Trying to start a business or take one to the next level can be expensive. You might be increasing your staffing, starting a marketing campaign or developing a new product. Self-funding is often recommended, but that isn’t a possibility for everyone.

Getting a business loan from your bank is certainly a possibility, but there are other funding sources available. So before you settle on where to obtain your funding, here are a few tips to keep in mind.

1. Know the difference between debt financing and equity financing

These two terms get thrown around a lot when discussing fundraising. Both are viable options, but they function very differently. 

Debt financing is, at its core, just obtaining funds that you have to eventually pay back in addition to interest. Those funds can come in the form of a bank loan, line of credit or a loan from private investors. It’s generally considered to be a lower-risk, lower-reward strategy for investors. While the borrower is required to pay back the funds, they are not giving up an interest in their business.

With equity financing, on the other hand, the business is not obligated to pay back the money raised. Instead, the lender is given equity in the business. If a company grows by a huge amount and then sells at a massive profit, the lender could see a big payout. 

Because equity investors are, well, invested in your success, you can sometimes get assistance apart from funding. Angel investors may offer mentorship or relationship introductions to help their investment pay off. Debt investors are less inclined to do this because they will theoretically get paid whether your business fails or succeeds.

Businesses looking to raise funds are more likely to get them via debt financing, but they will need to pay them back — and then some. With equity financing, a business owner has peace of mind knowing that the raised funds won’t have to be repaid if the business fails. But because that makes this approach riskier for investors, such funding is harder to obtain.

So consider carefully what’s most important to you and your business’ success. If you want to maintain complete control of your company, debt financing might be the better direction to take. If you’re looking to gain business relationships and reduce risks of failure, look into equity financing. 

2. Consider crowdfunding as a short-term strategy 

Crowdfunding isn’t a new thing, but the internet kicked it into high gear for business funding. When crowdfunding, businesses typically offer special deals or equity in exchange for funding. Kickstarter is probably the most well-known site, but there are many to choose from, so make sure to select the best one for you. You’ll want to select your site based on what compensation you’re offering and whether you want a general or niche-specific platform.

Unlike securing a loan through a bank, there’s a certain amount of marketing required with crowdfunding. Instead of trying to impress a bank manager with numbers and potential profits, you need to pitch something to excite investors. 

Before attempting crowdfunding, determine your target audience and which crowdfunding site will be the most visible to that crowd. You’ll also want to consider what you want to offer in return for funds. 

Rewards-based compensation is pretty straightforward. If you’re offering equity, though, you can’t just do whatever you want. You will need to comply with state and federal security filing regulations. Not only that, but you’re required to provide details and reports on the health of the business. So before you offer equity, make sure your deal is compliant.

For startups that are developing or rolling out a new product, crowdfunding is a viable option for raising capital. While crowdfunding might be appealing as a short-term strategy, you’ll also want something more reliable for the long term. Taking out a line of credit for when you need a quick funds injection is going to provide reliable cash access for the long term.

3. Pursue grants

Most of the time when you hear about grants, your mind probably goes to education or science. But grants can extend to a variety of activities, including nonprofits, public building upgrades and even small businesses. If you’re a small business or startup, you should investigate whether there are any grants you qualify for.

On a federal level, you can consult resources such as grants.gov. But make sure to also check at your local and state level. Sometimes cities or states will set aside funds to boost local commerce and/or bring new businesses to the area. With states, it’s often industry-specific. For example, Missouri tends to offer a lot of agricultural grants. By comparison, California is more likely to make grants available to tech and research industries. 

So if you have a small business, do some research to see whether you satisfy the application requirements for local, state or federal grants. Applying for grants typically requires a great deal of paperwork and tedious documentation. Given that grants do not have to be repaid, however, investing that time in the application process could prove to be worthwhile.

When you need to raise money, it’s tempting to jump on the first funding opportunity that arises. But before you sign on the dotted line, you’ll need to determine whether the way you’re raising money supports your goals. Those goals can be short term or long term, but ultimately they must contribute to the lasting success of your business.

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The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

There are times when your business needs a cash injection. You may require a major piece of equipment, say, or have to cover expenses as you increase your employee count. Whatever the reason, borrowing money is something that might be necessary from time to time.

But what exactly should you apply for? There’s not just one type of loan appropriate for all businesses or purposes. Here’s a quick guide to help demystify business loans and provide guidance on choosing the best one for your needs. 

Different loan types and when to use them

There are numerous types of loans available, and there are instances when one variety is more appropriate than others. I won’t get into all of them, but here are some of the most common varieties to know about.

Traditional business loans

First, there is the traditional business loan, also known as a term loan. With such loans, you contact a lender — either a bank or a private lender — and apply for a set amount of funds. These are then scheduled to be repaid over a certain time period. Getting a traditional business loan approved is by no means guaranteed. Banks will want to see a solid business plan or history in addition to a good credit rating. 

Traditional loans are usually best when businesses need a predetermined amount of money for a specific purpose. That may include things such as a large equipment purchase or a set period of time you’ll have to cover payroll. 

Term loans oftentimes require collateral of some sort before the funds are released. This can be business equipment, real estate, accounts receivable, inventory or securities.

There are instances where no collateral is required. Usually, these unsecured loans come with higher interest rates, carry extra fees or require a personal lien. 

SBA loans

A Small Business Administration loan is similar to a standard business loan but has a couple of key differences. With an SBA loan, you still take out a loan through a banking institution. Unlike a standard loan, however, the government will back a portion of your loan. In addition, you will provide a personal guarantee against the loan. Because you and the government are relieving the majority of the risk, the bank is more likely to approve your loan and possibly offer lower interest rates.

Other benefits of SBA loans include longer repayment periods, higher loan amounts and low fees. All of that probably sounds pretty good, so why don’t all businesses take advantage of SBA loans? The answer is that they can be difficult to qualify for.

Not only is good credit required, but businesses typically need to have been established for at least two years. A great deal of documentation is necessary, as well. Then, if you’re successfully approved for a loan, it can take a while — sometimes months — to receive the funds. So if your cash requirements have a quickly approaching deadline, a traditional loan or line of credit might be a better option. 

Lines of credit

As I just mentioned, lines of credit can work well for quick cash needs. With a line of credit, companies have a set amount available that they can draw from. Some lines of credit are even directly linked to a business’ bank account as a kind of built-in overdraft protection. 

Some businesses find lines of credit to be an efficient system, but they’re definitely for smaller, ongoing cash necessities. Lines of credit almost always have higher interest rates than standard business loans. So if you consistently max out your line of credit and never look at your monthly statements, you might be unaware of how much you are paying in interest. 

Choose your banking institutions carefully

Whether it’s a small business loan, a line of credit or an SBA loan, you’ll likely be dealing with a bank. While banks must adhere to certain rules and regulations, not all of them are equal. Since your financial institution can have a major impact on your overall business wellness, choose carefully.

The first thing to avoid is being tricked into a tempting introductory offer. Maybe a bank is offering an ultra-low interest rate on new loans. Check to see how long this interest rate is good for. If the rate is subject to change after six months, it might not be such a good deal.

