Going to an office is no longer a requirement of conducting business in the age of the internet, cell phones, Skype and GoTo meetings. One step away to save on your taxes. Schedule a quick 10-minute, no-obligation consultation. UNLOCKING the Missed Deductions of a Home Office Small-business owners should not miss the benefit of a home office deduction out of fear of a tax audit. Going to an office is no longer a requirement of conducting business in the age of the internet, cell phones, Skype and GoTo meetings. This means an increasing number of small-business owners are working from home, and eligible to claim a home office deduction. When Properly implemented, this deduction can make a significant difference in your tax liability. WHAT CONSTITUTES A HOME OFFICE? In order to claim a deduction for a home office the IRS requires that a designated space be used exclusively and regularly for business. Going to an office is no longer a requirement of conducting business in the age of the internet, cell phones, Skype and GoTo meetings. Exclusively used for business means it cannot ever be used for personal reasons during the tax year, this includes any type of storage for personal items. Although the office is to be used only for business, the tax code does not mandate that it be a separate room, it can be part of a room - walls are not a requirement. The office must also be used on a regular basis for business. HOW TO DEDUCT EXPENSES FOR THE HOME OFFICE There are two different methods you can use to claim a home office deduction, the actual expense method and the simplified method. ACTUAL EXPENSE METHOD The actual expense method allows you to deduct all direct expenses and a portion of any indirect expenses. Direct expenses are any expenses incurred specifically for the home office, such as painting the office or putting in new carpet. Indirect expenses include any expenses incurred for the home such as mortgage interest, property taxes and utilities. To claim these indirect expenses you need to determine the portion of the expenses that relate to the home office. This can be calculated by dividing the square footage of the office by the square footage of the house. You can also claim depreciation or a rent deduction for the part of the home used for business purposes. On the downside, when you sell the home any depreciation taken needs to be recaptured. This can be an unpleasant surprise come tax time. When using the actual expense method, detailed records and supporting documentation must be kept for all expenses. SIMPLIFIED METHOD If you prefer not to maintain records of these expenses, you can still take a home office deduction using the simplified method. The simplified method is calculated by simply multiplying the square footage of the office by $5 per square foot (up to 300 sq. ft.). The advantage to this method is the IRS does not require you to keep any records that are required by the actual expense method. The main drawback of the simplified method is that you will not be able to deduct your actual expenses if they exceed the allowance of the simplified method. The best solution is to keep track of all of your expenses and then determine at the end of the year which method will provide the greater deduction. MILEAGE Regular commuting to and from work is not a deductible expense, however travel between your primary office located in your home to your second office is classified as business miles that are deductible. This does not mean that you can set up a "home office" to deduct your regular commuting miles. It means that if your home office is where you conduct the majority of your business, you can deduct any mileage to a secondary location. Setting up a home office can potentially create several thousands of dollars in deductible mileage each year. TAKE AWAY Even the smallest home office can unlock significant deductions if the expenses are properly accounted for using either the actual or simplified method. It is very important that the space be used exclusively for business purposes. Save as PDF

