New Loan Program Comes with Government Guarantee and Forgiveness Clause
Business loans aren’t usually designed to be forgiven but these are extraordinary times and this is an extraordinary program.
The loans under this new program have a purpose of helping those needing funds to continue operations in the coronavirus emergency.
This a brand new federal program and we don’t address state tax aspects.
Charities can also qualify but our focus in this discussion is small business.
The borrower needs to be a “small business,” but loans can reach $10 million. So fairly large businesses are included here.
We briefly introduced this topic on our site with “What You Need to Know About Stimulus Package as A Business Owner.” On April 2, the Small Business Administration came out with a 31-page explanation of the rules titled the “Interim Final Rule.” So while questions remain, we have more guidance as to the details of these loans.
The new Paycheck Protection Program (PPP) involves loans to small businesses that can largely, or entirely, be forgiven if the loan is spent on certain expenses. A major benefit under the program is that the loan forgiveness is taxfree income.
The forgiveness feature focuses on the degree to which the expenditures went to payroll costs, interest on mortgages, rent and utilities. We don’t find it in the law but the SBA decided 75% of the forgiven amount must relate to wages. Wages over $100,000 won’t count.
Employee cuts and payroll reductions can reduce the forgiveness amounts. However, rehires by June 30, 2020, can help with the calculations.
Loan payments are generally deferred six months under current SBA policy.
The math can get complicated. What is the basic math the borrower needs to understand?
“Small business” loans may involve loans of up to $10 million generally to businesses that employ up to 500. If you are in food services or a hotel, the 500 employee rule can focus on each location. The affiliation rules can also get complicated and they aren’t waived for all businesses.
The basic measure of the loan is 2 ½ times your average monthly payroll. The latest SBA
pronouncement includes salary and wage and such factors as group health care in the definition of “payroll costs.” The quoted term includes “for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.”
We again emphasize the loans generally go toward deductible business expenses, and the business owner (or owners) get to keep any tax savings. Forgiveness is designed to be taxfree.
The loan application period is generally April 3, 2020 through June 30, 2020.
The loan application period for independent contractors and the self-employed begins April 10, 2020.
There are concerns the government funds won’t last until June 30 under this unique program.
This latest SBA pronouncement has its own encouragement to act quickly when it tells the reader the Paycheck Protection Program is “first-come, first-served.”
Can you go into this SBA program without first applying elsewhere? Yes. The usual SBA rule is waived due to the emergency circumstances.
There is only one loan per person under this program.
Guarantees by the borrower and collateral aren’t required
for these loans.
What needs to be done if you get such a loan? Care needs to be exercised after getting the SBA guaranteed loan because loan forgiveness turns on making payments for
designated purposes. So plan on having particularly careful booking and tracing in regards to such a loan.
As summarized in somewhat more detail on the Treasury Department’s Paycheck Protection Program (PPP) Information Sheet, the focus is on: payroll costs, including benefits; interest on mortgages incurred before February 15, 2020; rent on leases in force before February 15, 2020; and utilities for which services began before February 15, 2020.
The process can get complicated even though the government is trying to hasten and simplify. If you’re interested in applying for such a loan, we can help with the details. You can contact us at firstname.lastname@example.org.