Something else to consider is the depth of the relationship you can develop with the people at your bank. With national banks, you might benefit from robust online banking capabilities and other perks but be a virtual stranger to their employees. 

With local or regional banks and credit unions, there tends to be more potential for customization and negotiation. One of my peers was able to structure a line of credit at his local bank that automatically fed into multiple entities. The bank created this option at his request and did some custom coding to accomplish it. Without that close relationship, this arrangement would likely not have been available. So before choosing a bank, check around with your business peers to see which institutions have top-notch people who value customer service.

Do your research, get what you need

Given all the options that exist, business loans can seem complex. But just knowing the basic types and which ones might be available to you can be beneficial. 

So before applying for a loan, figure out exactly what you need and why. If you don’t, your business could suffer devastating cash shortages during the crucial startup stages. In fact, according to CB Insights, 38% of startups fail because they ran out of money or failed to raise funding. To avoid failure, do your research and give yourself the best chance of getting the right loan for your purposes.

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The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

One of the most commonly heard complaints — especially from small-business owners — is the failure or refusal of their customers or clients to pay their bills on time, or pay them at all.

If you are thinking, “Yeah, Dennis, you got that right!” then I submit that a certain amount of this failure to be paid could be your fault. Allow me to cite an example that occurred last week:

“Wonderful Tree Trimming and Landscaping” is a 30-plus-year-old mom-and-pop company in my town. “Marge” runs the show, and she is the nicest, most patient business owner you’ll ever meet. And that’s the problem. She is way too nice, way too patient and non-confrontational to a fault.

I got a call from her office manager, asking if I can help them with several past-due accounts.

“Of course,” I reply. “How old are they?”

“Only two years.”

“What? Only two years,” I repeat in a less-than-happy tone of voice. “What were you folks thinking?”

“Well, Marge likes to be patient and nice to people.”

“I am not! Please scan and send me the bills now!”

Not paying for services rendered could be fraud

Fraud and theft of services without legal justification revealing an intent not to pay, similar to dine-and-dash restaurant thieves, could justify an award of punitive damages. Notes on the accounts at Marge’s company revealed textbook examples of fraud and theft of services by people who agreed to pay for the tree trimming but offered one nonsensical excuse after another for not paying, made repeated promises to pay but never did or contested their credit card charge.

I reached one of them and asked that he bring a check to my office. He replied, “Money doesn’t grow on trees.”

My response in a most unfriendly tone of voice was, “I am going to enjoy suing you for the tree trimming and punitive damages for your obvious lack of intent to pay.”

Soon thereafter, I received this email from Marge: “Whatever you did worked! He called me around 2:30 p.m. and brought us a check by 3 p.m.! He had a scared face!”

Having patient, nice staff is not a virtue if customers won’t pay

In my experience representing small-business owners who are owed money, patience is not a virtue. A strong office manager/collections person who knows what not to say or do and who you authorize to immediately jump on past-due accounts is critical.

A common ploy of these kinds of customers is, “Gee, I never got your bill, so please mail another.” Do not fall for that, if possible! Fax the bill to them. This gives you proof of receipt. If you are in the same town, go to them and politely hand a copy to the customer or, if it’s a business, a receptionist.

Many online recommendations suggest being sugary sweet on the phone to your past-due customers. I disagree. The customer who, without justification, doesn’t pay is a thief, and the sooner you and your people recognize and accept that, the better.

So, when payment is past due, promised to be received by a certain date and does not arrive, you have one choice: Call and say, “No more delays. We will pick up a check at your office today, and if it isn’t there, this goes to our lawyer, who isn’t called Mad Dog for no reason.”

Why even put yourself at risk of being jerked around by an unknown customer? Do your research in advance. Check your court’s plaintiff/defendant index to see if the customer has been sued and for what. You can find this information on your county’s court website, generally at no cost to you. Require a signed credit application that will allow you to check their credit and find out if they’ve gotten in trouble before for not paying.

Great way to get stiffed: Convince customers you aren’t serious

A terrific recipe for being stiffed is to convince your customer that you aren’t serious about being paid, and I hear this all the time: “Well, we’ve been sending them past-due letters every month for the past year, and we thought that would scare them into at last doing something.”

They did something all right: They ignored you!

If the first letter or phone call gets no response, consider having your lawyer place a call and send a demand letter. That should be very inexpensive. Still no response? If you are within or close to your small claims court monetary jurisdiction, file suit.

Action earns the respect of employees and other customers

“When small-business owners act to preserve their bottom line by giving collections all the attention deserved, this earns respect and loyalty from employees and your customers. And, no matter how well you pay someone, respect and loyalty have no price,” observes David Schein, Cameron Endowed Chair of Marketing & Management at the University of St. Thomas in Houston.

“I tell businesses to have a one-two-three approach to collections,” he says. “Send invoice within 30 days. If not paid in 60 days, send letter with overdue invoice indicating that it will be turned over to your attorney if not paid promptly. At 90 days, turn it over to your attorney. Many of my businesses get paid with that 60-day letter.”

In case you wonder, “Dennis, how do you personally feel about these situations?” I’ll tell you. Angry, personally angry, and I share the feelings of my clients who have done the work, performed the service and been ripped off. To treat people that way, in addition to a breach of contract, is simply immoral. Collecting those debts gives me a great deal of moral satisfaction.”

Dennis Beaver practices law in Bakersfield, Calif., and welcomes comments and questions from readers, which may be faxed to (661) 323-7993, or e-mailed to Lagombeaver1@gmail.com. And be sure to visit dennisbeaver.com.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Profile

Who: Richard Atack, age 51

What: Manager, Barry-Regent Dry Cleaners

Where: Chicago

How long have you been in business? I manage the business for my father-in-law, the owner, who is now retired. His mother started the business in 1950. I’ve been working here for 29 years.

How did the pandemic affect you? Typically, we have customers in the thousands monthly. In late March and early April of last year, we were down 75%, working at 25% capacity. We’re now approaching about 60% to 65% of where we should be. There are definitely some customers, especially professionals who worked in an office who started working from home, who didn’t have any need for their business attire and just stopped coming in, while others carried on with reduced loads.

Who are your customers? We have cus­tomers from all backgrounds and professions. Just being able to talk to customers who are doctors, lawyers, educators, restaurateurs and others about their experiences has been very helpful. And last year, even before the masks were mandated, I was able to pay my seamstresses to make masks as a goodwill gesture to our customers.

How did you reduce expenses? Dry cleaning is a very labor-intensive industry; payroll is by far our biggest expense. We have a pretty low turnover of employees and keep them for years, if we can. We have employees who have been here longer than I have. So it was very difficult to juggle who to keep and who to cut hours for. We used to have between 25 and 30 employees. We currently have about 20.