Be aware of the special situations that could cause you to owe when you file your taxes next year. Save as PDF Read more articles Share 1 2 AVOID SURPRISES ON YOUR 2018 TAX RETURN According to the IRS, the number of taxpayers who owe at the end of the year has increased 40% in recent years. To make matters worse, if you owe money on your tax return you will also likely be charged penalties and interest for not paying the correct amount throughout the year. The best way to avoid this is to make adjustments to your federal withholdings with your employer or to make estimated tax payments throughout the year. To get started you should determine if you are likely to have a balance due when you file your 2018 tax return next year. WHY DO I OWE? When you are paid by your employer they are required to withhold federal taxes to cover your expected liability. However, these withholdings are not always sufficient to cover your final tax bill due to various factors that can affect your tax liability. Several of these factors include: More than one source of income . If you work more than one job, or if you have a spouse that also works, you have an increased chance of owing on your tax return. This is because each employer only accounts for the wages they are paying you when determining how much taxes to withhold. When you have more than one source of income you could be in a higher tax bracket than your employer expects. Significant increase in income. When you start making more money you run the risk of being phased out of various tax deductions that you may have qualified for in the past. And if you receive a large pay raise in the middle of the year, your withholdings in the first half of the year may no longer be sufficient for that portion of your income when you move into a higher tax bracket. No longer claiming your child. Claiming your child on your tax return can reduce your tax bill by $2,000-3,500 per year. So when you child moves out on their own, or when you cannot claim your child due to divorce, it can take a heavy toll on your tax bill. Major life changes. Getting married, getting divorced, or retiring. These are all major life changes that can have a dramatic impact on your tax return. When you go through one of these changes you should be prepared for significant changes to your tax bill. WHAT TO DO? If any of the above situations apply then you are at increased risk of having to pay when you file your 2018 tax return. To avoid this you can change your withholdings with your employer. If you have more than one job we recommend claiming zero allowances with your second employer. You can also request that an additional specified amount be taken out of each check and put toward your federal tax liability. You can also estimate your final tax bill and make quarterly estimated payments to reduce or eliminate your bill at the end of the year. If you still owe, making quarterly payments can help you avoid paying additional penalties when you file your return. If you would like help determining if you should adjust your withholdings or make estimated payments please give us a call. 1 2 3 4 Save as PDF Read more articles Share Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

Second Act Planning Retirement Readiness Course Join us for one of the following weeks where we review the steps to prepare and thrive in your "Second Act," where your retirement can be so much more than a life of leisure. Week 1: Highlight Your Passions, Skills, and Gifts. Famous baseball player Yogi Berra once said, “If you don’t know where you are going, you will end up somewhere else.” This course focuses on identifying your desired outcomes for the next phase of life and the preparation needed to get there. Topics include change/transition, articulation of personal values, and an understanding of your current and potential financial reality. Week 2: Engage Your Mind and Body According to Socrates, “the secret of change is to focus all of your energy not on fighting the old but on building the new.” This course focuses on how to optimize Social Security and Medicare to increase the security of your retirement years. We will also explore how to establish new physical, intellectual, emotional, and social habits for this next phase of life. Week 3: Reflect on Your External and Internal Codes Intellectual elite, Albert Einstein, once said the hardest thing in the world is to understand the income tax code. The course focuses on how to navigate the US tax code to your advantage with tax-efficient planning and tax-efficient retirement distributions. We will also address estate planning issues and end with an assessment of the internal codes (e.g., rules) that might be limiting all you are intended to be. Week 4: Originate Your Next Act Today American tennis groundbreaker, Arthur Ashe, said: “Start where you are, use what you have, do what you can.” This course focuses on investing what you have to generate a viable return for the future. Subjects discussed include investment risk/return, fixed-income security features, and articulation of the concepts that will inform your decisions in the future. To participate in one of the four classes, email Michael Baumeister at michael@monotelo.com and indicate which class you would like to be a part of, or submit the form below.

