The Cares Act was signed into law on March 27th, 2020. To summarize, it is a Payroll Protection Program loan (PPP) from the U.S. Small Business Administration (SBA) that can be forgiven, turning part or all of this loan into a grant that is tax-free to your business. In this article, we are going to focus on how small businesses can utilize this loan to find a little stability in these chaotic times created by the COVID-19 pandemic.
Frequently Asked Questions About The Payroll Protection Program
How do you get the SBA 7(a) Forgivable Paycheck Protection Loan?
There have been multiple loans made available so you want to make sure you are applying for the correct loan.
The forgivable loan is an SBA 7(a) loan that you will get from an SBA lender-----banks, credit unions, other approved SBA lenders.
The SBA 7(b) economic injury disaster loan that was made available a few weeks ago and many have applied for online is NOT the forgivable loan. If you are planning on taking advantage of the forgivable payroll prevention loan, then make sure to get the SBA 7(a) relief loans under the Care Act.
Contact your banker today to see about getting this loan started.
How Much is the Paycheck Protection Loan?
The payroll protection forgiveness loan through the SBA 7(a) loan is limited to 2.5 times your monthly payroll costs of 2019 (if you averaged your payroll out over the previous 12 months).
So, if your payroll for the last 12 months was $400,000 then your loan is limited to $400,000 / 12 months = $33,333 per month multiplied by 2.5 times= $83,333. That entire amount though is eligible to be forgiven up to the eligible expenses you incur.
Is your Business Eligible for the SBA 7(a) Loan Forgiveness- Paycheck Protection Loan?
The Payroll Prevention Program which is the forgivable portion of this loan. What requirements need to be in place for you to qualify?
- Must have less than 500 employees
- Must have been in business prior to 02-15-20
- Had employees that you paid salaries or wages to
- Good Faith Certification:
- That the COVID-19 uncertainty makes the loan necessary to support operations and the use of funds will go towards retaining employees.
How much of the Paycheck Protection Loan will be forgiven?
The idea of this is the government wants you to use this money to maintain operations and keep your employees on payroll.
You will have to apply for forgiveness later on to get part or all of your loan forgiven.
The eligible forgiveness portion is based on what you use for qualified expenses during the 8 weeks following the loan origination during the covered period of 02-15-20 and June 30, 2020.
The following expenses are eligible for forgiveness:
- Payroll Costs
- Salary, Wages, Commission (Limited to $100,000 per Employee)
- Payment of Group Health Benefits including premiums
- Covered Rent Obligation
- Rent Lease agreement in force before 2-15-20
- Covered Utility Payment (Which began before 2-15-20)
- Internet Access
- Payments of Interest on a mortgage
Do you have to pay taxes on the forgiven loan?
No, the loan portion that is forgiven is tax-free for your business. Which makes this the most advantageous of all of the business options.
What about the amount over the forgiven portion?
All of the money is subject to 1% interest. The excess portion of the loan that was not eligible for forgiveness will be paid back over a 2-year period.
You can also defer payments on the loan for 6 months, so your payments will be made over 18 months.
Forgiveness Requirements/ Traps
You need to make sure you understand the rules you need to follow in order to be approved for full forgiveness.
Again, the idea is the government wants you to keep your full workforce and not let people go.
Assuming you kept everyone at the same hours and rates, then your forgiveness amounts would be all of the eligible expenses above for 8 weeks following the origination dates during the covered period of 02-15-20 – 06-30-20.
Many small businesses we have spoken to have either had layoffs or reduced the number of hours for their employees.
You need to know that your forgiveness amount will be reduced IF:
- You reduce your workforce during the 8-week covered period when compared to prior periods
- You reduce the wages paid to an employee (under $100k) by more than 25% (this would happen if you reduced their hours)
You can rehire the employee and/ or increase pay to bring you back the level you need to be for full forgiveness.
The payroll protection loan is the most favorable loan at this point since it can be forgiven tax-free.
What if you need more than the amount offered to keep your business going?
The SBA 7(b) Loan – Economic Disaster Loan
You may have already applied for this loan as this has been out and available online for the last few weeks. The Cares Act expanded this loan.
This loan is not forgivable; however, this can be used for other purposes as you will have to certify that you are not using this loan for the same purpose as the forgivable loan.
The SBA website has streamlined this so the system moves through much quicker. You can also request a $10,000 immediate advance.
Note: if you do request the $10,000 and then apply for the PPP. The $10,000 will be used to offset the $10,000 of the PPP amount. The idea is that you will get this in a few days (at least that is what they are saying) while you wait for the PPP loan to process.
Details on this Loan:
- Care Act: Removed Personal Guarantee IF the loan is under $200,000.
- Interest Rate: 3.75%
- Max Amount: 2 Million
- Max Term: 30 Years
- Could get an immediate advance (within 3 days of request) of $10,000
If you need help guiding through this time, call us today.