Did you get payroll protection support? Yes. The PPP money really helped to keep people on—although once we had the money, the rules kept changing for how you keep track of your expenses in order to qualify for forgiveness. It was time-consuming for a small business. We don’t have a payroll or HR department; it’s all down to me to figure things out. With a little help from the bank and from the dry-cleaning association, talking to other cleaners, finding out what they’ve done, we got it worked out. And then for the second round of PPP money, it seemed a little easier.

Are you optimistic about the future of your business? It’s very hard to know how close to normal we will get back to. People’s work habits and travel habits have changed. On the flip side, a lot of cleaners went out of business, so maybe there’s not as much competition. And the industry is always changing, with fashions and what type of clothes people are wearing. There are technical changes, such as new solvents and cleaning methods that are more environmentally friendly. I don’t see it as a growth industry, but I also see it as an industry where if you’re providing quality service, there’s no reason not to be optimistic and have confidence in the future. Knowing that the Chicago community is in this together, and supportive of each other, has been one positive of the whole situation.

COVID-related shutdowns and restrictions have hit small businesses particularly hard. Many of them have closed permanently, while others are hanging on by their fingernails. Fortunately, there is some help available through the Paycheck Protection Program (PPP), which was first introduced in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Under the PPP, small businesses can get up to 24 weeks of cash flow assistance through federally guaranteed loans. Plus, the loans can be forgiven to the extent the proceeds are used for payroll and certain other expenses during the COVID-19 pandemic. Borrowers can apply for a PPP loan through any existing Small Business Administration 7(a) lender or through any federally insured bank, credit union, eligible nonbank lender, or Farm Credit System institution that is participating in the program.

The PPP has an up-and-down history, though. For instance, initial PPP funding – roughly $349 billion – was exhausted just a few days after the program was launched. Some mom-and-pop businesses had a hard time getting loans, too. But Congress later provided an additional $310 billion in funding and made important changes to the program, such as allowing more time to spend the loan proceeds and making it easier to get a loan fully forgiven. However, new PPP loan applications then were halted on August 8, 2020 – until a second stimulus package was signed into law in December 2020 that restarted the program with an additional $285 billion in funding. The law also opened up a second PPP loan for businesses that used up all the proceeds of their first PPP loan. The relief bill signed into law on March 11, 2021, injected an additional $7.25 billion into the program.

As it stands right now, the PPP will run until May 31, 2021, or until funds are exhausted, whichever occurs first. So, there's still time to tap into this form of assistance. Although uncertainty and confusion have surrounded the PPP since its launch, that shouldn't stop small business owners from participating in the program. Yes, there are a lot of rules and procedures you need to follow. But getting familiar with the PPP basics is a good place to start. That's what the following overview is designed to do.

Small businesses that didn't received a PPP loan in 2020 under the CARES Act may apply for a "first draw loan." Existing PPP borrowers that didn't receive loan forgiveness by December 27, 2020, may reapply for a first draw PPP loan if they previously returned some or all of their first draw PPP loan funds. A borrower who received the full available benefit of a first draw loan in 2020 under the CARES Act may only be eligible for a second draw PPP loan.

To be eligible for a first draw PPP loan, a borrower must have been in operation on February 15, 2020, and either (1) had employees for whom it paid salaries and payroll taxes, (2) paid independent contractors, or (3) operated as a self-employed individual, independent contractor or sole proprietorship with no employees. The borrower must also be either a:

• Small business that, together with affiliates (if applicable), have 500 or fewer employees;
• Business with more than 500 employees that meets the SBA's size standards (either the industry size standard or the alternative size standard);
• 501(c)(3) or 501(c)(19) organization with 500 or fewer employees per physical location;
• 501(c)(5), 501(c)(7) or 501(c)(8) organization with 300 or fewer employees per physical location that doesn't receive more than 15% of its receipts from lobbying activities;
• Tribal business concern;
• Nonprofit news organization;
• Online news publisher;
• Housing cooperative with no more than 300 employees; or
• 501(c)(6) organization or a destination marketing organization with 300 or fewer employees.

Borrowers can use first draw PPP loans for the following purposes:

• Payroll costs (salaries; wages; vacation, parental, family, medical or sick leave; and health benefits);
• Mortgage interest;
• Rent;
• Utilities (electricity, water, sewage, telephone, internet, transportation costs, etc.);
• Operations expenditures (e.g., any software, cloud computing, or other human resources and accounting needs);
• Property damage costs (e.g., from damages due to public disturbances that occurred in 2020 and not covered by insurance);
• Supplier costs (e.g., any purchase order or order of goods made before receiving a PPP loan essential to operations); and
• Worker protection expenditures (e.g., any personal protection equipment or property improvements to remain in compliance with government requirements or guidance established by the Department of Homeland Security, Centers for Disease Control and Prevention, Occupational Safety and Health Administration, or any state or local agency related to worker safety due to COVID-19).

As of January 2021, certain eligible borrowers that previously received a PPP loan can apply for a "second draw loan" with the same general loan terms and conditions as the first draw PPP loan (see above).

There are, however, some important differences. Each borrower must be an eligible recipient of a first-draw PPP loan and, together with its affiliates, have no more than 300 employees. The borrower must also be able to demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

Borrowers seeking more than $150,000 must submit documentation, such as annual tax forms or quarterly financial statements, at the time of their application to support the 25% reduction in revenue relative to 2019. Borrowers that receive less than $150,000 must provide such documentation when applying for loan forgiveness.

Up to 100% of the principal amount of a PPP loan and accrued interest can be forgiven. Both first and second draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during covered period following the loan disbursement:

• Employee and compensation levels are maintained in the same manner as required for the first draw PPP loan;
• The loan proceeds are spent on payroll costs and other eligible expenses; and
• At least 60% of the proceeds are used for payroll costs.

A borrower may choose a covered period between 8 weeks and 24 weeks after the receipt of PPP funds from the lender.

To have all or part of a PPP loan forgiven, a borrower must complete and submit a loan forgiveness application. Borrowers also need to keep records and have accurate bookkeeping to prove their expenses during the loan period. When the covered period is over, borrowers must apply for forgiveness through their lender. Use SBA Form 3508, Form 3508EZ, or Form 3508S (Forms 3508EZ and 3508S are shorter versions of the application for borrowers who meet specific requirements).

Some lenders may have their own forgiveness forms, too. So, borrowers should check with their lender to determine which form is the right one for their loan. After a borrower applies for forgiveness, the lender must provide a response within 60 days.

For first-time borrowers, the maximum loan amount is 2½ times their average monthly 2019 or 2020 payroll costs up to $10 million. Borrowers applying for the first time may use either calendar year 2019 or calendar year 2020 for purposes of calculating their average payroll costs.

The maximum loan amount of a second draw PPP loan is 2½ times the borrower's average monthly 2019 or 2020 payroll costs up to $2 million.

For borrowers in the accommodation and food services sector (NAICS Code 72), the maximum loan amount for a second draw PPP loan is 3½ times the borrower's average monthly 2019 or 2020 payroll costs up to $2 million.

Normally, cancelled debt is generally considered taxable income. However, the CARES Act says that any forgiven PPP loan amount won't be taxed.

