COVID-19 NEWSLETTER #2:
FINANCIAL RELIEF FOR DENTISTS

Dear Past and Present Clients:

I want to thank those of you who reached out with the kind words and encouragement following my first newsletter on leasing obligations.  As I noted in my March 29 email, I will be writing a series of newsletters regarding the COVID-19 crisis relating to both legal and non-legal matters which I hope you will find useful.   In this letter, I want to discuss in greater detail than most articles you may come across some of the economic relief that is out there for dentists. Sorry in advance for the length!

Topic #2 – CARES Act and Other Financial Assistance for Dentists:

The Coronavirus Aid Relief and Economic Security Act (CARES Act) was signed into law on March 27.  In this dense bill of nearly 900 pages, there is meaningful tax and economic relief for small business owners. I’ll be the first to admit that I have not read the new law in its entirety. It’s here if you want to take a deep dive:
https://assets.documentcloud.org/documents/20059055/final-final-cares-act.pdf?mod=article_inline
I did spend considerable time reviewing relevant sections and reading up on the benefits that appear to be of greatest interest to my dentist clients.  I am summarizing programs that may be of interest for you here with links to additional information you may find useful.  Some the of the information relating to relief programs is rapidly evolving or will be subject to as yet unimplemented regulations/policies.

EIDL Loans / Grant Money:

The Act allocated ten billion dollars for the purpose of delivering emergency grants of up to $10,000 from the Small Business Administration (SBA) to eligible entities who apply for the Small Business Administration’s (SBA) Economic Injury Disaster Loan (EIDL). This program is available to sole proprietorships and small businesses with less than 500 employees.  To be eligible, the business must have been in operation for at least a year (although the SBA can waive that requirement) and makes an application for the EIDL funding.  The grant monies may be used for providing paid sick leave for employees, maintaining payroll obligations to retain employees, making rent or mortgage payments and repaying other obligations your business may have. I presume the actual amount of the grant may depend on the number of applications the SBA receives under this program. Even if you do not desire a SBA loan, it may be worthwhile to pursue this application as there is no cost to apply and no obligation to take the loan if approved. Applicants are not required to repay advance grant payments even if subsequently denied for the SBA loan.  Here’s how to apply:

1. Go to https://covid19relief.sba.gov/#/
2. Complete the eligible entity verification by stating your applicable qualification.  For most this will either be a “business with not more than 500 employees” or the sole proprietorship/independent contractor option. Check all of the other verification boxes.
3. Complete your business information.  You will need to enter your gross income and “cost of goods sold” from 2/1/19 through 1/31/20.
4. Enter your ownership information for each owner.
5. Complete the additional information survey regarding criminal offenses and grant eligibility.
6. Select the box next to “I would like to be considered for an advance of up to $10,000.00”
7. Enter bank name and account number.
8. Review Summary and edit as needed to finalize.  Submit.

Once submitted, you should receive a ten-digit application confirmation number.  The emergency grant must be distributed within three days of application.

Under this loan program, you can receive a loan of up to two million dollars, with the amount of such loan to be determined by the SBA, less any business interruption insurance and other assistance you may receive. EIDL funding is directly from the US Treasury and not from a private lender. The maximum interest rate is 3.75% and collateral (i.e. office equipment lien, real property) is required for any loans in excess of $25,000. Repayment options will vary (with terms up to 30 years), but all loans would have a standard deferment of 4 months (with options for longer deferments) with the first payment due on the 5th month from the date of the note.  

For the subsequent loan application, you should anticipate you will need to gather or sign releases for your most recent tax returns, a personal financial statement, a schedule of liabilities, year end profit and loss statements for any year in which a return has not been filed, current year to date profit and loss statement.