Everything you need to know about the new 20% deduction available to you as a pass-through business owner. SMALL BUSINESS TIPS Quarterly: Oct 17 NEW DEDUCTION for Pass-Through Businesses The Tax Cuts and Jobs Act signed into law by President Trump at the end of last year included numerous changes to both individual and corporate taxes. One of the most notable changes was a new 20% deduction for pass-through businesses. This new deduction was created to ensure that pass-through entities were not penalized relative to the tax cut provided to C Corporations. A flat 20% deduction for any pass-through business sounds pretty simple, but things are rarely simple when it comes to the tax code. And that is why we are here, to handle the more technical aspects of this new deduction. For now, here is a brief overview of the deduction requirements. WHO QUALIFIES FOR THIS DEDUCTION? The simple answer to this question is that any "trade or business" that is not a traditional C Corporation qualifies for this 20% deduction. That includes self-employment income from a sole proprietorship or a single-member LLC. It also includes income from a partnership or a S Corporation, as well as income from a rental property. What it does not include is any wages you receive as an employee, even if those wages are paid by a partnership or S-Corporation that you own. HOW IS THE DEDUCTION CALCULATED? This is where things start to get a bit more complicated. The deduction is calculated as 20% of your net business income. This means you must first deduct all of your normal business expenses, including any salary you pay yourself, before determining the deduction. This also means that your business must show a profit in order to receive the deduction. INCOME LIMITATIONS ON THE DEDUCTION Like most deductions and credits in the tax code, the deduction is subject to various restrictions based on income and field of work. If your total taxable income for the year is less than $157,500, or $315,000 if married and filing a joint return (MFJ) then you will receive the full benefit of the deduction. Note that this income threshold is based on your total taxable income, not just the income of your business. It includes any other form of income you or your spouse receive. However, if your taxable income is greater than $157,500 ($315,000 if MFJ) your deduction may either be reduced or eliminated entirely. If your business qualifies as a "specified service trade or business " then your deduction will begin to phase out above these thresholds and will be completely eliminated at taxable income of $207,500 ($415,000 if MFJ). If your business does not fit the definition of a "specified service trade or business" then you will continue to receive the deduction although it may be limited based on the amount your business pays in wages, or the value of the business assets. SUMMARY With the introduction of this new 20% deduction for pass-through businesses, business owners are likely to see a reduction in their tax bill for 2018. The extent of the benefit you receive will depend on your total taxable income as well as the type of business you operate. If you expect your taxable income to be above $157,500 (or $315,000 if MFJ) then call us to help you determine how the tax law changes will impact you. Previous Article Save as PDF

On August 8th President Trump signed a presidential memorandum deferring the employee share of Social Security taxes due on wages paid between September 1st and December 31st. The intent of this memorandum was to provide employees with a temporary increase in cashflow in response to the COVID-19 pandemic. However, since this memorandum only defers the taxes and does not forgive them, they will need to be repaid at some point. Since the memorandum was signed we have been waiting for the Treasury to issue guidance on how this deferral will be implemented so that we could inform our clients on what they can expect. When the Treasury finally released their guidance this past Friday they left many questions unanswered. Per the Treasury guidance employers who do not withhold the employee’s Social Security taxes during the deferral period will need to pay the deferred taxes between January 1st and April 30th or be subject to penalties and interest. The guidance states that it will be the responsibility of the employer, not the employee, to pay the deferred taxes at the end of the deferral period. However, the guidance also states that employers may then make arrangements to collect the applicable taxes from the employees. What this means is that if your employer does not withhold Social Security taxes from your paycheck during the deferral period then you will see a small increase in your net paycheck until the end of the year. But in January you will either see one lump sum deducted from your paycheck or see your paychecks decrease for the first few months of the year as your employer collects back the Social Security taxes that are due. One question that the guidance did not answer was who decides whether to participate in the deferral, the employer or the employee? Some employees may welcome a short-term increase in their net paycheck while others will not want to deal with the hassle of repaying those taxes in a few months. It remains to be seen if employees will be able to choose if they want their taxes deferred or if they will have to go along with what their employer decides. Our Recommendation to Employees As we have already said, this is NOT forgiveness of your Social Security tax obligation, it is only a deferral until January. To avoid an unwelcome tax bill in January it is our recommendation that you reach out to your employer and let them know that you do NOT want to participate in the payroll tax deferral. Your paycheck will remain unchanged through the rest of the year and you will not be faced with a large tax bill in January. If you employer chooses to implement the deferral across the board and does not allow you to opt out then we would recommend setting aside the additional money in each paycheck to pay back the deferred taxes when they become due next year. Our Recommendation to Employers We are now one day from the start of the social security deferral period and there are still many questions that the Treasury has not answered regarding how employers will report taxes that have been deferred and if employers will be responsible for taxes when they are unable to get them from employees in January. Due to all of this uncertainty our recommendation is that employers do not participiate in the deferral for the time being and continue to withhold taxes as normal. Read more articles SOCIAL SECURITY TAX DEFERRAL Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

At Monotelo Advisors we work hard to free up cash flow by helping you minimize your federal tax liability, giving you more money to reinvest into your future. Welcome to Monotelo Advisors Tax expertise that delivers. CHOOSE YOUR DESTINATION SMALL BUSINESS PUBLIC SERVANTS TAX EXPERTISE Our Mission: To make a difference with meaningful and actionable financial solutions that positively impact our client's lives.