The IRS originally ruled that borrowers couldn't claim a tax deduction for business expenses that result in forgiveness of a PPP loan. However, Congress reversed that decision in December. As a result, tax deductions are allowed for the payment of eligible business expenses even if the payments would result (or be expected to result) in the forgiveness of a PPP loan.

The Biden administration has announced some tweaks to the Paycheck Protection Program (PPP) meant to boost access to the forgivable loans for mom-and-pop businesses.

The Small Business Administration will soon accept applications for PPP loans exclusively from businesses and nonprofits with fewer than 20 employees, for a period of 14 days. The SBA says that the share of the program's funding going to businesses with fewer than 10 employees is up nearly 60% when compared with the same point in the program last year. But the Biden administration wants to further target the PPP to the smallest businesses. The 14-day period will start on Wednesday, February 24, 2021, at 9:00 am.

The SBA will also allow sole proprietors, independent contractors and self-employed individuals to receive more financial support. These types of businesses, which include home repair contractors and small independent retailers, make up a significant share of all businesses. The SBA will revise the PPP's calculation formula for these applicants so that it offers more relief.

The SBA is eliminating the restriction that prevents small-business owners who are delinquent on their federal student loans from getting a PPP loan. Currently, the PPP is not available to any business with at least 20% ownership by an individual who is currently delinquent or has defaulted within the past seven years on a federal debt, including a student loan.

The agency will also eliminate the restriction that disqualifies small-business owners with prior non-fraud felony convictions from getting a PPP loan – a move with broad bipartisan support. The SBA has also clarified that small-business owners who are not U.S. citizens, but are lawful U.S. residents, may use their Individual Taxpayer Identification Number to apply for a loan. These changes will be implemented by the first week of March.

Congress provided $284 billion for the latest round of PPP loans under the coronavirus relief package passed in December. As of February 18, less than half of those funds have been used.

Congress recently passed a $900 billion COVID-19 relief bill that pumps billions of dollars back into the popular Paycheck Protection Program (PPP) that ended in early August. Under the PPP, small businesses can borrow money from private lenders without collateral, personal guarantees or fees. The loans don't have to be repaid to the extent they're used to cover certain expenses, and they provide an important lifeline to businesses that are struggling financially during the coronavirus pandemic.

The bill requires the Small Business Administration (SBA) to write regulations implementing the PPP no later than 10 days after the bill is signed into law. Once the SBA issues the regulations, the program will officially reopen and run through March 31, 2021.

The legislation also ensures that business expenses paid with forgiven PPP loans are tax deductible. It also clarifies that PPP loans will not be included in taxable income.

(Stay on Top of All the New Stimulus-Check Developments – Sign Up for the Kiplinger Today E-Newsletter. It's FREE!)

Who Can Apply?

Many small businesses, non-profits and independent contractors may be eligible for the new round of PPP loans. Borrowers may also qualify for a loan even if they received funds in the PPP's first round. There will be $284.5 billion in forgivable PPP loan funds available for certain borrowers that already got PPP loans and for other businesses that missed out in the previous round.

The bill created "second draw" forgivable loans for "harder hit" small businesses, certain non-profit organizations, housing cooperatives, sole proprietors, independent contractors and others with 300 or fewer employees. Qualified borrowers must show a loss of at least 25% of gross receipts in any quarter during 2020 when compared to the same quarter in 2019.

First-time PPP borrowers will be subject to the program's original eligibility rules.

New Amount for "Second Draw" Loans

The maximum loan amount is $2 million for "second draw" loans. That's down from the $10 million maximum that applied under the original CARES Act rules.

A borrower may qualify for a loan up to 2½ times its average monthly payroll costs. Businesses in the accommodation and food services industries, such as restaurants and hotels, may receive up to 3½ times their average monthly payroll cost.

Loan Forgiveness for the New PPP Loans

As with the previous round of PPP loans, the new loans may be entirely forgiven if spent for the proper purposes (primarily payroll) during the proper time period. Currently, there are three PPP loan forgiveness applications, but these will likely be updated by the SBA once the program officially reopens.

To obtain full forgiveness, borrowers will need to spend at least 60% of loan proceeds on payroll.

Borrowers may spend up to 40% on other qualified expenses during the covered period. In addition to rent, mortgage interest and utilities, the list of eligible non-payroll expenses has been expanded to include four new categories:

• Covered operations expenditures;
• Covered property damage costs;
• Covered supplier costs; and
• Covered worker protection expenditures.

Covered operations expenditures include payments for any software, cloud computing, and other human resources or accounting needs.

Covered property damage costs consists of expenses related to property damage caused by public disturbances in 2020 that are not covered by insurance.

Covered supplier costs are expenditures to a supplier under a contract, purchase order, or order for goods in effect prior to taking out a loan that were essential to the borrower's operations when the expenditure was made.

Covered worker protection expenditures include payments for personal protective equipment and adaptive investments to help a borrower comply with federal health and safety guidelines, or any equivalent state and local guidance, related to COVID-19 from March 1, 2020, to the end of the national emergency declaration.

Simplified Loan Forgiveness

For any loan up to $150,000, the covered loan amount will be forgiven if the borrower submits a one-page online or paper form listing the loan amount, the number of employees retained and the amount of the loan spent on payroll. Congress has directed the SBA to release this form within seven days after the enactment of the new bill.

Choice of Covered Period

The bill will also allow borrowers to select the end date of their covered period during which they are required to spend a sufficient amount on qualified expenses to receive forgiveness. However, it must be greater than eight weeks from the date of disbursement and not more than 24 weeks.

Editor's note: Congress on Dec. 21 passed the Consolidated Appropriations Act, 2021, which includes language that clarifies the tax treatment of forgiven PPP loans allowing for small businesses to deduct their expenses. For details, please read Good News! Business Owners Who Took PPP Will Get to Deduct Expenses After All.

Struggling business owners who took advantage of the government’s Payroll Protection Program (“PPP”) lifeline this year are now caught in the middle of an ugly fight between Congress and the IRS. At stake: Business owners’ ability to deduct several business expenses on this year’s tax returns.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed with overwhelming, bipartisan support to help defray the economic effects of COVID-19 and the government-mandated shutdowns. With a goal of providing fast, direct economic assistance to small businesses, the PPP was a key component of the CARES Act. The PPP provides small businesses with a dischargeable loan equal to 2.5 times the business’s average monthly payroll costs (up to $10 million). (For full details on the PPP program, please see this excellent online tutorial by attorney Paige L. Minch, a colleague of mine.)

The CARES Act allows PPP loan proceeds to be forgiven if used for certain business expenses, including payroll, mortgage interest, rent and utilities, during the “covered period.” The covered period was triggered upon disbursement of the loan to the recipient and could end on the earlier of 24 weeks or Dec. 31, 2020.

The Understood Tax Benefit of PPP Loans

As my partner, tax attorney Gary A. Forster explains, “a significant benefit to small businesses is the tax treatment of the PPP loan.” Section 1106(i) of the CARES Act excludes forgiven PPP loan proceeds from taxable income:

Taxability: any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.