Here’s a powerpoint created by one of the local SBA offices discussing loan criteria and providing more information:
https://www.sba.gov/sites/default/files/articles/EIDL_Information_and_Documentation_-_3-23-2020.pdf

The biggest unanswered question I have is whether the recipient of the grant has any obligation of repayment if they are approved for, but do not accept EIDL monies, provided the grant is applied to satisfy the various payroll and rent obligations of the practice. Everything I’ve read suggests that there is no repayment obligation provided the grant funds are properly used, but the grant would operate to offset any other debt forgiveness benefit the grant recipient may be eligible for.  This is consistent with the statement made by Senator Feinstein that “the advance does not need to be repaid under any circumstance.”
https://www.feinstein.senate.gov/public/index.cfm/press-releases?id=F85A3E6B-1FDA-4F73-92A0-587015A47E4C

Potentially Forgivable Loans:

The most publicized SBA relief under the CARES Act is the Paycheck Protection Program (PPP) loan. This is a program where 349 billion dollars are allocated for loans that provides cash flow assistance through federally guaranteed loans to employers who maintained their payroll between February 15 and June 30, 2020.  Under the program, if employers maintain their payroll, up to eight weeks of payroll may be forgiven. Like the EIDL loan, the PPP loan has no SBA fees and deferral periods from six months to a year.  Unlike the EIDL, the PPP loans will be administered through SBA partner banks that handle SBA 7(a) lending. All of the lenders with practice finance departments to whom you presently have a banking relationship should be able to assist you.

To be eligible, your business or sole proprietorship must be in operation as of February 15, 2020. Your maximum loan amount will be 2.5 times your average monthly payroll costs from February 15, 2019 through June 30, 2019. If you were not in business between February - June 2019, your maximum loan would be 2.5 times your average monthly payroll for January and February 2020.  What is a payroll cost?  Compensation, vacation, paid leave, sick leave, severance payments, employer paid health benefits, employer paid retirement benefits and state and local taxes on compensation of employees. For employees and owners whose compensation exceeds $100,000 annually, only those payroll costs less than $100,000 would be eligible.

The PPP loan monies may be used to pay for payroll costs, continuation of health coverage, employee salaries, commissions, payments of interest on any debt or mortgage obligations, rent payments, and utilities.

Forgiveness shall be determined within 60 days after application to your lender.  From my review of Section 1106 of the Act, it appears the amount will be based upon the sum of payroll costs, interest payments, rent payments and utility payments during the eight-week period following funding, not to exceed the amount funded to the borrower. If you received your funding in late April/early May you would be submitting this application in early July. Reductions and forgiveness may be based upon the reductions in the numbers of employees or compensation paid to employees during the eight-week period as compared to in 2019. That said, even if you have reduced your staffing or payroll, there is relief to those that increase their employee count and payroll to the February 15, 2020 levels by June 30, 2020.  You will need to provide documentation verifying the number of employees on payroll and pay rates, documents verifying your payment obligations to mortgages, rent and utilities. The actual amount of forgiveness is unclear but appears to be up to eight weeks of payment obligations.  It is very notable that while debt-forgiveness would ordinarily be considered gross income to the recipient, under Section 1106(i) of the CARES Act, forgiveness of the PPP loan would be excluded from any calculation of gross income.

As to any amount not forgiven, the repayment terms will be ten years or less and at an interest rate no greater than 4%.  Principal and interest payments shall be deferred up to six months. There shall be no repayment fees, which may make the loan attractive as a way to ensure adequate working capital.  My understanding is that applications for PPP loans will become available from various lenders starting next week but no later than April 11. In the interim, I suggest you reach out to your payroll providers, your health insurance provider and tax preparer as applicable and seek the following information:

• Employee earnings reports for 2019 detailing gross wages (including yourself if you are paid through your payroll), paid time off, vacation, sick leave, family medical leave for each employee AND state and local taxes paid for each employee during this time.
• Your Federal 941 forms, Form W-3 and W-2 forms for 2019
• All 1099s to any independent contractors you may have
• Detailed information concerning the employer contributions to health and retirement plan funding.

