If you’re like a lot of our customers, you’re worried. And that worry is broad—from concerns about the health and safety of your family, staff, and friends to wondering how long your business can handle being slowed-down (or shutdown entirely) during COVID-19 mitigation efforts. We’ve seen people in social groups flat-out say they’re done—shutting their doors and giving up. And that’s understandable. How can you make payroll? Or rent? How do you make payments on capital assets? How do you survive this? For local business owners, they aren’t academic questions—they’re realities.
The good news is there’s a path forward, for everyone. But you must take action now. Enter the CARES Act. Considered to be the “third step” in the Federal Government’s response to the COVID-19 outbreak (more are planned), the CARES Act is meant to inject massive liquidity into the US Economy, as well as give local businesses the resources they need to get through COVID-19 mitigation. Simply put, the Federal Government wants you to keep all employees paid even if they are idle—and they are giving some significant incentives to make it worth your while to do this.
As you may know, on March 27th, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law, to support 30 million small businesses, which employ nearly half of the nation’s workforce. What you may not fully understand is how this new legislation applies to your business or practice, and more specifically how to get started putting it to work for you.
To keep it simple, CARES allocates roughly $2.2 Trillion dollars, of which $349 Billion are specifically set aside for a new small business loan program, called the “Paycheck Protection Program” or simply PPP. That $349 Billion is basically intended to keep your business running, even if it’s idle. Mostly, it’s a loan program (there are some grant portions as well), but significant portions of the loans are either fee and tax free, or with delayed payments, and in some cases, are entirely forgivable and won’t be treated as income.
Put another way, you can take a loan out through a PPP program, pay no interest or fees on that loan, likely not have to start paying it back for six months (or more in some cases), and in the end have significant portions of that loan forgiven.
As a rule, if your company has fewer than 500 employees, you qualify. This includes corporate entities as well as sole proprietorships, self-employed persons, and independent contractors (including “gig economy” workers).
There are of course restrictions on how this money is used—remember, this is intended to keep your business afloat as we navigate COVID-19 mitigation. But as a rule, small business owners like you can apply for loans and grants that will offset the cost of your payroll, rent, and utilities.
There are a number of sub-programs within the CARES Act, and if you use some you may not be able to use others. Specific programs of note include:
The goal of this program is to make sure you can meet payroll along with other basic expenses. For most people reading this post, it’s arguably the most interesting place to start. It provides up to $10 million in zero-fee loans to cover payroll and other operating expenses. Note, however, that this is scaled to your payroll. As a rule, you can borrow up to 2.5 times your average monthly payroll under this plan. More importantly, up to 8 weeks of payroll, mortgage interest, rent, and utility costs can be forgiven (which means most of this loan is intended to be forgiven). Payments on principal and interest are deferred for one year. Note, there is an application process to forgive these loans and you will need to provide documentation on payroll and all relevant expenses (plan on 60 days after your applying to forgive a loan for a final decision). Also note, if you layoff staff or reduce overall payroll by 25% or more, less of your loan will be forgiven.
This program includes a grant and a loan component and it’s something to consider if you’re looking beyond payroll and rent (think covering your capital leasing obligations or other expenses). The CARES Act creates a new emergency grant of $10,000 for small businesses that apply for an SBA economic injury disaster loan (EIDL). EIDLs are loans up to $2 million with interest rates of 3.75% for businesses and 2.75% for nonprofits, and principal and interest payments deferred up to 4 years. The EIDL loans may be used to pay for expenses that could have been met had the disaster not happened, including payroll and other operating expenses. The EIDL grant does not need to be repaid even if the applicant is denied an EIDL. A small business may apply for an EIDL grant and a Paycheck Protection loan. Note, EIDL grant will be subtracted from the amount of the Paycheck Protection loan that is forgivable.
If you already have an SBA loan, or were planning on taking one out, this applies to you (again, think capital leasing obligations). If you already have a load (such as a 7(a), 504, or microloan) or take one out within 6 months after the CARES Act is enacted, the SBA will pay all loan costs for borrowers, including principal, interest, and fees, for six-months. SBA borrowers may also seek an extension of the duration of their loan and delay certain reporting requirements.
The CARES Act creates a refundable payroll tax credit for businesses, large and small, that retain their employees during the COVID-19 crisis. Employers are eligible if they have been fully or partially suspended as a result of a government order, or they experience a 50% reduction in quarterly receipts as a result of the crisis. For employers with 100 or fewer full-time employees, they may claim a credit for wages paid to all their employees, up to $10,000 a person. For employers with more than 100 employees, they may claim a credit for those employees who are furloughed or face reduced hours as a result of the employer’s closure or economic hardship. The Department of the Treasury is authorized to advance payment of the employee retention tax credit. This tax credit is not available if the employer takes an SBA paycheck protection loan.
The CARES Act allows employers to delay paying the employer-portion of payroll taxes through the end of 2020. The deferred amount is due in two installments - 50% is due before December 31, 2021, and the other 50% is due before December 31, 2022. Deferral is not available if the employer takes an SBA paycheck protection loan.
The CARES Act allows the Treasury to send advance payments of tax credits available to employers that are required to provide up to 12 weeks of coronavirus-related paid leave to their employees.
The CARES Act provides other forms of tax relief for businesses, including loosening requirements for net operating losses, and limitations on business interest deductions. The CARES Act also permanently fixes the qualified improvement property (QIP) error in the 2017 tax law, so that QIP investments are entitled to 100% recovery over 15 years. Distillers are exempt from excise taxes on undenatured alcohol for the purpose of producing hand sanitizer.
Single employer pension plans can delay quarterly contributions for 2020 until the end of the year. Employers may also use 2019 funded status for the purposes of determining funding-based limits on plan benefits for the plan years that include 2020.
Most programs should be available for application on Friday, April 3rd.
Per Sec. Steven Mnuchin, “Businesses can go to a participating SBA 7(a) lender, bank, or credit union, apply for a loan, and be approved on the same day,”.
Visit www.sba.gov/lendermatch to get started.