Economically speaking, small businesses are one of the most detrimentally affected groups as a result of the COVID-19 pandemic. Although many were ordered to close their doors, they have been forced to make the difficult decision to struggle to pay employees without a source of revenue or to furlough or lay off their staff. A major provision of the recently enacted CARES Act provides for an SBA-administered loan that aims at getting companies through these tough times by providing capital to make payroll. Prior to participating in the new loan program, business owners should carefully consider their options and consult with their COVID-19 business survival consultant.
The Paycheck Protection Program provides qualifying businesses with a loan that is intended to cover eight weeks of payroll expenses and to pay for other critical expenditures related to ongoing operations (such as rent and utilities). As a part of our commitment to helping businesses navigate their options during these uncertain times, we have distilled the Paycheck Protection Program down to its key elements, including its eligibility requirements and its payback and forgiveness terms.
Does My Business Qualify Under the Paycheck Protection Plan?
Eligible businesses must meet the following criteria to participate in the Paycheck Protection Program:
- The business must have been in operation on February 15, 2020.
- Business must have been paying employees a salary and paid the associated payroll taxes since February 15, 2020.
- Only businesses with 500 or fewer employees qualify.
- If your business is in the food services industry, the 500-employee limit is on a per-physical-location basis.
- Nonprofits and tribal businesses also qualify for the loan, so as long as they meet the above criteria and otherwise meet the SBA’s definition of a small business.
- Self-employed individuals may also qualify.
How Much Is My Business Eligible to Receive Under the Paycheck Protection Plan?
The loan amount under the new Paycheck Protection Plan is calculated by multiplying your average monthly payroll costs by 2.5. The amount received by a single business cannot exceed $10 million. Businesses may apply for the Paycheck Protection Plan loan at any SBA-approved bank. That institution will ensure that you qualify and that the loan amount requested is appropriate given your average monthly payroll costs and the overall loan cap. Proceeds from the loan should be used for payroll costs, rent, utilities, or interest payments on mortgages or debt that was issued prior to February 15, 2020.
What are the Loan Repayment Terms? Is there Loan Forgiveness?
When you must begin repaying your loan will differ based on the bank used to originate the loan. Repayment deferral can vary between six months and one year. Most importantly, some if not all of the loan may be forgiven if you retain your employees and the loan proceeds are used to pay the salaries of employees and other qualifying expenses (such as rent and utilities). Luckily for taxpayers, the forgiveness of any portion of the loan will not be considered a cancellation of indebtedness income for tax purposes. The amount of forgiveness will be adjusted downwards if your employee count drops due to attrition, but employers may be able to rehire that employee to salvage a part of the forgiveness benefit. The computation of debt forgiveness will involve several computations. Your COVID-19 business continuity consultant can assist in determining your maximum loan forgiveness amount, once the time comes.
Key Takeaways for Businesses Affected By COVID-19
Like most government programs and regulations, navigating Coronavirus-related legislation can be cumbersome and frustrating. At a time when business owners are simply trying to keep their businesses afloat, our team of COVID-19 business survival professionals can take some of the administrative load off of your back. We are closely monitoring legislative developments and helping our clients make strategic decisions based on the available programs and information.
The Paycheck Protection Plan may not be right for everyone. Some businesses may be considering laying some or all of their employees off to lower payroll costs and are not sure whether the Paycheck Protection Plan can offer a better alternative. In these times of uncertainty, we can help. Our team of tax and business professionals are perfectly positioned to help business owners make informed and strategic decisions about the future of their businesses.
We Are Here for You!
Regardless of your particular business or estate needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.
In addition to our main office in Irvine, the Tax Law Offices of David W. Klasing has unstaffed (conference room only) satellite offices in Los Angeles, San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland, Carlsbad and Sacramento. During the COVID-19 pandemic, our staff are working from home, but have full virtual meeting capability.
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