As of March 27, 2020, at 1:30 pm the House of Representatives passed the most recent stimulus package called the CARES Act. The bill now goes to the President’s desk for signature.
Included in the bill is a payroll loan which in many cases will be forgivable, either 100% forgivable or portions of the loan will be forgivable. After careful review, we believe that any small business that qualifies for this loan and is currently operating, maintaining payroll and even potentially those that do not have payroll but are self-employed should consider applying for the loan immediately. For those businesses that have let their workforce go during this time, we ask that you call our office; we believe it is in your best interest to apply for this loan as well.
Paycheck Protection Program
The loan should be originated at the SBA website or with your local business banker, please reference Paycheck Protection Program when applying for your loan. Our office cannot originate the loan for you. If you do not have a business banker you work with we can put you in contact with local bankers that we have relationships with. The loan value per business is approximately the average of your monthly payroll multiplied by 2.5. So if your average monthly payroll is $40,000 you would be eligible for a loan of $100,000. There are some adjustments that the SBA may make to this loan amount during the loan process. Loans can be used to pay for rent, payroll, utilities, and operations of the business. The forgiveness is based on maintaining payroll levels through June 30, 2020. The period of forgiveness is for payroll paid from April 1, 2020 – June 30, 2020. Borrowers will complete a loan forgiveness application with the bank or SBA at the end of the period.
Additional Forgiveness Details
Borrowers are eligible for forgiveness of indebtedness on a covered 7(a) loan in an amount (the “Forgivable Amount”) equal to the following costs incurred during the 8-week period after the origination of the loan: payroll costs, payment of interest on mortgages entered into before February 15, 2020, payment on any rent under leases entered into before February 15, 2020, and payments for utility services that began before February 15, 2020. The total amount forgiven can be up to, but not exceeding, the principal amount of the loan.
Loan forgiveness may be reduced based on a reduction of employees or a reduction in employee pay.
Reduction of Forgivable Amount based on reduction of employees: For reduction of employees, to determine the amount actually forgiven, the Forgivable Amount will be multiplied by a fraction, the numerator of which is the number of full-time equivalents employed during the 8-week period after loan origination, and the denominator of which is the number of full-time equivalents employed during one of the following periods chosen by the applicant: (a) the period beginning February 15, 2019, and ending June 30, 2019, and (b) the period beginning January 1, 2020, and ending February 29, 2020. Note that seasonal employers must choose the period described in clause (a).
- Consider this example for a company with average monthly employment of 100 employees: if the potentially Forgivable Amount is $1 million but the borrower’s average monthly employment for the year prior to application is reduced from 100 to 75 during the 8-week period, then only $750,000 is eligible to be forgiven (25% reduction in workforce = a 25% reduction in loan forgiveness). All principal of the loan in excess of $750,000 would have to be repaid by the Borrower.
Reduction of Forgivable Amount based on reduction in pay: With respect to a reduction of employee pay, for each employee making not more than $100,000 in annualized salary or wages who has their pay reduced during the 8-week period after loan origination, the Forgivable Amount will be reduced by the amount the reduction exceeds 25% of the employee’s pay for the quarter most recently completed prior to loan origination. These amounts are in addition to the reduction for the reduction of employees.
- Consider this example for the same company as above: If the company retained 25 employees but reduced their pay by 30% as compared to the most recent quarter, then the Forgivable Amount would be reduced by 5% (i.e., 30% – 25%) of each affected employee’s annual salary. If the salary of each of those employees had been $100,000, then the Forgivable Amount would be reduced by $125,000 (25 employees times $100,000 times 5%). When added to the $250,000 reduction noted above for reduction in force, the Forgivable Amount would be reduced by a total of $375,000. All principal of the loan in excess of $625,000 would have to be repaid by the borrower.
At this time if you file just a 1040 and you have no employees, you do qualify for the loan, but we have not received clarity on your forgiveness options, even then the loan is 3.75% interest payable over 10 years. This loan should be considered for self-employed individuals with no payroll that otherwise need funds. As this solution is more cost and tax-effective than accessing investment or retirement funds.
We continue to collect more information as it becomes available and will provide that information either through direct communication with our clients or through our webpage.
Please understand that our office is operating short staff with employees working from home or taking care of children out of school. We will do our best to reply to the loan document request as quickly as possible and provide assistance in completing loan applications whenever possible. Thank you,
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Jeremy Klaven, CPA#1 First Missouri Center, Suite 214St. Louis, MO 63141
cell: (314) 583-6515
office: (314) 720-8686
fax: (314) 754-9967