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THE MONOTELO TEAM Jim Richter, CFP®, CAIA®, EA, CEPA ® President jim@monotelo.com Jim Richter is the President of Monotelo Advisors. Jim sets the strategic direction for the firm, including oversight of all tax and financial planning services at Monotelo Advisors. He brings 20+ years of experience in the financial services industry, including 10 years of hedge-fund specific work across diverse investment products. Prior to founding Monotelo Advisors, Jim spent 7 years as a Managing Director and Partner at a Chicago-based asset management firm. Prior to his time in the asset management industry, Jim spent 9 years as a fixed-income specialist in the banking industry. Jim is a CERTIFIED FINANCIAL PLANNER™ and a Chartered Alternative Investment Analyst with a degree in Finance from the University of Illinois - Chicago. He is an Enrolled Agent, a federally authorized tax practitioner empowered by the US Department of the Treasury to represent taxpayers before the Internal Revenue Service. Jim is also a Certified Exit Planning Advisor (CEPA®), trained to help business owners align their goals and build transferable value to successfully exit their companies. If you asked Jim where he would like to be right now, it would be in the Northwoods of Wisconsin. Ron Rindone, CPA Certified Public Accountant ron@monotelo.com Ron is a Certified Public Accountant with more than 40 years in public accounting. Ron has extensive experience with accounting and taxation in the manufacturing and service industries. He is a member of the Illinois CPA Society. Ron has a deep understanding of the Internal Revenue Code and how it intersects with our small business owners and individual families. He has a Bachelor’s degree in accounting from the University of Illinois. Ron and his wife have one son and two grandchildren. In Ron’s free time he enjoys spending time at his home in Lake Geneva with family and friends. Little known fact about Ron: he has been to the World Series of Poker more than once! Nicknamed “Best Dressed Ron” by the Heartland Poker Tour announcers in 2016, Ron was perfectly fine with his new nickname after he walked away with $74,000 in tournament winnings. Gavin Tabb, CPA Certified Public Accountant gavin@monotelo.com Gavin is a Certified Public Accountant and small business specialist for Monotelo Advisors. He is responsible for supporting our small business clients throughout the United States with seamless payroll, bookkeeping and monthly accounting services throughout the year. Gavin has a Bachelor’s degree in accounting from Northern Illinois University. He is an Intuit QuickBooks Certified User. Gavin and his wife have a five-year old daughter and one-year old son. Mike Matousek, CPA Certified Public Accountant Mike@monotelo.com Mike has extensive experience, spanning over four decades, starting as a staff accountant, and eventually becoming a partner at his own firm. His responsibilities included preparing and filing individual and business tax returns, assisting in audit field work for corporations, assessing the risk of material misstatement in financial statements, and designing audit procedures in accordance with Generally Accepted Auditing Standards (GAAS) for various accounts. As a partner at his firm, Mike was also involved in training and supervising staff, playing a leadership role in the development of his team. His current focus at Monotelo involves researching tax positions for clients to minimize tax liabilities and filing complex corporate tax returns. Mike has a wealth of experience and expertise in tax planning, auditing, and leadership within the field of public accounting. Jessica Padden, EA Tax Specialist jessica@monotelo.com Jessica is a tax specialist and paraplanner with Monotelo Advisors. Her expertise lies in personal tax returns and comprehensive tax planning, especially during significant life transitions. Jessica excels at deciphering the complexities of tax returns, helping clients minimize their taxes by