Without this key feature, forgiven loan proceeds are subject to U.S. income tax.

The IRS Steps in with Its Own Take on the Policy

The Act does not expressly address tax treatment (i.e., deductibility) of business expenses paid with PPP loan proceeds. But as Forster explains, “If the proceeds used to pay the expenses are not taxable as income, then the only logical reading is that the expenses paid must be deductible.” Otherwise, the non-deductibility completely unwinds the tax benefit provided by 1106(i). Nevertheless, the IRS has seized upon the silence as an apparent loophole, by announcing that expenses paid with forgiven PPP loan proceeds are not deductible. The IRS’ position would frustrate the intended tax benefit of the PPP loan by effectively taxing discharged PPP loan proceeds.

It seems senseless to forgive tax on $100 of PPP loan proceeds – if and only if used for deductible business expenses – only to turn around and disallow a deduction on the very same $100 expenses paid for with the forgiven loan. The IRS position negates the taxability language of section 1106(i) of he CARES Act by eliminating the tax savings on expenses paid with the PPP loan.

Senators Fire Back, But IRS Stands Firm

In response, Senate Finance Committee Chairman Chuck Grassley (R-Iowa), Ranking Member Ron Wyden (D-Ore.) and House Ways & Means Committee Chairman Richard Neal (D-Mass.) wrote a letter to Treasury Secretary Steve Mnuchin (under whose authority the IRS operates), explaining congressional intent. They wrote that the IRS position essentially renders the tax language in the CARES Act meaningless and stressed that:

providing assistance to small businesses, only to disallow their business deductions as provided in Notice 2020-32, reverses the benefit that Congress specifically granted by exempting PPP loan forgiveness from income …

Undeterred, the IRS recently doubled-down on its position in Revenue Ruling 2020-27 by stating that a taxpayer may not deduct eligible PPP expenses in the year 2020 if the taxpayer reasonably expects the loan to be forgiven later. In response, Sens. Grassley and Wyden issued a joint statement on Nov. 19:

Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses. We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless.

Government agencies must carry out congressional laws as Congress intends. When considering the propriety of an agency’s interpretation of law, courts consider two factors: first, whether Congress directly spoke to the issue in the law; and, next, whether the agency’s interpretation is based on a permissible construction of the law. Government agencies, like the IRS, are granted interpretive deference, but remain constrained by congressional intent.

The CARES Act is silent regarding the details of tax deductibility, but the Act speaks quite loudly and clearly on the broader question of taxability. The only expenses for which payment results in PPP forgiveness are those which are normally deductible. In other words, you can only get the forgiveness – and the tax benefit – by using the money for payment of normally deductible expenses. Otherwise, the loan is not dischargeable. Disallowing the deduction contradicts the tax benefit. Had Congress intended for forgiven PPP funds to be taxable, it could have said so; or it could have remained silent on the issue. Instead, Congress made its intent quite clear by inserting section 1106(i).

Any doubts about Congress’ intent are addressed by the bipartisan statements of Congressmen Grassley, Wyden and Neal:

… as was expressed to Treasury during the development of the PPP, we did not intend to deny the deductibility of ordinary and necessary business expenses, nor did these small businesses expect to lose deductions for their business expenses when they applied for a PPP loan.

What May Happen Next? And What about Business Owners?

Congress could enact additional legislation in direct response to the IRS. Identical bills have been introduced in both the Senate and House of Representatives, titled the “Small Business Expenses Protection Act of 2020.” The law would amend section 1106(i) to leave undisturbed the tax deductions for business expenses paid with forgiven PPP loan proceeds. If such clarifying legislation is not passed, then it remains to be seen who, if anyone, will defy the IRS by deducting the expenses and take the challenge to court. Any court deciding the issue will undoubtedly look to congressional intent.

What Should Business Owners Do Now?

Congress’ failure to act before tax filings begin could set up a fight between taxpayers and the IRS. While business owners should seek and rely upon the advice of tax advisers and legal counsel, they are likely to face tough choices. A business might forgo the deductions and simply pay the tax. Another option would be to take the disputed deductions but file a Form 8275 Disclosure with the IRS, relying upon the statutory language and congressional intent to contradict the IRS’ stated position. This should not be done without professional guidance and may set up a deficiency lawsuit in U.S. Tax Court or a federal district court; one with the potential to garner national attention.

In the meantime, we should expect that many business owners will delay filing until the last possible moments. In any event, business owners should proceed with caution and should not proceed without competent guidance from professional advisers and counsel.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The COVID-19 pandemic has hit U.S. small businesses very hard. In March, Congress created the Paycheck Protection Program as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to save jobs and prop up struggling businesses during the pandemic. Under the PPP, small businesses could borrow up $10 million from private lenders without collateral, personal guarantees, or fees. These loans don't have to be repaid to the extent they're used to cover the first 24 weeks (eight weeks for those who received their loans before June 5, 2020) of the business's payroll costs, rent, utilities and mortgage interest. However, at least 60% of the forgiven amount must be used for payroll.

The PPP ran from early April through early August. In total, more than $525 billion has been distributed to more than 5 million small businesses. One reason the PPP was so attractive to borrowers was the potential to turn these loans into grants. The program, however, has been criticized for problems with its rollout and the complicated process of getting loans forgiven.

The Small Business Administration began processing loan forgiveness applications on October 2. As of late September, lenders have submitted about 96,000 forgiveness applications to the SBA. Those applications represent about 2% of all PPP loans.

Simplified Loan Forgiveness for Smaller Loans

After much speculation about legislation to provide automatic PPP loan forgiveness for certain loans, the SBA recently acted on its own to give some relief to some borrowers, since an automatic forgiveness bill has yet to move forward in Congress.

Recipients of PPP loans of $50,000 or less can apply for forgiveness using a simplified application that was released by the Treasury Department and the SBA on October 8. A borrower that, together with its affiliates, received loans totaling $2 million or greater may not use the new form to apply for forgiveness.

The SBA says that out of a total of 5.2 million PPP loans that the agency has approved, roughly 3.5 million were loans of $50,000 or less.

The new application streamlines the forgiveness process for PPP borrowers by doing away with complicated full-time equivalence (FTE) or salary reduction calculations.

The new SBA loan forgiveness application (Form 3508S) requires fewer calculations and less documentation for eligible borrowers than the two other forms – SBA Forms 3508 and 3508EZ. This is primarily because businesses that borrowed $50,000 or less are exempt from the CARES Act provisions that impose a reduction penalty if the borrower reduced FTE employees or the salary or wages of employees during the covered period.

Businesses that borrowed $50,000 or less will still have to certify that:

• Funds were used for eligible expenses;
• Payroll costs were at least 60% of the forgiveness amount; and
• They meet the owner-employee's limitations and caps.

