The stimulus bill passed by Congress has set aside $377 billion targeted towards small businesses. The most significant part of this funding will provide forgivable loans to small businesses in order to help them with their payroll and other essential costs.
If you’re a small business owner trying to navigate through the pandemic, this money will be a significant help. So how can you access it? Here are the answers to your most important questions, based on what I know so far. The information here is subject to change but I’ll do my best to keep it updated and the advice given is my own.
If you’re an independent contractor (i.e. work in a hair salon, etc.) the stimulus bill passed Friday expanded unemployment and now covers independent contractors and freelancers. You may very be eligible so you should consider applying to your state. You need to be officially furloughed or laid off by your company to be eligible or provide proof that your business has been disabled by the pandemic. Be patient because most states haven’t caught up with the new rules.
Are these loans?
Yes…but with some forgiveness. These loans are being made through the SBA’s existing Section 7(a) program. The loan amounts can be used for all your operating expenses, including rent, payroll, administrative and production costs. It’s also been expanded to include mortgage and paid sick leave.
What is being forgiven?
The key part of this program is that the portion of the loans that you use to cover your payroll costs (which includes time off) as well as rent payments, mortgage obligations and utilities incurred between February 15 and June 30 will eligible for forgiveness. If you need more of these costs forgiven you would have to apply for an additional loan. But in the end it’s a huge help because the government is funding these expenses for you with no payback required.
What is the process for getting forgiveness?
That is still unclear. See my concerns at the end of this article.
How long does this program last?
Section 7(a) loans under this program can be offered through December 31, 2020. However, the forgiveness portion must be applied for by June 30th. I admit I’m not completely clear on this and am awaiting further documentation from the SBA. My advice is to confirm this with your banker (see below).
Where do I get this money?
The funding is made through Small Business Administration member banks. Unlike the Economic Injury Disaster Loans, which were made available a few weeks ago and offer low interest loans to small businesses directly from the SBA, this program is being handled by its network of member banks. If for some reason the link isn’t working then just Google “SBA Bank” or similar search words with your location.
How much can I borrow?
You can borrow up to 2.5 times the amount of your monthly payroll up to a newly established maximum of $10 million
What are the terms?
They may vary, but interest rates are maximized at 4 percent. Borrowers can defer payments from six months to a year.
What records do I need?
You will need to provide documentation supporting your payroll costs during this period. That would include your quarterly payroll tax returns you file with both the federal and state governments and underlying payroll registers and accounting records. If you’re looking to get forgiveness for mortgage, rent and utility payments then invoices, proof of payment, statements and receipts will be needed so make sure you’re keeping good records.
What if I don’t have a great credit history?
The banks will be making the ultimate lending decisions, but I’m told that the SBA is asking them to relax their requirements in order to make these loans available to as many as possible.
What if I lay people off?
The loan is targeted towards businesses that keep their people employed during this period, rather than having them collect unemployment. The amount of the loan eligible for forgiveness will be reduced proportionally by the number of employees laid off during this period relative to the borrower’s prior employment levels.
Is there a limit?
Yes, employee compensation above $100,000 annualized will not be forgiven under this legislation. It is still unclear if that means the entire salary or just that portion above $100,000. That is a question you will need to confirm with your banker.
As a business owner, will my compensation be forgiven too?
Yes, assuming you’re on the payroll and receiving a W-2 from the business. But it would be subject to the limitations above.
I run a non-profit. Am I still eligible for this program?
Are there any additional fees?
No, the program waives fees for both borrowers and lenders.
Will my business be taxed on the amounts forgiven?
No. Forgiveness amounts will not be included in your company’s taxable income.
What should I be doing right now?
You should be reaching out to your banker and getting things rolling. I believe it will take weeks for both the SBA and their member banks to get fully up to speed with the program. Also, social distancing means many key people in the process could be working from home and that could further delay the process. The sooner you get things started, the better.
Should I have any concerns?
Yes. I’m recommending to my clients that before committing to the Section 7(a) make sure that the new loan forgiveness provisions included in the stimulus are fully stipulated in the loan documents. The process for getting forgiveness is still unclear and you want to be absolutely sure you will not be on the hook for these funds after June 30.
Gene Marks CPA
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