As appealing as it may sound: There is no such thing as free money.
The CARES Act which was passed March 27th has provisions for banks to lend up to $349 billion in the Payroll Protection Program set up by the Small Business Administration. The rules have changed a number of times and are likely to change again. For the time being, businesses can apply for the SBA PPP program to cover 2 months of payroll and office expenses.
This act is in place to help small businesses (up to 500 employees) whose business is suffering due to the COVID-19 pandemic.
Reach out to our team for help:
Many business owners are regarding this as a grant because the loans are forgivable.
Be careful. Funds should be placed in a separate account to easily track where and how they were spent. Co-mingled funds run the risk of voiding the loan's forgiveness and converting the total amount of the loan to the 2 year, 1% rate with 6 months deferral. All SBA PPP loans must be spend 75% on payroll and 25% on operating costs.
To Put That in Concrete Terms:
If you were to receive a loan in the amount of $100K you would be required to spend $75K on payroll.
If you spent only $70K in payroll the remaining $5K would become a loan at the 1% rate for 2 years with 6 months deferral.
The remaining $25K would need to be spent on rent and other operating expenses.
If you spend only a portion of that, the remainder becomes a non-forgiven loan at the 1% 2 year rate. You could easily end up with a $15k loan that has to be repaid in 2 years time, just as your business may be climbing back to solvency.
Tax Implications for Loans:
If a business were to receive a loan for $100K but did not follow the best practices, co-mingled the funds and could not prove that the money was spent on payroll, and then that business closed its doors, there would be tax liabilities.
Assume the business owner goes back to the bank and it is resolved that they cannot repay the $100K loan. The bank then settles the debt. When the business files their 2020 taxes they will receive a 1099 from the bank in the amount of loan that was settled. If, for example the loan is settled at 10 cents to the dollar, that business will have an income tax liability of an additional $90K.
What is a forgivable loan?
The SBA PPP loans are being called "free money" and grants by many in the business community but there is little discussion around understanding what a forgivable loan truly entails. What are the criteria by which forgiveness is granted? How will businesses account for their financial responsibilities. What would it mean to your business if the loan were not forgiven? Join John Milikowsky in this brief overview of what a forgivable loan means.
Step One Determine Your Eligibility
Loans are disbursed through your bank, or, in the case of a small number of banks, to anyone who applies. Banks offering applications to non-members can be found here: https://thinksba.com/cv/
Businesses must have had employees before February 2020.
They must continue to have employees (not have laid off their workforce).
Businesses must have fewer than 500 employees. There are exceptions HERE
Businesses will have to prove that their economic need is due to the COVID-19 outbreak.
Step Two Determine Your Loan Amount
Take the average monthly salary (verified by submitting payroll records) X 12 (1 year).
Multiply that number by 2.5.
That number cannot exceed $10M
Salaries over $100K/year can only be counted up to the $100K amount.
Businesses MUST use 75% of their loan amount to cover payroll or the loan is no longer forgiven.
Loan Amount Calculator
Step Three Apply for the Loan
Application processes vary from bank to bank. All require that you verify your average payroll for the previous year by presenting payroll records. Additionally, you will want to gather your expense reports, income reports, salary documentation for bonuses, severance, benefits, 401K contributions and you will need to present bank statements showing that you do, in fact need this loan. The PPP and the EIDL loans are hardship loans. If you take the loan and get audited later and the SBA, IRS or Bank discover that you did not experience a hardship and would have been fine without the loan, you can open yourself up to lack of loan forgiveness (at best) and potentially even to fraud charges.
Our team of experts is here to walk you through the loan process and help you ensure you remain compliant with the guidelines set forth for loan forgiveness.
Call us today for your personal guided loan application $500 (Currently $350 for the first 50 applicants).