Cuts to Payroll Affecting Loan Forgiveness
Business owners are facing difficult decisions to keep their business afloat, they need to plan about every option before making a rash decision. With the PPP (Paycheck Protection Program), an expansion of the existing 7(a) loan being recently passed by the CARES Act, has allocated $350 billion to help out millions of business owners out there who are trying to keep everyone afloat along with their business.
Small businesses can borrow 250% of their average monthly payroll expenses during the one year before the loan is taken, which is up to $10 million. How much of the loan can business owners be forgiven? Principal amounts used for payroll, mortgage interest, rent, and utilities payments during eight weeks (starting with the loan origination date) between Feb. 15th, 2020 and Jun. 30th. 2020, will be forgiven. So if the full principal is forgiven, then you're not liable for the interest accrued over that time.
However the whole point of the PPP is to help keep employees at their current salary, and if their salary has been cut or they've been laid off then the loan forgiveness amount will be drastically reduced. To be eligible for 100 percent of the loan forgiveness, you would have to keep all of your employees.
For example, if last year you had 5 employees and now this year you have four. Your loan forgiveness will be reduced by 20 percent. If an employee's annual salary has been reduced by more than 25 percent, then your loan forgiveness will also be reduced by the amount of more than 25 percent.
If you need help or are still confused, please contact us today!