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Captain’s log. Stardate March 30, 2020. My law firm is still operational, and my employees are healthy. In North Carolina, legal services are considered “essential” in both local and statewide “Stay-At-Home” declarations, and federal immigration agencies are largely operational. To protect my employees, I have closed our office spaces to the general public and moved my staff to a staggered 50% work from home schedule, so no employee is currently sharing an office with another employee. Not only are my employees more than 6-feet away from each other; they are not even in the same room! A month ago, my business manager ordered enough hand sanitizer and bleach wipes for Armageddon. However, two business disrupters are already upon us: (1) new consultations have plummeted and (2) we are concerned that existing clients on payment plans will not be able to make their payments.
Although the law firm has been profitable in 2020, we have to plan for a financial crisis. That’s where a CARES Act one-time paycheck protection program (PPP) loan comes in. AILA is putting together some really valuable resources that will be available to members on Monday and will have a free recorded webinar available on Wednesday, but I wanted to share a little about what we have been doing.
Over the weekend, I read the PPP loan provisions as enacted into law. Basically, a small business can borrow an amount equal to two and a half times its average monthly payroll costs, up to $10 million. The PPP loan can be used to cover: (1) payroll costs (any employee paid more than $100,000 annually is prorated down to a hypothetical $100,000 salaried employee); (2) insurance premiums, including continuing benefits for employees on paid sick leave, family or medical leave; (3) rent payments and payments on mortgage interest; (4) utility payments; and (5) interest on other previously accrued debt obligations. The PPP loan has an interest rate of 4% or lower and has a repayment period of up to 10 years. In addition, lenders must defer all interest and repayment for at least 6 months (and up to one year) from the loan origination date.
The best part is that before monthly payments begin six months down the road, the federal government will forgive the portion of the loan covering eight weeks of:
- payroll (which again is the modified payroll number, including employee benefits and taxes);
- payments to cover rent or mortgage interest;
- utility payments; and
- interest on existing debt.
Of course, my law firm will have to provide documentation related to such costs in order to receive the forgiveness, and forgiveness is reduced if employees are laid off. Significantly, forgiven portions of a loan are normally considered taxable income. However, pursuant to the CARES Act, the forgiven portions of the loan will not be treated as taxable income.
Armed with the law, I looked at my law firm’s last twelve months of payroll costs to figure out our average monthly payroll costs. I then multiplied that number by 2.5 and emailed my bank to request the PPP loan. My point-of-contact immediately wrote back indicating it would take several days to get the program up and running, but we would be contacted the moment the PPP loans are ready to be processed. According to information from the SBA, the loan portal opens for small businesses on Friday, April 3 and the portal will open for self-employed individuals and independent contractors on April 10th. AILA will be offering additional resources to help members through the application process. A sample application may be found here.
Some banks are providing small short-term loans for immediate financial needs. Fortunately, my law firm has a small capital reserve and a line-of-credit available. But having a PPP loan will give me, and more importantly my incredible employees, some peace of mind as we navigate the uncharted waters ahead. Stay tuned.