addressing issues such as basis calculations, farm income, and company stock plans. With a Master's in Financial Planning from the American College, she is also an Enrolled Agent and Accredited Financial Counselor. Since 2011, Jessica has been dedicated to helping clients achieve more secure financial futures. Her commitment to her clients is unwavering, and she strives to provide personalized and effective financial solutions. When Jessica is not assisting clients, she enjoys spending her time reading, crafting, or hiking with her family. Starla Dolihite, EA Tax Specialist starla@monotelo.com Starla is a tax specialist with Monotelo Advisors. She serves in our personal tax department where she brings her best to Monotelo clients each day. Her attention to detail and commitment to excellence are what make her special. She is passionate about studying tax law and getting into the nitty-gritty so she can apply that knowledge to make a difference in the lives of our clients. Outside of work she enjoys hiking, mountain biking, paddleboarding and serving in her church. Starla and Brian, her husband of 33 years, have three adult children and one daughter-in-law. If Starla could be anywhere right now it would be working out at the gym, or at the beach. But not just any beach! The beach has to be on the Florida Gulf Coast. Starla and her husband are Florida natives. Starla has a Bachelor Degree in Accounting from the University of West Florida. Starla is an enrolled agent, a federally authorized tax specialist that operates to provide advisory services to American taxpayers about matters concerning the Internal Revenue Service. Renee Katschke Small Business Specialist renee@monotelo.com Renee is a small business specialist for Monotelo Advisors with over 15 years of public accounting experience. Renee works alongside Mary Bresson in our West Brooklyn office serving our small businesses and farming clients. She started her career in banking and has been providing bookkeeping, payroll and sales tax return preparation services since 2006. Renee also supports our team in preparing individual 1040, corporate and partnership tax returns. Marianne Richter Engagement Manager marianne@monotelo.com Marianne Richter is responsible for ensuring that Monotelo is delivering a high level of customer service and meeting the expectations of Monotelo’s small business relationships. Marianne brings 13+ years of diversified training and marketing experience in the consumer goods industry to Monotelo. Marianne and her husband, Jim have two adult sons. Little known fact about Marianne: she is a certified personal trainer and health coach. If Marianne could be anywhere, it would be on a beach. Anita Ruffin Accountant anita@monotelo.com Anita is a seasoned accounting professional who has served in public and corporate accounting over the course of her career. Working in the accounting department at Motorola for a decade, Anita played the role of staff accountant, compensation analyst and team leader in Motorola’s network services business. Anita holds a Bachelor of Science degree in Accounting from the University of Missouri. She and her husband have three adult children and a dog! Anita enjoys traveling, gardening, leading her BSF bible group and spending time with family. If she could be anywhere right now, she would be on the beach, in a tropical island! Cassie Beesley Associate Cassandra@monotelo.com Cassie is a long-time resident of Bunker Hill, and is thrilled to assist Monotelo clients in the local communities she loves. Cassie earned two bachelor’s degrees from Eureka College, one in Mathematics and one in Secondary Education. After graduating from college, Cassie worked as an administrative assistant for over 5 years, where she found her calling in accounting and her love for numbers. In her spare time, Cassie coaches girls and boys volleyball at her alma mater high school. When Cassie is not caring for the needs of Monotelo’s clients, you might find her writing her own fictional stories, or hiking and kayaking

