The COVID-19 pandemic has brought economic distress all over the globe. From Fortune 500 to small businesses, to the government – all are hit. These are testing times, but the number one pressure is on those who just took a wild leap and got hit by the spread of Coronavirus. Small businesses have been sweating, and the reason for their number one worry is payroll. Whether it’s a sole proprietor or a company with 500 employees – most have already stopped paying themselves, laid-off employees, or cut working hours to manage things swiftly.
Well, if you could feel the pain while reading this, then you should go ahead and thank the government for the newly introduced aid program offered for small businesses – The Paycheck Protection Program (PPP), Coronavirus Stimulus Loan, or the PPP Loan. The same got signed into law on March 27, 2020, and here is all you need to know about it. Let’s have a look.
How do you know if you qualify?
If you own a small business with fewer than 500 employees and were functional on or before February 15, 2020, then you qualify. Your company could be an S Corp, C Corp, LLC, sole proprietorship, or an independent contractor. This also includes some nonprofits, tribal groups, and veteran groups. Just the point in highlight is that you would need to prove that your business has been economically affected or that the economic uncertainty makes the loan necessary to help function your business.
How much loan can PPP get you?
The PPP can get you $10,000, but this would depend on your Payroll Costs. The amount that you would qualify for would be equal to 2.5 times your average monthly payroll costs. This cost would be calculated, taking into account the payroll costs of the last 12 months. Therefore, it is a simple calculation; you take your average monthly payroll cost and multiply it by 2.5 – the resultant will be the qualifying amount off your PPP loan.
What can a PPP loan be used for?
The PPP loan can be used to take care of the payroll costs of your employees and yourself. The amount can also be used for rent, mortgage obligations, utilities, and other debt obligations you may have relating to your business.
What is the rate of interest?
The PPP loan is crafted to support you, and the interest rate is half a percent. Therefore, you can say that it’s an interest-free loan. Though the passed bill allowed for a maximum of 4% but the U.S. Treasury states that the maximum rate would be 0.5%. The rate here could certainly fluctuate, but we know for sure it won’t exceed 4%.
What is the mode to payback?
The U.S. Treasury has specified the loan term to be two years with deferred payments for the first six months. There is no prepayment penalty, and hence you can repay or get the loan forgiven earlier.
Does the loan require any security collateral or personal guarantee?
No, the loan does not ask for any security collateral or a personal guarantee for processing it.
How to get the PPP Loan forgiven?
This is the main deal about the whole Paycheck Protection Program. There is a loan forgiveness provision that accompanies the PPP Loan, and you can be eligible for the amounts you spend in the next eight weeks after receiving the loan on certain qualifying expenses. Such qualifying expenses include payroll costs, rent, interest on mortgage, debt, and utilities of the business.
A point in highlight is that if the number of your full-time employees depletes over the time, which in turn reduces your payroll costs by 25% or more, then the amount of loan eligible for forgiveness will be reduced accordingly.
The issuing bank will decide the loan forgiveness amount based on the above criteria. You can request forgiveness by supporting it with proof. Further, the bank will have 60 days to either accept or reject your request.
Will your business get Forgiveness of Debt Income via a 1099-C?
This is an intriguing question. If you will have to pay taxes on the amount of debt forgiven on loan? The answer is a big NO! The law entails explicitly facts that the forgiven PPP Loans will not be considered a forgiveness of debt income and will not be filed through 1099-C.
Would you still qualify if you already have an SBA loan?
Yes, you can still avail of the PPP Loan, even if you have one or more ongoing SBA loans. Just the total number of loans taken by you shall not exceed the maximum number of loans given by the SBA.
What is the SBA Economic Injury Disaster Loans (EIDL)?
This is another good loan option given by the SBA to support small businesses. The amount of loan here goes up to $2 million per applicant and is given to companies that have been impacted by the COVID-19 pandemic.
If you have more substantial payroll costs than what a PPP can cover, then you can consider taking an EIDL. EIDL has low rates, longer repayment terms, and can be used for multiple purposes in comparison to the PPP loans. However, the EIDL does not offer any loan forgiveness program, but the benefit here is a quick advance of $10,000, which does not need to be repaid by you and can be availed after three days of your application for EIDL.
Let us take a quick look at how a PPP would work out for you.
Let us assume that your total payroll costs for the last 12 months are $3,60,000, which makes your average payroll cost to be $30,000. If you multiply the average cost, i.e., $30,000 by 2.5, you get the loan amount you would be eligible for, which sum up to be $75,000.
Now, let’s imagine the scenario where over the next eight weeks, you receive the loan and use $60,000 for payroll costs, $10,000 for rent, and $7000 for utilities. In this case, you would have a total qualifying expense of $77,000 for forgiveness. Here, the beauty is that since your qualifying expense is more than the amount of loan, you would be eligible for forgiveness of the entire sum. Sounds more than perfect, right?
What should be the future course of action for you or the bottom line of this blog?
What the MyTaxFiler team suggests is that you apply early on because there are about 30 million small businesses in the U.S. and only $350 million allocated for the Paycheck Protection Program. It is practical to assume that the amount would run out soon, and therefore you shall make the most of it and seek support for your business.
MyTaxFiler suggests that you apply with an FDIC-insured bank for the PPP since the non-banks are taking applications just to broker the information to banks and get some fee in return. You shall get in touch with your company banker with whom you have established a relationship because sources have it that banks are working with existing customers first. If in case, you do not have an established relationship in a bank, then you shall go ahead and approach a small community bank that specializes in SBA loans and is eager to get more local business.
The best thing about the loan is the loan forgiveness clause, and also the amount here would help you pay your payroll and other business costs and keep your business together in these harsh and testing times. Going the extra mile for your business and team members now will definitely bear fruits and enable you to emerge out of this chaos as a more energetic and closely-knit team with high loyalty and morale to bring the business to its rightful form soon. Please feel free to get in touch with the MyTaxFiler expert at [email protected] to know more about the PPP or the EIDL and make a smart decision when the time is right.