Borrowers also need to provide documentation that supports the eligible payroll and nonpayroll payments from the covered period, such as:

• Tax forms;
• Payment receipts, cancelled checks, or account statements documenting the amount of employer contributions to employee benefit plans;
• Copies of lender amortization schedules and receipts or cancelled checks verifying eligible payments from the covered period;
• Business rent or lease payments; and
• Business utility payments.

The supporting documentation must be retained for six years after the date the loan is forgiven or repaid in full.

The PPP has undergone many changes since it was first created. These might not be the last changes to the program. Nevertheless, borrowers who are qualified to use Form 3508S should consider starting the process for loan forgiveness as soon as possible, as they're unlikely to see additional program changes. Given the large volume of outstanding PPP loans, both lenders and the SBA may become overwhelmed with an influx of forgiveness applications.

I feel for the owners of small and midsized businesses right now: They are like sailors facing headwinds and choppy waters of a very tough business environment with very little visibility, and the survival of their business at stake.

Many sought a lifeline in the Paycheck Protection Program (PPP) passed under the $2.2 trillion CARES Act earlier this year. But even as these forgivable loans may help keep businesses afloat and workers employed, the rules are in flux and ambiguous. Even specialist financial advisers are steering their clients as though navigating by the stars, rather than by precision GPS.

The banks providing the loans have asked recipients to hold off on submitting forgiveness applications, as even they try to come to terms with how it’s all supposed to work. So, if you are feeling anxious that you don’t quite understand how to get your loan forgiven, know you are not alone.

Make sure you have a good tax or other financial adviser, who has experience in your particular industry. Here are some items to discuss with them:

1. PPP EZ: A simpler forgiveness filing

The most recent news is that the Small Business Administration has provided a simpler filing document for businesses that meet certain criteria. Ask your adviser about the PPP EZ forgiveness option if you are:

• A business owner with no employees.
• A business owner with multiple employees who did not reduce anyone's pay by more than 25%.
• A business owner with employees who did not have to reduce employee headcount during the pandemic or has restored the headcount by the time the forgiveness application is filed.

2. Loan repayment terms

The most recent revision by Congress was an effort to provide flexibility, but it can also put borrowers into some confusing positions. For instance, the new rules allow companies to win forgiveness of their loans if they can demonstrate that 60% of the loan was spent on payroll over 24 weeks, through Dec. 31, 2020. This was an expansion from the much shorter eight-week window in the rules previously.

This change was aimed at helping businesses like restaurants that are only starting to open now, providing them the time to pay workers and gain forgiveness. But it also can mean that those same businesses will be applying for forgiveness at the end of the new window, which puts them into next January. Meanwhile, many signed agreements with their banks before the new rules were issued, and those loan agreements may well stipulate that they need to start paying off the loan in November.

An act of Congress does not supersede a contract with your bank. If you need to take the entire loan window to achieve forgiveness, you may need to speak with your bank and get (in writing!) a waiver on paying the loan. Otherwise, you might be delinquent on repayment before your loan is even forgiven.

3. The loan forgiveness window

You can avoid the question about the loan repayment terms if you do not need the extended forgiveness window. Assuming you’ve been keeping your books in order — which I’ve been preaching since the moment CARES passed — you should be able to determine whether you need that extra time. If you don’t, then go ahead and apply for forgiveness. There’s no need to wait only to find more new rules and stipulations waiting ahead of you.

But if you find that you do need that extra window, then take advantage of it. Again, this will depend on the industry you’re in. Restaurants and gyms are coming online much more slowly than, say, law firms or marketers.

4. Your payroll-to-loan percentages

Now that only 60% of PPP funds need to be spent on payroll, as opposed to the original 75%, there’s more leeway for the businesses that need it. The question you have to ask, and ask honestly, is do you need that extra flexibility?

And while initially it was reported that the new 60% threshold came with a cliff — meaning if you didn’t hit the threshold you wouldn’t receive any forgiveness — the Small Business Administration and Treasury clarified recently that there would still be partial forgiveness under that threshold.

But beware: The law as written by Congress conflicts with this clarification provided by the SBA and Treasury. It’s murky, and this is where good advice is critical.

5. Consider whether you should take advantage of other PPP benefits

Under the latest updates, businesses that received PPP loans can now delay payment of payroll taxes, which they could not originally do under the CARES Act.

But remember that’s a delay, not forgiveness. You’re still going to have to pay that money back. As you work your way through your records, consult your adviser, and decide when to apply for forgiveness, consider whether you need to take advantage of all those benefits, or if you’ll be fine without them.

There’s no one-size-fits- all approach here. Just because the benefit is there doesn’t mean you should take it.

6. Your long-term business needs

Part of the anxiety I hear from clients around PPP is what happens if they don’t qualify for forgiveness? And this is something every business owner who received PPP loans should be thinking about.

But the reality is likely far less scary than what many are currently imagining.

As a business owner you likely already had a plan for the year, and even when the pandemic first hit, you started thinking about what you had to do to survive. In some cases, business owners made pivots that will allow them to be even stronger on the other side of this.

But you have to zoom out for a moment and think about not just what things look like after you apply for loan forgiveness, but what it looks like in 2021 and beyond.

If you do have to pay back any portion of your PPP loan, remember that it carries only 1% interest by law. You’ll never get a loan at that rate again at any point in history. Does taking advantage of every little PPP benefit help your business the most? You may find that the forgiveness of a low-interest loan should be secondary to critical personnel decisions you need to make. Hanging onto an underperforming employee just to win forgiveness, or keeping all employees when you could just treat some of your PPP funds as a loan and stretch your cash may still be a better business decision.

It can be helpful as well, in times of uncertainty to develop contingencies. Imagine at least three scenarios that could play out. Doing so will make the future less uncertain, give you a clear path forward, and help you decide how to manage your PPP loans.

Even as you consider these items, perhaps most importantly, you need to keep running your business. I’ve written about this before, and it still holds true: Don’t let the PPP specifics distract you from keeping your business afloat.

Let people like me, your tax and financial advisers, do the hard work.

While it’s important to ensure you have a base understanding of PPP and the latest updates, so that you can have intelligent conversations with your advisers, let the experts steer you through the PPP forgiveness effort. And remember that you aren’t alone in this.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The CARES Act, which was signed into law on March 27, 2020, provided much-needed economic relief to businesses and employees affected by the COVID-19 pandemic. One of the CARES Act's key components was the Paycheck Protection Program (PPP), which offers forgivable loans to small businesses so that they can make their payrolls during the pandemic. However, the CARES Act included a number of restrictions that have hampered the effectiveness of the program.

But now there's some good news for small business owners: President Trump signed the Paycheck Protection Program Flexibility Act (PPPFA), which gives borrowers additional time and flexibility to use PPP loan proceeds. The legislation zipped through Congress with bipartisan support, and there's high hopes that the PPPFA will provide an additional boost for small businesses trying to claw their way out of the pandemic-induced economic crisis.

We've listed 7 of the most significant changes from the PPPFA. Read on to see how your business might benefit from the improvements.

