Tax

Tax

No PPP Loans Today, But You Can Still Get $150,000 from the SBA

No PPP Loans Today, But You Can Still Get $150,000 from the SBA

Can your business use an infusion of cash to deal with losses caused by the COVID-19 epidemic? 

The hugely popular federal Payroll Protection Program (PPP) loan program that paid forgivable loans to millions of businesses ended on August 8 (although it could come back in revised form). But you can still obtain a low-interest Emergency Income Disaster Loan (EIDL) of up to $150,000 from the Small Business Administration (SBA).

Do You Qualify for an EIDL?

You can qualify for an EIDL if your business has fewer than 500 employees and has suffered “substantial economic injury” due to the COVID-19 pandemic. You have suffered economic injury if you’re unable to pay your normal business operating expenses and other bills, or to sell or produce your goods or services because of the pandemic.

You can obtain an EIDL even if you already received a PPP loan. However, you may not use the EIDL to pay the same payroll costs or other expenses you pay with a PPP loan.

How Much Can You Borrow?

The SBA is currently capping EIDLs at $150,000. The amount you receive is intended to cover six months of your business operational expenses. For most small businesses, the loan amount is based on gross revenues minus cost of goods sold during the period from February 1, 2019, through January 31, 2020, divided by two.

What Are the Loan Terms?

These are 30-year loans at a 3.75 percent interest rate. You don’t have to make any payments until one year after you receive the loan (interest continues to accrue during the one-year delay). There is no prepayment penalty.

How Do You Apply?

You apply for an EIDL with the SBA, and the loan is funded directly from the U.S. Treasury. Unlike with PPP loans, banks are not involved. You can apply online, and the SBA has created a streamlined application.

Do You Need to Have Collateral or Make Guarantees?

The SBA does not require a personal guarantee for an EIDL of less than $200,000.

Collateral is required only if the loan is over $25,000. 

For loans over $25,000, the SBA obtains a security interest in all tangible and intangible property your business owns or acquires, including inventory, equipment, and receivables. The SBA files a UCC-1 lien against your business. 

How You Can Use the Money

The money is supposed to be used to help you carry on your business until life gets back to normal. You can use the money to pay normal operating expenses, such as employee salaries and benefits, rent, utilities, and fixed debt payments. You can continue to take your owner’s draw for work you actually perform for the business.

But EIDLs are not supposed to be used to replace lost sales, fund business expansion, start a new business, or refinance long-term debt. Nor can you use them to pay yourself dividends or bonuses. 

As you can see, EIDLs can be a useful source of low-interest financing during these troubled times. If you need my assistance or would simply like to discuss EIDLs, please call me on my direct line at 408-778-9651.

Tax

Don’t Let Section 179 Recapture Hurt You

Don’t Let Section 179 Recapture Hurt You

Okay, so you took the big Section 179 expensing deduction on your vehicle.

How do you keep it?

You might wonder: What do we mean by “keep it”?

In tax law, there’s no free lunch. The Section 179 deduction comes with “recapture strings” attached. 

When you claim your Section 179 deduction, you make a deal with the government to keep your business use above 50 percent during the “designated” depreciation periods (five years for vehicles).

One Sad Story 

In 2018, Jerry Jackson claimed a $53,000 Section 179 deduction on a qualifying pickup truck. In 2020, Jerry’s wife drives the truck and Jerry’s business use drops to zero.

Jerry violated his 50 percent business-use agreement with the government. Now he has phantom income to report (called “recapture”), and he’s going to pay the price for breaking his tax promise on the Section 179 deal.

The pickup truck is listed property. This means that Jerry must recompute his allowable deductions using the ADS straight-line depreciation tables, which will result in the following:

  • $5,300 deduction (10 percent of $53,000) in 2018
  • $10,600 deduction (20 percent of $53,000) in 2019

In 2018, Jerry deducted his 90 percent business cost ($53,000) using Section 179. But now, with recapture, his ADS straight-line depreciation for 2018 and 2019 totals only $15,900 ($5,300 + $10,600). 

