President Trump signed the Coronavirus Aid, Relief, and Economic Security Act “CARES Act” into law which provides relief funds to help stimulate the economy from the impact of the COVID-19 pandemic. Small businesses that would like to apply for a loan with reduced interest and potential forgiveness should apply through the Economic Injury Disaster Loan program on the Small Business Association website. Below are some of the frequent issues and questions we have received regarding the act. Please make sure you consult directly with your tax attorney regarding any specific questions related to your business. You can speak with a Denver IRS tax attorney by contacting The McGuire Law Firm.
Who is eligible for the Coronavirus disaster program loan and what is considered a small business?
Small businesses in every state are eligible to apply for a low interest loan due to the impact of Coronavirus. According to the CARES Act, business with fewer than 500 employees are eligible for loans under 7(a) of the Small Business Act. Sole proprietors, independent contractors, and other self-employed individuals are eligible to received covered loans under the CARES Act.
What is the maximum loan amount?
The maximum dollar amount for business loans under the CARES act is the lesser $10,000,000 or the following formula. Take the average monthly payments for payroll costs for the year prior to the date the loan is made multiplied by 2.5 and add the amount of outstanding loans made during the period from January 31, 2020 and ending on the date the loans are eligible for refinancing. Note, this formula is slightly different for seasonal businesses, so unless an election is made, these seasonal business use payroll costs averages for the 12-week period beginning February 15, 2019.
How may I spend my small business loan from the CARES Act?
According to the CARES Act Sec. 1102, loans provided by the federal government under the stimulus package may be used for payroll, employee salaries, mortgage interest payments, rent, utilities, and interest on other debt obligations that were incurred before the covered period. Note, the covered period is February 15, 2020 and ends on June 30, 2020.
Will my loan be forgiven under Section 1105 of the CARES Act?
Section 1106(b) of the CARES Act provides for forgiveness of indebtedness for several costs and payments including payroll, mortgage interest, covered rent obligation payments and utilities.
Typically, whenever a loan is forgiven, it is considered as relief of indebtedness and will be included as gross income for that taxable year. Section 1106(c) notes that the forgiven debt for purposes of the CARES Act specifically will be considered canceled indebtedness by lenders but Section 1106(i) will exclude the relief from gross income for tax purposes.
Note, the amount of loan forgiveness may be reduced by certain reductions in salaries or layoffs so maintaining the number of employees helps insure maximum loan potential from the Act.
What is considered a payroll cost?
Payroll costs are defined in the CARES Act through the Paycheck Protection Program and include payments to employees that are salaries, wages, commissions or other similar compensation, payment for cash tips, payment for vacation/medical/sick leave, group health care payments and insurance premiums, retirement benefit payments, and payments of state/local tax assessed based on employee compensation. Similarly, payroll costs
for sole proprietors include wages, income and net earnings from self-employment that does not exceed $100,000 for 1 year as prorated during the covered period by the Act.
How do I apply for the small business loan from the CARES Act?
First, download, the Business Loan Application (Form 5), the Home or Sole Proprietor Loan Application (SBA Form 5C), and the Economic Injury Disaster Loan Supporting Information (Form P-019) from the SBA website. Depending on the specific business, there may be additional forms required but a Disaster Assistance loan officer will request these.
For all non-profit businesses, in addition to the Disaster Business Loan application, you need to file the Tax Information Authorization (IRS Form 4506T). Also, attach a complete copy of the most recent Federal Income Tax return including all schedules for the business. Attach a Personal Financial Statement (SBA Form 413) for each partner, managing member, and principal owner owning 20% or more of the business. Small business also should include a Schedule of Liabilities listing all fixed debts (SBA Form 2202).
For sole proprietorships, you need to file SBA Form 5C and IRS Form 4506T.
Next, fill out the forms and upload the completed forms to the SBA website, email them to email@example.com, or mail them to the following address:
U.S. Small Business Administration
Processing and Disbursement Center
14925 Kingsport Rd.
Ft. Worth, TX 76155-2243
You can contact The McGuire Law Firm to speak directly with a Denver IRS tax attorney or Denver business attorney regarding your businesses needs and the taxation issues related to the CARE Act. We wish everyone the best during the troubling time.