Under the CARES Act and Small Business Administration regulations, the term of any unforgiven portion of a PPP loan is two years from origination. The PPPFA extends the maturity of PPP loans from two years to five years. The extended repayment period applies only to PPP loans made after June 5, 2020, but lenders and borrowers can renegotiate the maturity of any previously existing PPP loan.

Under the CARES Act, PPP loans don't have to be repaid to the extent the borrowed money is used to cover the first eight weeks of the business's payroll costs, rent, utilities, and mortgage interest. However, current PPP borrowers can now choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. New PPP borrowers will automatically have a 24-week period, but the use period can't extend beyond December 31, 2020.

Originally, PPP borrowers had to use at least 75% of loan proceeds for payroll costs. Borrowers who failed to satisfy this requirement had their loan forgiveness amount reduced. However, under the PPPFA, the 75% threshold is now reduced to 60%. As a result, borrowers can now use up to 40% of PPP loan proceeds for nonpayroll costs, such as rent, utility and mortgage-interest payments.

The amount of a PPP loan that is forgiven is generally reduced if the borrower cuts back on the number of "full-time equivalent" (FTE) employees during the eight-week or 24-week coverage period. However, this rule doesn't apply for a significant decrease in employment and/or wage levels between February 15 and April 26, 2020, if the number of workers and wage levels are restored by June 30, 2020. The new law extends this deadline from June 30 to December 31, 2020.

The PPPFA also adds a new exception to the loan forgiveness reduction rules. Now, the amount of a PPP loan that is forgiven won't be reduced due to the borrower's failure to restore FTE levels by December 31, 2020, if, in good faith, the business can document an inability to:

• Rehire people who were employees on February 15, 2020, and hire similarly qualified employees for unfilled positions by Decmber 31, 2020; or
• Return to its pre-February 15, 2020, level of business activity because it's complying with COVID-19 regulations or guidance issued by the Department of Health and Human Services, Centers for Disease Control and Prevention, or Occupational Safety and Health Administration between March 1 and December 1, 2020.

These exemptions are important for businesses that are unable to return to full operation because of restrictions on customer capacity or similar reopening restrictions.

The CARES Act allows borrowers to defer payment of PPP loan amounts for six months from disbursement of the loan. The PPPFA extends the deferral period until the date that the amount of loan forgiveness is determined. If the borrower doesn't apply for loan forgiveness, the business must begin making payments 10 months after the last day of the eight- or 24-week loan use period.

The CARES Act permits a business to delay payment of employer payroll taxes through December 31, 2020 (payments are due over the following two years). However, the CARES Act did not permit PPP borrowers to take advantage of this benefit. The new law removes this restriction, so any PPP borrower can now delay payment of its payroll taxes like other businesses.

The IRS just did something that stunned me. It pulled the rug out from under desperate small-business owners just as they were starting to get their feet under them.

It was about a month ago that I praised what I saw as one of the most comprehensive, beneficial acts of Congress in American history. With the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, I saw the federal government committing to what I committed to doing for my clients decades ago: help small businesses.

While not sold as a clear and free windfall, the drafters of CARES made it clear: Spend this money on the right things — like keeping your employees on the payroll — and keep your books in order, and any loans you receive under the program would be forgiven. It was a lifeline to small businesses when they needed it most. A way to defend them, and by virtue the U.S. economy, from mass extinction.

IRS Takes Action After-Hours

But now that lifeline is being yanked away. On April 30, late in the evening — when few people were likely paying attention — the IRS released guidance that essentially nullified much of the benefit of the Paycheck Protection Program (PPP) created under the CARES Act. It stated that those who receive PPP may not receive tax deductions for using those funds to pay expenses. That includes expenses like payroll and rent, the very point of the PPP.

Congress specifically drafted the legislation so that small businesses could receive PPP loans without having to count it as taxable income. That makes the IRS’ move all the more stupefying. And it could cost some small businesses on the brink more than they can afford.

How Much Could It Cost Businesses?

That cost isn’t theoretical. It’s actually fairly easy to quantify.

Let’s say a small-business owner requests and receives $600,000 to cover payroll for the 10 weeks where he or she is covered by the PPP. If they can’t deduct that amount as expenses, that means their federal tax burden clocks in at a rate of 37%.

That equates to a $222,000 increase in their taxable income. Meaning the effective tax-free benefit of the loan is $378,000, not the $600,000 intended by the law.

Why Some May Say Move Makes Sense

The IRS has one goal: to collect revenue, so maybe this move shouldn’t have surprised me. Your tax adviser might tell you that they actually saw this coming all along, and it’s just how the IRS works. After all, to prevent "double dipping," the law doesn't allow deductions for expenses that are otherwise exempt from tax.

Even though Congress didn't create an exception to this rule, lawmakers intended the expenses to be deductible to provide the greatest possible benefit for small businesses. And while this type of tax exemption is usually reserved for organizations like churches and the military, it makes sense to expand it in the midst of a pandemic where most of the businesses receiving the PPP aren’t able to operate or bring in income due to state or local orders.

What You Can Do about It

The only advice I can give to my clients is to push back. The truth is that your voice matters. We do not have to collectively lay down and just take whatever the IRS hands down. Call your senator, the Small Business Administration and local representatives. Call your local news station and tell them how this change is going to hurt your business.

I’ve made my career caring for my clients and sticking up for them. And right now, that includes contacting my own senator, which I did the moment I heard about this guidance from the IRS. If there’s enough collective pressure, the IRS will either back down, or Congress will pass legislation that explicitly puts PPP tax deductions into law. A bill has already been introduced in the Senate that would make it clear that small businesses can deduct expenses paid with a forgiven PPP loan. There's strong bipartisan support for the bill, so its eventual passage looks promising — but the Treasury Department opposed the legislation.

If our only option is to put pressure on the Treasury, then that’s what we’ll do. Thankfully, likely after receiving messages from frustrated and beaten down business owners, a bipartisan group of congressional leaders on May 5 sent a letter to Treasury Secretary Steve Mnuchin asking him to reverse course on this shortsighted rule change. The letter states it nearly perfectly:

“Providing assistance to small businesses, only to disallow their business deductions … reverses the benefit that Congress specifically granted by exempting PPP loan forgiveness from income.”

But it’s only a first step, and the urgency and scale of this moment demands more. For already battered small-business owners, it certainly feels easier to throw your hands up and surrender, but don’t. If you have anything left, use it to stand up and let your voice be heard. It’s not the advice you’d normally hear from your tax adviser, yet these times are anything but normal.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The Paycheck Protection Program (PPP), which was created by the Coronavirus, Aid, Relief, and Economic Security (CARES) Act, ran out of its initial funding of roughly $349 billion just a few days after the program launched on April 3. Last week, Congress approved another $310 billion for PPP loans.

The fresh funding means many small-business owners will have a second chance at getting a PPP loan that could help them keep their companies afloat. Businesses will be able to apply for PPP loans again starting on April 27.

