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How to Legally Comply With the CARES Act to Achieve Loan Forgiveness

Congress passed the CARES Act as a response to the COVID-19 pandemic. This bill, among other things, includes a provision titled Paycheck Protection Program (PPP). This provision allows small business owners to take small business administration (SBA) loans to help them cover expenses related to the COVID-19 pandemic.

What Should I Do to Get My Loans Forgiven?

This program contains a provision that allows small businesses to get loan forgiveness up to the principal amount of the loan for some expenses. The expenses should be made within the covered period of this Act. The first eight weeks that pass after taking the loan is generally considered the covered period.

So, if you are a small business owner, you may be able to get your loans forgiven for the expenses paid for eight weeks beginning from when you took the loan. These expenses include the following:

  • Payroll costs: These can include salary, health care costs, paid leave time and retirement costs for employees
  • Mortgage interests
  • Utility and rent

You should note, however, that the following will not qualify as payroll costs for loan forgiveness:

  • If you pay an employee an annual salary of more than $100,000
  • Payments to an employee who is working primarily outside the U.S
  • Family and sick leave wages for which a credit is allowed (sections 7001 and 7003 of the Families First Coronavirus Response Act)

You don't need to have collateral or a personal guarantee to get this loan. But you must certify, in good faith, that you need the loan because of the circumstances caused by COVID-19.

Do You Qualify for This Loan?

In order to qualify for the Small Business Administration loan, you cannot have more than 500 employees. Also, your principal place of business must be in the United States.

How Do I Apply for Loan Forgiveness?

Before you can get a loan forgiven, you have to submit an application to the lender. The application should include:

  • Verification of the number of full-time employees along with their pay rates
  • Proof of other payments like utility and rent

The lender has 60 days after they receive your application to make a decision on your request. If your application is approved, the small business administration must give the money and interest to the lender within 90 days.

Maximizing Your Loan Forgiveness

This Act was passed to encourage employers to continue paying their employees. Thus, for you to get the full amount of forgiveness, you need to at least spend 75% of the loan on payroll costs.

Also, make sure to have a copy of all the required documents that verify your eligibility. Submitting all the required documents to the lender on time is also helpful to ensure the timely processing of your claim.

What Are the Tax Implications of This Loan?

The money that was forgiven will not count as gross income for federal tax purposes. However, note that you will have to pay back the money that is not forgiven as it will be considered a regular loan. You can pay this money back within ten years at an interest rate not exceeding 4%.

Additional Resources

Still Have Questions? Speak to an Attorney

The Paycheck Protection Program is a great way to ensure your business stays afloat during this unprecedented pandemic. But there are specific steps you have to take to ensure your loans will be forgiven. If you are confused about the process or if you need more information, speak to a small business attorney near you.

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