Quarterly: Oct 17 Overcoming Our Cognitive Biases We started a series on decision-making back in June when we introduced the concept of Level 1 and Level 2 thinking from Daniel Kahneman’s book “Thinking Fast and Slow.” The main goal of the series (Better Thinking... , ...Better Decisions , The Fallacy of the Formula ) was to explore how cognitive biases are formed and how they influence our decision-making. The challenge with our cognitive biases is that they tend to influence us most at the extreme ends of the spectrum. And it’s at these extreme ends of the spectrum where we may need to ignore them the most, because all risky asset classes will experience long periods of underperformance. The S&P 500 Index has experienced three separate periods where it underperformed riskless one-month Treasury bills for more than a dozen years (1929-1943, 1966-1982, and 2000-2012). Any student of the market knows that longer periods of underperformance by risky assets are a necessity. If these periods never occurred, there would be no risk, and the risk premium would disappear. The periods of underperformance essentially create the equity risk premium that investors capture when they choose to take on the random and unpredictable risk of the equity markets. If The Markets Are Random and Unpredictable, How Should That Impact Our Decision-Making? Mean reversion is the theory that security prices return to their long-term averages over time. In every asset class, from bonds to stock to commodities, buying what is cheap leads to better outcomes because expensive stocks revert down to their mean over time while cheap stocks revert up to their mean over time. Unfortunately, that truth only holds up over longer periods of time. Expensive stocks can get more expensive in the short-term while cheap stocks can get even cheaper. Using the CAPE Ratio (the Cyclically Adjusted PE ratio from Robert Shiller) for the S&P 500, we can look back at periods of time when assets were expensive and times when assets were cheap. Source: Macrotrends, Multiple.com and Telos Asset Management Company The CAPE ratio is a valuation measure that uses real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle. The ratio is generally applied to broad equity indices to assess whether the market is undervalued or overvalued. Source: Macrotrends, Multiple.com and Telos Asset Management Company By inverting the CAPE ratio chart we can observe the direct relationship between price and future returns. The following chart lines up the annualized 10-year forward returns of the S&P 500 with the CAPE ratio at the start of the period. When the blue line is high, stocks are theoretically undervalued and their future return potential is high. When the blue line is low, stocks are theoretically expensive, and the potential for future returns is muted. Source: Macrotrends, Multiple.com and Telos Asset Management Company While these charts clearly prove that price matters, they do not address the value premium (the advantages of buying cheap stocks over expensive stocks). And unfortunately, there is little evidence that investors can accurately time the value premium or when the mean reversion will take place. That’s where patience and discipline come in. And How Do We Overcome Our Cognitive Biases? The key to overcoming our cognitive biases is to override them with a process that systematically allocates based on math and sound logic rather than human judgement. Process-driven investing is nothing more than a long-term approach to putting capital at risk by owning a broad variety of asset classes, making periodic contributions and regularly rebalancing. The challenge with process-driven investing is that it requires an investor to focus on the investment process and not the short-term results. That can be extremely difficult when the short-term results don’t coincide with the long-range return objectives. Over the long term, however, overcoming our cognitive biases with a good process should deliver more reliable outcomes with better results.

