call us today to discuss your specific situation.

Robert Eisenstadt 
Kutchins, Robbins & Diamond, Ltd.
1101 Perimeter Drive, #760
Schaumburg, IL 60173
(847) 278-4422
reisenstadt@krdcpas.com