Late Wednesday, the US Senate voted unanimously to advance “Phase Three” as part of the economic relief effort for COVID-19 emergency. The legislation, entitled the “Coronavirus Aid, Relief, and Economic Security Act” (the CARES Act), follows intense negotiations over the last week. Its estimated $2+ trillion price includes: immediate cash relief for individual citizens; a broad lending program for small business; extraordinary public health spending to confront coronavirus; and, targeted relief for specific industries hit hard by the pandemic.
The CARES Act is 880 pages long, consisting of several different Divisions and Titles. We’re still digesting the complex legislation and remind you that it has not yet been signed into law. It still must get through the House of Representatives. Although not yet law, we believe it is important to for our clients to be at the front end of the opportunities and changes that may become law any day.
Keeping American Workers Paid and Employed;
A business loan that may turn into a grant.
For this post, we are focusing on the section Act section titled “Keeping American Workers Paid and Employed.” While certainly of importance to wage-earners, this discussion will be of greatest interest to our business clients and friends with businesses. These provisions could provide some substantial help to small businesses.
Under the program small businesses (those with fewer than 500 employees) can obtain a loan to help cover payroll costs for the covered period of February 15, 2020 through June 30, 2020. Eligible payroll costs include payroll taxes, workers’ compensation insurance, etc.
How much can you ask for?
The maximum loan available is 2.5 times the average total monthly payroll costs during the most recent 12-month period. Special rules exist for new businesses without this history. For example, if your business payroll cost averages $150,000 per month you can request a loan under this provision up to $375,000. The idea being to provide businesses with about 10 weeks of working capital to get to the other side of the storm.
When a loan is a gift,
how to turn this loan into a grant you don’t have to repay.
The unique and game-changing twist on this loan is that by using the loan proceeds for eligible expenses, keeping your employee headcount about the same and not dropping your employee wages by more than 25% you can have the loan forgiven. Yes, you read correctly, used in the way intended by the legislation you may get complete loan forgiveness.
There are rules and benchmarks that your business must meet to have the loan forgiven, but the bar is not set very high. If you’re a business owner – whether you are a current Scholl & Company client or not – and would like more information call us at (831) 758-5966 and we’ll help you understand what options may be available to you.
And a special “no worries” provision is available for you if you don’t get the entire loan amount forgiven.
What if you fall short of qualifying to have the entire loan amount forgiven? No worries there, you’ll have up to 10 years to repay the loan at only 4% interest.
And wait, there’s more…
With almost any other government guaranteed loan (SBA, FDA, FHA, etc.) the business owner must personally guarantee the loan and provide collateral. That is, thankfully, not the case here. This loan is a nonrecourse loan and requires no personal financial exposure.
Do you need even more incentive?
As it is currently written in the Senate-passed bill, the cancellation of the debt is specifically excluded from your business taxable income. Normally, canceled debt creates taxable income.
It is a rapidly changing world.
While this discussion is based on the Senate-passed legislation and subject to change, possibly substantial change, we believe it is important you have as much lead time as possible to evaluate your options and opportunities to continue with your business success.
We are here to help.
There are plenty of details you will need to evaluate and processes to follow to take advantage of this loan option. We are passionate about standing shoulder-to-shoulder with our clients as a team. If you’re in need of assistance just give us a call at (831) 758-5966 or email help@schollcpa.com.