WHITE PAPER INTRODUCTION STARTING OVER, AND OVER (SOO)! The SOO case is about a young Realtor who started her real estate career right out of college. With a strong desire to be in the industry, she began her real estate career as an administrative assistant, and worked her way into a sales position at a local real estate office in the Northwestern corridor of the US. After building a successful business in the Northwest, she had to make a life changing decision. Should she follow her fiancé to the Midwest, while he attended medical school? Or should she stay in the Northwest and continue to grow her business? Judy decided to take the challenge and build a second real estate business in the Midwest. She joined a traditional platform with a 60/40 split. Her business grew quickly, but she did not like the idea of giving such a large percentage of her commissions to her broker. Judy found a niche office with minimal overhead expenses where she was able to switch to a 90/10 commission split. She now had two locations that were generating significant income for her, and because of her ambition and hard work, Judy was recognized with the Rising Star Award in 2016. THE CHALLENGE Within three years of her move to the Midwest, her business was grossing $150K in revenue annually, and she was paying 32% of her income in state, federal income and wage taxes. On top of her growing tax bill, her fiancé’s school loans were rapidly increasing and there was growing concern over how long it would take to pay back the loans when the government was taking such a large piece of her commissions. Was there anything they could do to increase their cash flow and start paying down his school loans? In the middle of our dialogue over how Monotelo helps Realtors® reduce their tax liability, Judy and her fiancé got married and decided to move back to the Northwest as soon as he finished school. Her new husband had a nice position lined up in the medical field, and Judy was planning to pick up her Northwest-based real estate business where she left off. With the addition of her husband’s new salary, the likelihood of being pushed into a higher tax bracket was high. Combining the high federal income tax bracket with the self-employment tax and state income tax, they were going to be paying close to 50% of every marginal dollar to the federal government as her business income grew. Save as PDF THE SOLUTION Judy and her husband struggled with the decision to implement our strategy, because of the added complexity of their move back home. After considerable thought, they decided to move forward and implement our recommendations in the fall of 2016. The Monotelo team made sure Judy’s real estate business was properly structured to apply the tax code in the most efficient way possible. By changing the way Judy received income and structuring her new business to take advantage of provisions in the revenue code, Monotelo reduced her tax liability by $8,000. The increased cash flow had a significant impact on their ability to start paying down her husband’s outstanding student loans. What a relief! More White Papers WLW: Win One, Lose One, Win One CWS: Could-A-Would-A-Should-A JSZ: Junior Sam Zell

ECONOMIC RELIEF FROM THE SMALL BUSINESS ADMINISTRATION If your business is struggling, you may be able to get some help from the federal Small Business Administration (SBA), which is authorized to provide loans to small businesses on an as-needed basis. There are two types of relief you can apply for: Economic Injury Disaster Loans Traditionally, low-interest SBA Economic Injury Disaster Loans (EIDLs) have been available to small businesses following a disaster declaration; these are authorized by Section 7(a) of the Small Business Act. EIDLs are commonly granted on a local level following a natural disaster (such as a hurricane or a tornado). But right now they are authorized for small businesses in all U.S. states and territories due to the COVID-19 pandemic. Currently, each disaster loan provides up to $2 million to pay fixed debts, payroll, accounts payable, and other bills. The interest rate is fixed at 3.75 percent for small businesses and 2.75 percent for non-profits. EIDLs can be repaid over a period of up to 30 years. Additionally, due to COVID-19, the SBA is providing advances of up to $10,000 on EIDLs for businesses experiencing a temporary loss of revenue. Funds are available within three days after applying, and the loan advance does not have to be repaid. Small business owners can apply for an EIDL and advance here: https://covid19relief.sba.gov/#/ . New Paycheck Protection Program The Paycheck Protection Program (PPP) is an expansion of the existing 7(a) loan program, authorized by the recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Who’s Eligible? Employees. According to the SBA, you are eligible if your business was in operation as of February 15, 2020, and you had employees for whom you paid salaries. (The CARES Act includes as eligible payroll your payments to 1099 independent contractors, but the SBA guidance says no—you can’t include the 1099 payments. And since this is an SBA loan, the SBA guidance likely rules for now.) No employees. You qualify the PPF loan even if the only worker is you. Thus, both the sole proprietor with no employees and the single-member LLC with no