So in 2020, the year of violation, tax law recaptures $37,100 ($53,000 – $15,900). Jerry must report the 2020 recapture income on the same form or line on which he (or his corporation) claimed the original $53,000 deduction in 2018.

For example, say Jerry operates as a proprietor who claimed his 2018 Section 179 deduction on Schedule C. In 2020, he reports the recapture income as other income on Schedule C. 

Holy smokes! On Schedule C, that means the Section 179 recapture is going to create self-employment taxes. Correct! The original Section 179 deduction reduced self-employment taxes.

On his recapture income, Jerry gets the double whammy: increased income and self-employment taxes.

Traps to Consider

Retirement. Are you going to retire? Will retirement bring your business use to zero?

Children. Do your children drive your business vehicle(s)? Will their driving bring your business use to 50 percent or less? 

Spouse. Does your spouse drive your business vehicle for personal purposes? Will your spouse’s mileage drop your business use to 50 percent or less?

Personal use. Are you converting Section 179 assets, such as a vehicle, to personal use? Does the conversion to personal use occur during the recapture period? 

You need to consider recapture when doing your tax planning. If you would like my help with this, please don’t hesitate to call me on my direct line at 408-778-9651.

Tax

Four Insights into the PPP Loan and Its Forgiveness

Four Insights into the PPP Loan and Its Forgiveness

We receive many questions about the Payroll Protection
Program (PPP). Here are two of them with our answers.

1. Good Faith at the Time

Question. What are your thoughts on the repercussions
for business owners who acted in good faith based on the information available
at the time and are now left to do things that may be more questionable to earn
PPP loan forgiveness?

Answer. First, with good faith, there’s no fraud
issue as there is no fraud intent. Second, lenders and individuals had to
scramble for a good two months or more before guidance was clarified, so many
of the PPP loan application forms were murky (and some still are).

Obtaining the loan based on the guidance that existed at the
time of your loan application and approval is a non-issue. Further, during the
early process, lenders used (and in some cases, still use) their own formulas
to determine the loan amounts.

As to taking “questionable” actions to earn forgiveness, if
you follow the forgiveness applications, you are doing nothing questionable.

And that’s what you should do: follow the instructions in
the loan forgiveness applications. No funny business.

2. EIDL, EIDL Advance, and
PPP

Question. I’m seeing the Economic Injury Disaster
Loans (EIDL), EIDL advance, and the PPP. What are the differences?

Answer. We’ll deal with the big picture here. It will
prove helpful.

PPP. The PPP is the cash infusion program of choice.
The cash infusion part comes from a bank or other SBA lender and is based on
your prior payroll (2019 in most cases). It comes into your business as a
forgivable loan if you spend the money on defined payroll, interest, rent, and
utilities during a period of up to 24 weeks.

Example. You receive a $50,000 PPP loan and spend it within
the 24 weeks on defined payroll with no reduction in your employee head count.
You qualify for 100 percent forgiveness.

EIDL. Unlike the PPP loan, which comes from a bank or
other approved SBA lender, the EIDL is a loan directly from the SBA; it carries
a 3.75 percent interest rate, may require collateral, and must be repaid.

EIDL advance. The EIDL advance, when available, comes
into play with the EIDL application. It’s an advance on the EIDL of up to
$10,000. If you reject or don’t receive an EIDL and don’t have a PPP loan, the
EIDL becomes a non-taxable grant and does not have to be repaid.

If you have a forgivable PPP loan, you reduce the amount of
forgiveness by the amount of your EIDL advance.

Example. You have a forgivable PPP loan of $30,000
and an EIDL advance of $7,000. The lender will forgive $23,000 of your $30,000.
Let’s say you pay off the remaining $7,000. In this case, you have received a
net of $30,000 ($7,000 + $30,000 – $7,000).

If you would like to discuss your PPP, EIDL, or EIDL
advance, please call me on my direct line at 408-778-9651.

 

 

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