There’s a lot of buzz going around about this new stimulus package and loan forgiveness talk, and if you’re anything like me, you simply want to know, “how can my business actually take advantage of this money?”
First things first… call your bank.
Right now, all FDIC insured banks will be able to extend these loans, but only to the extent that they have capacity.
Applications open for small businesses and sole proprietorships on April 3rd. Independent contractors and self-employed individuals can apply starting April 10th. Application link below.
Things to get ready for the application:
- Most recently filed tax return.
- EIN documentation (proving you were in business prior to Feb. 15).
- Payroll reports (proving you had employees prior to Feb 15th and their pay rates).
- Payroll tax forms.
- Proof of rent, utility, and health care costs in the form of receipts/invoices.
If you were in business on Feb 15th, employ less than 500 employees, and have been affected by COVID-19, you are eligible for a small business loan. There is still a lot of unknowns on the practicality of how these loans will work, but bankers are gearing up for what will be a flood of applications.
How do I know how much I can borrow?
Small business owners are eligible to secure up to 2.5x their average monthly payroll costs for the period of Feb 15, 2019 – Jun 30, 2019. Loan amounts might vary based on how the bank calculates eligible payroll costs, but to get an idea of what we could potentially borrow, here’s what I did at ChiroFusion.
I ran payroll reports using the period from Feb 15, 2019 to Jun 30, 2019. I added all payments made to each employee excluding the employer’s portion of social security and medicare tax. This should include commissions, bonuses, and health insurance premiums as well. I then divided that amount by 4.5 (months) and multiplied it by 2.5 to get a ballpark figure for our eligible loan amount.
Be mindful that there is a $10 million cap on the loan amount you are eligible for.
What's the deal with this loan forgiveness talk?
Well, it depends. As the bill is written, if employers maintain their headcount for 8 weeks once they receive the funds, 100% of the loan can be forgiven.
The loan can be forgiven only if the funds are used for:
- Payroll costs.
- Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).
- Any payment on any covered rent obligation.
- Any covered utility payment.
Covered, in this regard, simply means the liability was present on Feb. 15th
After receiving the funds, an 8-week clock starts to use them on qualifying expenses to keep your business afloat and employees paid. The amount of the loan that is eligible for forgiveness decreases if you end up having to decrease your headcount. 100% of your loan is forgiven to the extent you keep all of your employees employed during the 8-week period.
The best advice I can give is to contact your local bank and ask for a meeting. More guidance will be provided to lenders over the next several days.
What happens to the unforgiven portion of my loan?
If, after 8 weeks, you still have funds left over, you then start a 2-year clock with your bank to pay off the loan. Interest and principal on the loan are deferred for the first 6 months of the loan (deferred, not forgiven), and the interest rates are capped at 0.5%. Another great piece of news is that the loan is fully guaranteed by the government, not by individual owners. So, there’s no personal tax returns or personal collateral needed when applying for the loan.
Tax implications of the stimulus bill
If your business qualifies to have a portion, or all, of the loan forgiven, the amount forgiven is NOT taxable. Yes, you read that right. Businesses that use these funds to keep their business afloat during this pandemic will essentially be able to recognize a tax-free sale for their business.
The bill states that a certification is required by each loan applicant stating that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments.
In other words, don’t try to play the government. They normally win. Request the amount of money you need and spend it on activities to keep your employees paid and your business afloat. The more money that is abused is less money for those in need.
What if I’m a sole proprietor or LLC? Do I qualify for the loan and/or loan forgiveness?
Absolutely. Even businesses that have been operating for less than a year are eligible; however, you will have to annualize it based on the months you have been operating.
As the bill is written, “payroll costs” include the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period.
This means the amounts you paid yourself (as long as they are reported as net earnings from self-employment) and independent contractors will be eligible for the loan and loan forgiveness.
Furthermore, as long as obligations related to rent, mortgage, or utilities were present and being paid by your business prior to February 15, 2020, as an eligible loan recipient, your loan amount could be forgiven.
How do I calculate my loan amount as a sole proprietor or LLC?
So far nothing has been set in stone regarding calculating the loan amount for businesses without payroll records. However, it will be based on the obligations you had prior to Feb 15th, so start rounding up invoices and receipts for the eligible costs mentioned above.
What if my business doesn’t need additional cash, but is still affected by the virus?
The bill also states that employers and self-employed individuals are able to defer payment of the employer share of the Social Security tax that they otherwise are responsible for reporting and paying to the federal government along with normal payroll filings. The provision requires that the employer tax deferred in 2020 be paid over the following 2 years. Half of the balance is require to be paid by December 31, 2021 and the other half by December 31, 2022.
Additionally, employers subject to closure or experiencing greater than 50% reduction in quarterly receipts are eligible for a refundable payroll tax credit for 50% of wages paid to employees who are furloughed or facing reduced hours.
If a business applies for and is granted assistance through the Paycheck Protection Program, however, they will not qualify for the above deferral or credit. Speak with your accountant about which benefit is better for your business.
Additional provisions provided by the CARES Act
Employers are now able to repay student loans for employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. Normally, these payments would be considered fringe benefits and are added to the employee’s W2. If you already offer this benefit or have been thinking about it, the provision is good or all payments from now until January 1, 2021.
Currently, businesses have a limit on how much they are allowed to report as net operating losses on their tax returns. Plus, these losses cannot be carried back to reduce income in a prior tax year. The provision allows net operating losses that occurred in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow a net operating loss (NOL) to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.
The provision also modifies the loss limitation applicable to pass-through businesses and sole proprietors. Currently owners of these business types are only allowed to claim a loss equal to their individual basis in the business. This provision allows these business types to access critical cash flow, by utilizing the excess losses to maintain operations and payroll for their employees.
Section 2307 of the bill corrects an error in the Tax Cuts and Jobs Act that allows businesses to write off costs associated with improving facilities instead of having to depreciate those improvements over their useful life. Not only is this applicable in the current year, but you can also amend a prior years’ tax return to fully expense an improvement to increase cash flow and continue to improve and invest in your business.
There are additional business provisions around paid sick leave, child sick leave, unemployment assistance, and employer sponsored health care programs. If these situations apply to your business, please reach out for further information.
- Call your bank and make an appointment to discuss loan options.
- Apply online here for COVID-19 relief – When asked about “Emergency advance”, check the box and enter your bank info. You could qualify for a grant up to $10,000 that does not need to be repaid under any circumstance as long as its used for eligible costs as discussed above.
- Amend prior year tax returns and utilize your net operating loss (NOL) balance.
Finally, I imagine you—like all of us—are anxious, and made more so by our necessary physical isolation. Please know you are part of a larger community of people who believe that another, better world is possible. If we all hold that vision together, we can get there, one day at a time.
Sending love and strength to the entire chiropractic community during these difficult times.