Secretary of the Treasury Mnuchin has indicated that they will request additional funds should the program prove popular and the $350B funds be exhausted. Nonetheless, a prompt submission of the application will be help minimize lag times from application to funding.  

My understanding is that you can have both EIDL and PPP loans, but the EIDL can be taken out first, then must be refinanced into the PPP loan, which adds the EIDL loan to the amount of your max loan under PPP. If you received an EIDL grant, the amount of the grant would be offset against the forgiven portion of the PPP loan.

Complete regulations and guidelines for this PPP loan program will be forthcoming from the SBA no later than 30 days from its enactment. Funding should begin in late April.

Employee Retention Credit:  

The CARES Act also provides a refundable payroll tax credit for 50% of the wages paid by an eligible employer to an eligible employee between March 12, 2020 and January 1, 2021.  Eligible employers must have operations that are fully are partially suspended as a result of a governmental order and as a result the employer experiences a greater than 50% reduction in quarterly receipts (as compared with the prior year). The credit isn’t available if you take a PPP loan, other small business interruption loans or a work opportunity tax credit.  Consult your tax preparer regarding your eligibility for this credit.

Other Tax Benefits:  

There are a number of enactments within the CARES Act that may provide a tax advantage.  Employer portions of FICA Taxes owed for the remainder of 2020 may be deferred over the next two years.  There is a temporary repeal of the taxable income limit for net operating loss deductions such that they can fully offset income.  The limit on business interest that may be claimed as a deduction has been increased from 30% to 50% for the 2019 and 2020 tax years. Again, it cannot be stated enough that you should consult your tax preparer before taking any credit, deduction or deferral of payment obligations as some of these options are not available if you receive other relief.

Unemployment Insurance Benefits:

In California, unemployment benefits are known as EDD benefits.   While typically there is a waiting period before a worker can receive their benefit payments, the CARES Act absorbs the cost of the “waiting week” to provide faster access to cash.  It also appears that payments may be expanded to cover the self-employed and independent contractors who might ordinarily not be entitled to such benefits. Further, I understand an additional $600 will be added to every EDD check between now and July 31, 2020. Benefits will extend 13 weeks beyond their usual length. This may be of great interest to those of you who are associate dentists and are currently without an opportunity to practice.

Penalty Free IRA Distributions:

Owners of Individual Retirement Accounts are able to take a tax-favored distribution of funds from their accounts. If an IRA (or similar plan) holder is adversely affected by the pandemic (this is defined very broadly) they can take a distribution (or cumulative distributions) of up to $100,000 during the 2020 calendar year. The money can be re-contributed within three years of the withdrawal date to any combination of IRA accounts. The withdrawal and recontributions are treated as a tax-free rollover.  There doesn’t appear to be any specified limitation as to what the withdrawn funds may be used for.  Essentially, this is an interest free loan of monies held in your IRA. If the monies are not recontributed within three years, income tax would be due on the distributions, but the tax liability could be spread over multiple years if you knew you did not intend to recontribute the money (or by amending prior years’ tax returns).  The typical 10% penalty for early withdrawal of IRA funds is not applicable.  While the access to your IRA monies could be very beneficial in that you could pay down debt or cover your overhead, I suggest consulting your tax advisor and financial planner before liquidating securities in a down market and distributing the funds.  

If you are still reading this very long newsletter, I hope you found the above information useful.  Again, please consult your business and tax advisors regarding the merits and your eligibility for these various programs. In the coming days, I will be providing some additional thoughts on a few other topics relative to this Covid-19 crisis. Please feel free to reach out should you have any questions. Over the years you’ve placed your trust in me and I am very grateful.  We will get through this together.

Sincerely,

J. Sean Dumm, Esq.

Law Offices of J. Sean Dumm, APC
Sean@jsdlawoffice.com
(949) 276-5095 Direct
(888) 212-DUMM (3866) Toll Free

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