employees qualify. Small businesses that employ 500 or fewer employees are eligible for PPP relief. In this small business category, you find S and C corporations, sole proprietors, partnerships, certain non-profits, veterans’ organizations, and tribal businesses. How Much Aid Is Available? Small businesses can borrow 250 percent of their average monthly payroll expenses during the one-year period before the loan is taken, up to $10 million. For example, if your monthly payroll average is $10,000, you can borrow $25,000 ($10,000 x 250 percent). At $1 million, you can borrow $2.5 million. The law defines “payroll costs” very broadly as Employee salaries, wages, commissions, or “similar compensation,” up to a per-worker ceiling of $100,000 per year; Cash tips or the equivalent; Payment for vacations and parental, family, medical, or sick leave; Allowance for dismissal or separation; Payment for group health benefits, including insurance premiums; Payment of any retirement benefit; or State or local tax assessed on employee compensation. What’s specifically not included in payroll costs: Annual compensation over $100,000 to any individual employee Compensation for employees who live outside the U.S. Sick leave or family leave wages for which a credit is already provided by the Families First Coronavirus Response Act (P.L. 116-127) How Much of the Loan Is Forgiven? Principal amounts used for payroll, mortgage interest, rent, and utility payments during an eight-week period (starting with the loan origination date) between February 15, 2020, and June 30, 2020, will be forgiven. If the full principal is forgiven, you are not liable for the interest accrued over that eight-week period—and, as an added bonus, the canceled amounts are not considered taxable income. Warning: Payroll Cuts Affect Loan Forgiveness Because the whole point of the PPP is to help keep workers employed at their current level of pay, the loan forgiveness amount decreases if you lay folks off or reduce their wages. 1. If you keep all your workers at their current rates of pay, you are eligible for 100 percent loan forgiveness. 2. If you reduce your workforce, your loan forgiveness will be reduced by the percentage decrease in employees. Example: Last year, you had 10 workers. This year, you have eight. Your loan forgiveness will be reduced by 20 percent. You are allowed to compare your average number of full-time equivalent employees employed during the covered period (February 15, 2020, to June 30, 2020) to the number employed during your choice of 1. February 15, 2019, to June 30, 2019, or 2. January 1, 2020, to February 29, 2020. 3. If you reduce by more than 25 percent (as compared to the most recent full quarter before the covered period) the pay of a worker making less than $100,000 annually, your loan forgiveness decreases by the amount in excess of 25 percent. Example: Last quarter, Jim was earning $75,000 on an annual basis. You still have Jim on the payroll but have reduced his salary to $54,750 annually. Jim’s pay has decreased by 27 percent, so the amount of your PPP loan forgiven is reduced by the excess 2 percent. The good news: If you have already laid workers off or made pay cuts, it’s not too late to set things right. If you hire back laid-off workers by June 30, 2020, or rescind pay cuts by that date, you remain eligible for full loan forgiveness. When Are Payments Due? Any non-forgiven amounts are subject to the terms negotiated by you and the lender, but the maximum terms of the loan are capped at 10 years and 4 percent interest. Also, payments are deferred for at least six months and up to one year from the loan origination date. What If You Already Applied for an EIDL for Coronavirus-Related Reasons? No problem—if you took out an EIDL on or after January 30, 2020, you can refinance the EIDL into the PPP for loan forgiveness purposes, but you can’t double-dip and use the loans for the same purposes. Any remaining EIDL funds used for reasons other than the stated reasons above are a regular (albeit low-interest) loan that needs to be repaid. How to Apply for a PPP Unlike EIDLs, which run directly through the SBA, PPP loans go through approved third-party lenders. Talk to your bank or your local SBA office (given the current demands on the SBA, your bank may be a better place to start). There’s no fee to apply, and your burden for demonstrating need is low. In addition to the appropriate documentation regarding your finances, you need only make a good-faith showing that the loan is necessary to support your ongoing business operations in the current economic climate; the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; and you do not have a duplicate loan already pending or completed. If You’re Going to Apply, Do It Now The law allocates $349 billion for PPP relief—a huge amount, but one that will presumably be in very high demand given the devastating effects of the COVID-19 pandemic. There’s no guarantee that more funding will be forthcoming, so act now to claim your share if you are eligible. It may be a while before the processes to grant these loans are actually up and running, but get things rolling at your end ASAP. If you are in dire straits right now, you may also want to go ahead and apply for an EIDL loan and advance, as the process is already in place to apply.