On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law to assist taxpayers affected by the novel coronavirus (COVID-19). The $2.2 trillion stimulus is applicable to individuals, small businesses including certain nonprofits, and specific industries severely impacted by the COVID-19.
An important provision in the CARES Act for a small business is a new type of Small Business Administration (SBA) loan program called the Paycheck Protection Program (“Program”). The Program is available to businesses that were in operations as of February 15, 2020 that were deemed to be adversely affected by COVID-19. The loans are available during a covered period from February 15, 2020 through June 30, 2020. Eligible recipients of the Program include sole proprietors, independent contractors, business entities, nonprofit organizations, veterans organizations and tribal businesses that employ not more than the greater of (A) 500 employee including full-time, part-time or other basis or (B) if applicable, the size standard in number of employees established by the Administration for the industry in which the business operates. In addition, the hospitality and dining industry are eligible to participate in the Program if it employs 500 or fewer employers per location. The is expected to become available starting April 3, 2020 at banking institutions that are approved SBA lenders.
The loan amount is the lesser of (A) 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan date or (B) $10 million. Payroll costs include salary, wages, commission, tips, vacation, parental, family, medical, or sick leave, severance, group health care benefits including insurance premiums, retirement benefits, state or local tax assessed on the compensation and compensation paid to sole proprietors and independent contractors. However, for employees, sole proprietors, and independent contractors paid over $100,000, only the amount up to $100,000 (prorated for the covered period) is calculated in the payroll costs.
The loan proceeds may be used for eligible payroll costs (as defined in the previous paragraph), rent, interest on mortgages, utilities, and interest on other debts. The portion of the loan that is not forgiven will have a maximum maturity rate of 10 years at an interest rate capped at 4%. The payment of principal and interest is deferred for 6 months up to 1 year. The loans are fully guaranteed by the Small Business Administration and are nonrecourse against the borrower if the loan is not repaid. However, if the proceeds are used for non-allowable purposes, then the loan is recourse to the borrower if the loan is not repaid.
The amount of the loan that may be forgiven is the total of the payroll costs, rent, interest on mortgages and utilities incurred during the 8-week period commencing on the loan origination date. The cancellation of debt is not taxable income to the loan recipient. However, during the period between February 15, 2020 to June 30, 2020, the loan forgiveness is reduced if employees are laid off or if the wages or salaries of the employees are reduced by more than 25% of their prior year compensation. For loan recipients to be eligible for the debt forgiveness, the borrower will be required to submit an application along with the following information:
- Documentation of the number of employees on payroll and the pay rates for the period before February 15, 2020 and during and after the covered period. This documentation will include payroll tax filing to the IRS and state authorities along with unemployment insurance filings.
- Documentation indicating the mortgage interest, lease and utility payments paid. This can be in the form or cancelled checks.
- Certification by the loan recipient that the documentation provided is true and correct and that the amount requested for forgiveness was used for the covered costs.
Our team will be prepared to assist you with the application process, so please contact us with any addition questions. You can either contact someone with whom you traditionally work with at the firm or email us at COVIDfirstname.lastname@example.org and one of our team members familiar with the program will get back to you as soon as possible.Categories: Tax, Tax Planning, Small Business, COVID-19 Resources