Uncertainty and confusion have surrounded the PPP since its launch—especially with respect to eligibility, payroll costs, and debt forgiveness. Hopefully, the answers below to common question about the PPP loans will help small business owners who are seeking financial support right now. The country needs our small businesses to bounce back as quickly as possible, and PPP loans are a big part of the plan to make that happen.

Question: Are small businesses required to have 500 or fewer employees to be eligible for PPP loans?

Answer: No. The Small Business Administration (SBA) says businesses can be eligible for PPP loans even if they have more than 500 employees. For example, a business with more than 500 workers can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry.

A business can also qualify for a PPP loan as a small business if it met both tests in the SBA's "alternative size standard" as of March 27, 2020:

• The maximum tangible net worth of the business is not more than $15 million; and
• The average net income after federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.

Question: The CARES Act excludes annual employee compensation in excess of $100,000 from the definition of payroll costs. Does that exclusion apply to all employee benefits of monetary value?

Answer: No. The exclusion of annual compensation in excess of $100,000 applies only to cash compensation, not to non-cash benefits, such as employer contributions to retirement plans.

Question: Do PPP loans cover paid sick leave?

Answer: Yes. PPP loans cover payroll costs, including costs for employee vacation, parental, family, medical and sick leave. But sick and family leave wages are excluded for which a credit is allowed under certain sections of the Families First Coronavirus Response Act.

Question: Is there anything that is expressly excluded from the definition of payroll costs?

Answer: The CARES Act excludes the following:

• Compensation of an employee whose principal place of residence is outside the U.S.;
• Compensation of an individual employee exceeding $100,000 for the year; and
• Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020.

Question: Should payments that an eligible borrower made to an independent contractor or sole proprietor be included in calculations of the borrower's payroll costs?

Answer: No. Amounts paid to an independent contractor or sole proprietor should be excluded. However, an independent contractor or sole proprietor is eligible for a PPP loan if he or she satisfies the applicable requirements.

Question: How much of a PPP loan that is forgiven depends on the borrower's payroll costs over a 24-week period. When does that 24-week period begin?

Answer: The 24-week period begins on the date the lender makes the first disbursement of the PPP loan.

Please note that borrowers who got their loans before June 5, 2020, have the option to use an eight-week period, which was the original spending period under the CARES Act, instead of the newer 24-week period.

Question: Can a business claim a tax deduction for expenses that result in forgiveness of a PPP loan?

Answer: No. A tax deduction is generally available for all ordinary and necessary expenses paid or incurred during the year in carrying on any trade or business. Business-related payroll costs, mortgage interest, rent, and utilities are, therefore, normally deductible. However, no deduction is allowed for any expense that is otherwise exempt from tax. This prevents a double tax break.

Loan proceeds properly used (according to the CARES Act rules) for payroll, mortgage interest, rent, and utilities do not have to be repaid. In addition, income associated with PPP loan forgiveness is exempt from tax under the CARES Act. As a result, to prevent duplicate tax breaks, expenses that result in PPP loan forgiveness are not deductible.

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business's ongoing operations qualify for a PPP loan?

Answer: Probably not. Borrowers must certify in good faith that their PPP loan request is necessary to support their ongoing operations, taking into consideration their current business activity and their ability to tap other sources of funding. According to the SBA, "it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith."

Question: Is a seasonal business that was not fully ramped up on February 15, 2020, still eligible for a PPP loan?

Answer: Yes. The SBA says that in evaluating a borrower's eligibility, a lender may consider whether a seasonal business was in operation on February 15, 2020, or for an eight-week period between February 15, 2019, and June 30, 2019.

Small-business owners will be able to get loans under the stimulus bill this week. On March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act. The legislation provides a stimulus package worth approximately $2 trillion. The CARES Act expanded certain loan programs administered by the Small Business Administration. It also created a new SBA program to help small-business owners affected by the coronavirus outbreak. The loan programs all have different purposes, so small businesses will have to compare what option works best for them.

The bill established a new $349 billion program to help smalls keep their workforce on the payroll. The Paycheck Protection Program will provide capital to small businesses without collateral requirements, personal guarantees or SBA fees. All loan payments will be deferred for six months but will accrue interest during this period. The SBA will forgive the portion of the loan that is used to cover the first eight weeks of payroll costs, rent, utilities and mortgage interest. Businesses must keep their workforce largely intact during that period to qualify for loan forgiveness. No more than 25% of the forgiven amount can be used for non-payroll costs. Loans can be up to 2.5 times the borrower’s average monthly payroll costs or up to $10 million. The interest rate will be fixed at 1%. (Here's more information about the program. A sample application form for borrowers can be found here.)

Many small businesses will likely qualify for Payroll Protection loans. Businesses and other employers must have been in operation on February 15, 2020, to qualify. Small businesses, nonprofits, self-employed individuals and veterans organizations with 500 or fewer workers can apply for the loans under the new program. Some businesses with fewer than 1,500 employees in certain industries may qualify too (click here to see more information about the SBA’s size standards). Businesses that have pending or existing SBA disaster assistance loans can still receive funding through the Paycheck Protection Program as long as the loans aren’t used for the same thing. A single business can only apply for one loan under the program. Small-business owners can begin applying for PP loans on April 3. Independent contractors and people who are self-employed can begin applying on April 10.

Some lenders will have to become certified by the SBA before they can participate in the PP program. Because the anticipated response is greater than anything ever experienced by the SBA, the agency will allow lenders that don’t currently participate in any of its loan programs to process and service these loans. Federally insured banks, credit unions, farm banks and a broad range of nonbanks can participate in the Paycheck Protection Program, but they must be certified by the SBA first. The loans will come with a 100% guarantee from the SBA. The agency will speed up the certification process and will issue guidance for lenders interested in participating. Lenders have the authority to approve loans on the spot so folks can get their money on the same day. The only requirement is that the loan is first registered with the SBA to make sure the borrower hasn’t already gotten a loan through another bank. Lenders will be compensated by processing fees paid by Uncle Sam. New lenders can submit their application via email to the SBA. The agency has yet to provide any application forms or criteria that these companies will have to meet.

For businesses that need a quick infusion of capital to cover expenses right now, a disaster loan and an emergency grant could help your business. The CARES Act broadened the existing Economic Injury Disaster Loans program maintained by the SBA. The CARES Act significantly expanded the disaster loan eligibility and may provide emergency cash advances that can qualify for forgiveness if used for paid leave, payroll maintenance, meeting higher supply chain costs and other qualified expenses. Those applying for a disaster loan can also receive a cash grant of up to $10,000 within three days of applying for the loan. There are restrictions on businesses that receive the loans. Small businesses must apply for the loans directly with the SBA.

For those needing help to keep up with payments on your current or future SBA loan, the SBA’s Small Business Debt Relief program could help. The program provides immediate relief to small businesses with non-disaster SBA loans, such as the SBA’s 7(a) and 504 loans, and microloans. Under the program, the SBA will cover all payments on these loans, including principal, interest and fees, for six months. You can apply for one of these loans through any lender already participating in these SBA loan programs.