The CARES Act: How to Apply for A Disaster Loan

Background. On Friday, March 27, 2020, the President enacted The Coronavirus Aid, Relief, and Economic Security Act, also known by its acronym, the CARES Act. It provides much relief for businesses through loans, job credits, and tax deductions. It also provides relief to individuals through personal tax rebates, easing access to retirement funds, and tax deductions. See our full write-up here.

One of the most interesting facets of the relief bill for businesses is the ability to get a “paycheck protection loan” under SBA Section 7(a), designed for employers with under 500 employees. The Act provides about $350 billion for this purpose. The loan is administered by your local bank but guaranteed by the SBA. All small employers are eligible, including nonprofits and sole proprietors.

The basic rules.

To determine the amount that a business is eligible to borrow under this program, figure the average monthly payments for payroll over the prior 12 months, and multiply by 2.5. In other words, the business can borrow 2-1/2 months of payroll cost. Payroll cost, for this computation, is the total compensation paid to anyone up to $100,000 a year (that includes their group health and retirement benefits). The maximum to be borrowed cannot exceed $10 million.

The loan terms are up to 10 years with 4% interest. No personal guarantees are required, and the standard SBA fees are waived. Repayment can be deferred for 6 to 12 months.

This is key – the loan is administered by your local bank that is approved and guaranteed by the SBA. Pay careful attention to their rules and qualifications. This article is a summary and does not include every important rule.

The bonus! 

The loans can be forgiven tax-free to the extent they are used to make the following payments in the 8-week period beginning on the date of the loan for –

  1. Payroll
  2. Mortgage interest
  3. Rent
  4. Certain utilities

Documentation for qualifying use is given to the lender for processing. Forgiveness is reduced if the employer –

  1. Reduces its workforce during the 8-week covered period as compared to the same period in 2019, or
  2. Reduces the salary paid to an employee who earned less than $100,000 in annual salary by more than 25%.

Consider this example.

A business applies for a payroll protection loan on 5/1/2020. It has $1.5 million of eligible payroll costs in the prior 12 months (excluding those payments in excess of $100,000 per person per year). That’s $125,000 per month on average. The business is entitled to a payroll protection loan of 2.5 months of that, or $312,500.

The business spends $250,000 on payroll, mortgage interest, and utilities in the following 8 weeks (5/1/2020 to 6/26/2020). It does not reduce its workforce or reduce the employees’ pay. It is eligible for $250,000 of tax-free loan forgiveness. The business owes the balance of $62,500 but may qualify for 6 to 12 months of deferral on those payments.

How to apply for these loans.

  1. Contact your local bank and ask if they are an approved SBA Section 7(a) lender. If they are not approved, you will need to use one who is.
  2. Tell the selected banker that you want to apply for one of these loans.
  3. Secretary Mnuchin has projected that the loan proceeds could be disbursed as early as one week after the enactment of the law.
  4. Find more information here https://www.sba.gov/funding-programs/disaster-assistance

What if you don’t qualify for an SBA 7(a) loan?

Consider applying for a Section 7(b) loan. Under the CARES Act, the loan will not qualify for tax-free forgiveness, but the government will pay the first six months of interest and principal.

Also, the Act creates an emergency grant of up to $10,000 while your Section 7(b) loan is being processed. This advance is not required to be repaid, even if your loan application is denied.

R. Milton Howell III, CPA, CSEP
R. Milton Howell III, CPA, CSEP

Milton is experienced in taxation issues including, tax research for both open and closed transactions, structuring complex tax transactions, estate and income tax planning, and representing clients before tax authorities. As DMJ’s Director of Tax Services, Milton regularly writes and reviews articles in local, regional, and national publications on tax matters and spends significant time monitoring current tax issues and legislation.

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