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What Small Businesses Should Know About the CARES Act and the Paycheck Protection Program

The CARES Act is short for the Coronavirus Aid, Relief, and Economic Security Act and is essentially a stimulus package to help individuals, families, and small businesses through these uncertain times. One big aspect of the CARES Act is the Paycheck Protection Program, created specifically to provide aid to small businesses, and help small businesses retain as many of their employees as possible.

So, what is the Paycheck Protection Program? The Paycheck Protection Program is a Small Business Association 7(a) loan available to small employers, self-employed individuals, and independent contractors. While SBA 7(a) loans have always been around, the CARES Act modified this loan to have the potential for loan forgiveness.

Eligibility: Small businesses and businesses with not more than 500 employees.

Loan Amount: 2.5 * Average Total Monthly Payroll Costs, not to exceed $10 million. Average Total Monthly Payroll Costs can consist of compensation, payment for vacation, health insurance premiums, payment of retirement benefits, and payment of state and local tax (not FICA taxes).

No Collateral Requirement and No Personal Guarantee Needed

              Term and Interest: 2 years, 1%

Use of Loan Proceeds: Payroll Costs, Utilities, Rent, and Mortgage Interests

Overall, this loan has the potential to make a huge difference to many companies during these unprecedented times! However, the most important part of this program is that the loan can be forgiven.

How do I ensure my loan is forgiven? The maximum amount eligible for loan forgiveness is the sum of payroll costs, rent, utilities, and payments on mortgage interest in the 8 weeks following origination of the loan. While the exact requirements for proving the loan was used in these ways is still unclear, it is likely you will need to provide some kind of documentation verifying payments in the 8 weeks after receiving the loan.

It’s also important to note that the amount of your loan that gets forgiven can be reduced by laying off employees and potentially by reductions in employee salaries. Lastly, to be eligible for loan forgiveness you must spend 75% of the loan amount on payroll costs (the remaining 25% on rent, mortgage interest, and utilities).

How do I apply? You must apply through an eligible 7(a) bank, and you can check if your bank is an eligible 7(a) bank through the Small Business Association website. Before applying, you will likely want to prepare payroll documentation and the loan application. Also, it’s important to note, that all owners of 20% or more of equity must sign the application.

It’s easy to see that the Paycheck Protection Program has the potential to be the light in somewhat dark times for many companies and their employees. However, what is best for each specific company is completely dependent on that company’s situation. If you’d like to discuss what is best for your specific situation, please don’t hesitate to reach out to us at pwa@keatinginc.com.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of Raymond James, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Content provided herein is based on our interpretation of the Care Act Stimulus and is not intended to be legal advice or provide a tax opinion. This document is a summary only and not meant to represent all provisions within the Care Act Stimulus.