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5 Quick Tips On Maxing Out Loan Forgiveness

by: attorney Phillip B. Rarick

You can always count on the Americans to do the right thing – after they’ve tried everything else. –   Winston Churchill.

Millions of small business owners and self-employed have filed for loans under the  Paycheck Protection Program because part or all of the loan can be forgiven if you retain your employees and maintain their salary levels.

Okay, we know, as of this writing, millions have applied and few have received!

But assuming SBA gets through this current bottle-neck and the funding starts to flow, then your focus will be on maxing out the amount that can be forgiven.

The SBA will forgive the part of your loan that covers the first eight weeks of payroll, mortgage interest, rent, and utility payments immediately after you receive funding.  You must use 75% of the borrowed loan for payroll costs; only 25% can be for mortgage interest, rent, and utilities.

The SBA will not forgive the portion of the loan used for other expenses; this part of the loan will be maintained at a 2 year loan at 1% interest rate.  Loan payments are deferred for the first 6 months of the loan  although interest will accrue during this time.

So even if part of your loan is not forgiven, the loan terms are exceptionally favorable for you – maybe this explains why many banks have been lying low in the grass and not soliciting applications because they simply do not want to take on a boat-load of low interest rate loans or short term loans that are quickly forgiven.

So here are 5 quick tips for maxing out your loan forgiveness:

  1. If possible, do not reduce the number of full time employees during the 8 week period. The SBA will do a Head Count Analysis for this period and reduce the forgivable portion of your loan according to a head count formula.

Note #1:  The CARES Act allows the business to remedy the forgiveness amount by June 30, 2020, but it is still unclear how mechanically you do this.  Expect further SBA guidance on this point.

  1.   If possible, do not reduce employee salaries during the 8 week period.  The SBA will do a Wage Analysis and reduce the forgivable portion according to their wage analysis formula for any such reduction.  But see Note #1 above.
  2.  Keep the loan funds in a separate bank account and only withdraw to cover eligible expenses.
  3.   Keep a separate expense account to accumulate all eligible costs.
  4.    Document all eligible costs.

For a deep dive into the tax benefits for small business under the CARES act I highly recommend for other attorneys and  professional advisors the recent webinar by estate tax lawyer, super-guru and friend Alan Gassman: Update On The Paycheck Protection Act Loan Rules.

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