What You Need To Know Before Applying For Coronavirus Loan Relief

Small business interruption loans from the Paycheck Protection Program of the CARES Act would be available to:

  • Companies and some nonprofits with 500 or fewer employees during the period February 15 through June 30, 2020

The maximum loan amount of $10 million could be used for:

  • Payroll and employee-related costs, debt, rent and utility payments

Use of these loans for payroll is limited to:

  • Compensation of $100,000 / employee, independent contractor or sole proprietor maximum maturity of 10 years interest rate 4% no personal guarantee

These loans are to be administered by banks and credit unions:

  • Borrowers should turn to their bank to apply these loans could qualify for loan forgiveness any debt forgiveness will not be subject to federal income tax

Below is a detailed analysis of the provisions related to the availability of loans to businesses, nonprofit and other organizations.

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Paycheck Protection Program

These loans are to be administered by banks and credit unions: to apply go to your bank website.

Loans are limited to the lesser of:

  • The sum of average monthly payroll costs for the one-year period ending on the date the loan was made multiplied by 2.5, and any disaster loan from the SBA taken out after January 31, 2020 that has been refinanced into a paycheck protection loan, or $10 million

Payroll costs, in turn, are the sum of the following:

  • wages, commissions, salary or compensation to independent contractors tips vacation, parental, family, medical or sick leave allowance for dismissal or separation group health care benefits retirement benefits state or local tax assessed on the compensation of employees.

REVENUE RULING 2020-27 AND REVENUE PROCEDURE 2020-51

  • Clarification of the tax treatment of expenses where a PPP (Paycheck Protection Program) loan has not been forgiven by the end of the year the loan was received.
  • Small enterprises that asked for loan forgiveness in 2020 and reasonably expect that their loans will be forgiven cannot deduct typically deductible expenses paid for with PPP funds. The same rule will apply to small enterprises that plan to apply for a PPP loan in 2021 and reasonably expect the loan to be forgiven.
  • Loan forgiveness applies to small enterprises that maintained full-time employment after receiving PPP loans and spent the money on only:
    • Rent
    • Mortgage
    • Utilities
    • Payroll
    • And did not reduce wages under $100,000 per year by more than 25-percent.

The federal government enacted the PPP under the CARES Act. It authorized $349 billion in forgivable loans earmarked for small businesses to help pay employees during the pandemic crisis¾up to an amount of $100,000 per annum per employee¾to a maximum of $10 million per enterprise or non-profit organization.

US Businesses deduct expenses and are taxed on net income. Most businesses cannot survive if they cannot deduct operating costs before tax rates are applied. Some of the costs that are typically deducted include:

  • Air Filtration Devices
  • Cleaning Services
  • Furnishings
  • Mortgages
  • Outdoor Dining Permits
  • Packaging Costs
  • Personal Protective Equipment
  • Plexiglass Barriers
  • Rent
  • Sanitizers
  • Shipping Charges
  • Utilities
  • Web-conferencing-tools

Small businesses faced almost insurmountable costs to keep their doors open during the pandemic. According to some estimates, close to 100,000 small enterprises closed down permanently up to September 2020. Some argue that the real number is much higher than this. Some say that this IRS ruling will lead to the closure of many more small enterprises. According to the World Economic Forum, nearly one in four small businesses remain closed temporarily or permanently. It is expected that many more will close permanently.

The World Economic Forum estimates that 37-percent of US small enterprises in the leisure and hospitality industries recorded no transactions since mid-March and that half of the small businesses that closed down in the retail and nightlife categories will not open again.

According to Gallup, the average American’s holiday spending budget will drop by 14-percent year-on-year, which will affect small businesses that cannot offset the sales dip, perilously. Seventy-five percent of all larger PPP loans were granted to large organizations, including big corporations, religious institutions, charter schools, and think tanks. According to researchers at MIT, the PPP program saved 2.3 million jobs in six months. It was a costly exercise¾it cost $500 billion, or $500,000 per job saved.

Large US corporations dominate the total share of US wealth, but small enterprises are the employers: more than half of all US workers in the private sector work for small businesses. It would be catastrophic to the US economy if this new IRS rule causes more small business failures and subsequent layoffs.

Forgiveness of Paycheck Protection Loans

The sum of the following payments made by the borrower during the 8-week period beginning on the date of the loan is forgivable:

  • Payroll costs
  • Mortgage interest
  • Rent
  • Utility payments

To seek forgiveness a borrower should submit to the lender an application including:

  • Number of employees pay rates cancelled checks showing: mortgage, rent, or utility payments. Loan forgiveness will not create taxable income payments due on the remaining balance will not be due for six months

There is a provision, however, that reduces the amount that may be forgiven if the employer either:

  • Reduces its employees during the 8-week covered period.
  • Reduces the salary or wages by more than 25% during the covered period.
  • If the employer rehires or increases the employee’s pay by June 30, 2020, this reduction is avoided.

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Economic Injury Disaster Loans and Emergency Grants

The CARES Act also expands access to Economic Injury Disaster Loans (EIDLs) and include not only:

Apply here: https://www.sba.gov/page/disaster-loan-applications

  • businesses with fewer than 500 employees, but also sole proprietors and ESOPs.
  • Loans made before December 31, 2020 no personal guarantee will be required on loans below $200,000.
  • EIDL program is expanded to extend to all entities with no more than 500 employees:
    • allows a disaster loan to be taken out between January 31, 2020 and the date on which a paycheck protection loan is available for reasons other than paying payroll costs, for example working capital
    • creates a new emergency grant to allow a business that has applied for a disaster loan to get an immediate advance of up to $10,000
    • the advance can be used for payroll and is not required to be repaid
    • for those with existing 7(a) loans the SBA will pay six months of principal, interest and fees on qualifying loans

Employee Retention Credit

The CARES Act provides a quarterly credit against certain employer payroll taxes available to employers that:

  • Have experienced a full or partial suspension by government order in their operations and decline in gross receipts due to COVID-19, OR employer’s gross receipts are below 50% of the comparable quarter in 2019 amount of the credit is 50% of qualified wages, not to exceed $10,000 per quarter per employee.
  • Once employer’s revenues go above 80% of a comparable quarter in 2019, employer no longer qualifies after the end of that quarter.
  • wages are payments to employees while they are unable to work due to the operational or financial difficulties.
  • This credit is unavailable to employers that have received a small business interruption loan or paycheck protection program may be limited if the employer took the credit for paid family and medical leave under the TCJA. This payroll deferral only applies to the employer, not the employee, portion of FICA.

Payroll Tax Deferral

CARES Act defers payment of payroll tax liabilities incurred for the remainder of the year:

  • For the employer portion of the tax: 50% of 2020 payroll tax liability will be due by December 31, 2020.
  • The remaining 50% due by December 31, 2022.
  • Payments are not subject to underpayment penalties.
  • This payroll deferral only applies to the employer, not the employee, portion of FICA.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.

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Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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