This advisory is very preliminary and will be followed by more detailed advisories, but in the meantime you should be aware of what could be a game-changer for many of you.
The CARES Act provides that businesses with fewer than 500 employees will have access to nearly $350 billion in “paycheck protection loans” loans during the “covered period,” which runs from February 15, 2020 through June 30, 2020. The loans are generally limited to the lesser of your average monthly “payroll costs” for the previous year, or $10 million. “Payroll costs” is a defined term, and is quite broad, but will not include the compensation of any employee in excess of an annual salary of $100,000.
The loans will have a maximum maturity of 10 years and an interest rate not to exceed 4%. Proceeds may be used to cover payroll, mortgage payments, rent, utilities, and any other debt service requirements. Most fees are waived under the Small Business Act, and no personal guarantee is required by the business owner.
Here is the kicker: A separate section of the CARES Act provides that a portion of these loans can be forgiven on a tax-free basis. The amount to be forgiven is the sum of the following payments made by the borrower during the 8 weeks starting on the date the loan is made:
- payroll costs (as defined)
- mortgage interest
- certain utility payments.
There will be a procedure through which borrowers can submit applications for forgiveness to the lender, providing appropriate documentation of how the loan proceeds were used.
There are a few devils in the details: The amount of the loan forgiveness will be reduced if you:
- Reduce your workforce during the 8-week covered period when compared to other periods in either 2019 or 2020, or
- Reduce the salary or wages paid to an employee who had earned less than $100,000 in annualized salary by more than 25% during the covered period.
This reduction can be avoided, however, if you rehire or increase the employee’s pay within an allotted time period.
Source: McCarthy & Company