The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress on Friday, March 27th, offering individuals and businesses $2.2 trillion of financial relief from the financial strain caused by the coronavirus epidemic. To put the United States’ financial downturn into perspective, nearly 3.3 million Americans filed for unemployment benefits for the week ending March 21. Not only is this a U.S. record for the number of unemployment claims in one week, it shattered the previous record set in 1982 by more than four times. This article will explore the following sections of the CARES Act and how it can help you and your business:
1.) Loans available for small businesses;
2.)Other special provisions for small businesses;
3.)Rebates for individuals (also known as stimulus checks); and
4.) Labor provision sand unemployment compensation
Paycheck protection program from the SBA
The Paycheck Protection Program (PPP) provides loans of up to $10 million to qualified small businesses. This program provides cash-flow assistance through 100 percent federally guaranteed loans to employers who maintain their payroll during this COVID-19 emergency.
DOES MY BUSINESS QUALIFY? If your business was in operation on February 15, 2020 and has 500 or fewer employees or independent contractors for whom the business had paid salaries, compensation and payroll taxes, you qualify. (There are limited exceptions to the 500-employee threshold, such as businesses in the hospitality and food sectors that have multiple locations, which can have up to 500 employees per physical location of the business.)
BUSINESSES MUST PROVIDE GOOD FAITH CERTIFICATION: In addition to the aforementioned qualification criteria, in order to participate in the PPP a business is required to certify the following:
- That the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
- Acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments;
- That the business does not have an SBA 7(a) loan pending for the same purpose and duplicative of amounts applied for or received under a covered loan (i.e. the Economic Injury Disaster Loan);
- During the period beginning on February 15, 2020 and ending on December 31, 2020, the business has not received amounts under the Paycheck Protection Program for the same purpose or duplicative amounts applied for or received under a covered loan.
IT LOOKS LIKE MOST U.S. SMALL BUSINESSES ARE ELIGIBLE? It certainly appears that way. This definitely looks like a very good deal for U.S. small businesses.
PPP LOAN PROVISIONS (IT GETS EVEN BETTER)
The PPP loan provisions make this program look even more attractive:
- No collateral required
- No personal guarantee required
- No loan fees
- If you spend the money as you are supposed to and keep your employees on payroll, some or all of the loan is forgiven (See following section)
- The forgiven portion of the loan is NOT considered taxable
- For the portion of the loan that is not forgiven, repayment terms are up to 10 years at not more than 4% interest
- Initial loan payments are deferred for a period of six months to one year
- No prepayment penalty
WHAT EXPENSES CAN I USE THE LOAN TO PAY FOR? In addition to payroll, the following expenses can also be paid using a PPP loan:
- Costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums;
- Payments of interest on any mortgage obligation;
- Interest on any other debt obligations that were incurred before the covered period.
HOW MUCH CAN I BORROW? Here’s how the loan will generally work – each eligible business may receive up to 2.5 times its average monthly payroll costs subject to a $10 million limitation. The SBA will be issuing more guidance on how to apply for a PPP loan and calculate the maximum loan amount your business will be eligible for. We have also prepared a free template that you can use to help calculate this.
MY BUSINESS HAS ENOUGH CASH TO GET US THROUGH THE NEXT FEW MONTHS. SHOULD I STILL APPLY? Nobody knows when life – and the worldwide economy – will be back to normal. Even if your business is in the fortunate position of weathering this storm for now, that could change in a hurry. The PPP program is a pretty sweet deal for all U.S. small businesses. If you qualify to apply, you should strongly consider doing so. However, if your business is thriving because of COVID-19 you should probably leave this program for those who need it most.
HOW TO APPLY: While the SBA will be administering and guaranteeing these loans, you will apply through your bank or credit union.
WHAT TO DO NOW: Talk to your bank or credit union as soon as possible and ask for a checklist of required documentation that will be required for the initial loan application (and subsequent loan forgiveness application – see next section). We’ve also included this in our free template.
Although your bank or credit union is likely still waiting for more information from the SBA on how to process PPP applications, they will probably be inundated with loan applications very soon so its best to be as prepared as possible ahead of time.
NOTE: A loan under the PPP makes the borrower ineligible for the Employee Retention Tax Credit made available under the CARES Act (see later section in this article). This only applies to the Employee Retention Tax Credit in the CARES Act and does not apply to any credits available under the Families First Coronavirus Response Act (such as the paid sick leave tax credit) or other credits available under the CARES Act.
MAJOR NOTE: The SBA has up to 30 days following the enactment of the CARES Act to issue regulations implementing and providing guidance under certain provisions of the CARES Act. In addition, the Treasury Department is required to issue regulations implementing and providing guidance under certain provisions of the CARES Act. Issuance of regulations and guidance may delay loan approval and disbursement or modify/waive certain loan requirements.
Loan forgiveness provisions
Under the CARES Act, small business loan borrowers will be eligible for loan forgiveness, both for new loans under the PPP and for existing SBA 7(a) loans.
WHAT EXPENSES CAN BE FORGIVEN? For borrowers under the PPP, the loan forgiveness will equal the amount spent by the borrower in the 8-week period after the loan origination date on the following items (not to exceed the original principal amount of the loan):
- Payroll costs (not to exceed $100,000 of annualized compensation per employee)
- Payments of interest on any mortgage loan incurred prior to February 15, 2020
- Payment of rent on any lease in force prior to February 15, 2020
- Payment on any utility for which service began before February 15, 2020
IS THE CANCELED DEBT CONSIDERED TAXABLE INCOME? No. The forgiven loan amount is NOT considered taxable income to the borrower.
HOW IS THE FORGIVEABLE AMOUNT OF THE LOAN CALCULATED? The amount forgiven will be reduced proportionally by any reduction in the number of employees retained as compared to the prior year. Any loan amount outstanding after considering the amount forgiven will be repayable over a term not to exceed 10 years.
DON’T FORGET! You must separately apply for loan forgiveness with your bank or credit union with appropriate supporting documentation. It is not automatic.
Economic Injury Disaster Loan (EIDL) Program – additional $10k grant
EIDL’s are lower interest loans of up to $2 million, with principal and interest deferment available for up to 4 years that are available to pay for expenses that could have been met had a disaster not occurred, including payroll and other operating expenses.
All businesses suffering substantial economic injury from a disaster, including the COVID-19 pandemic, in all 50 states, the District of Columbia and associated territories may apply for an EIDL.
The Act made several changes to the Economic Injury Disaster Loan (EIDL) program under Section 7(b) of the Small Business Act:
- Loans over $200,000 must be guaranteed by any owner having a 20 percent or greater interest in the applicant. The CARES Act removed the requirement for personal guarantees on loans under $200,000.
- The CARES Act also removed standard EIDL program requirements that the borrower not be able to secure credit elsewhere or that the borrower have been in business for at least one year, as long as it was in operation on January 31, 2020.
- The CARES Act creates a new grant program that provides an emergency advance of up to $10,000 to small businesses and private nonprofits harmed by COVID-19 within three days of applying for an EIDL. To access the advance, you must first apply for an EIDL and then request the advance. This loan advance will not have to be repaid.
HOW TO APPLY FOR AN EIDL LOAN: To apply for an EIDL online, visit disasterloan.sba.gov/ela.
Other business provisions under the CARES Act
DELAY IN PAYMENT OF PAYROLL TAXES: Businesses and self-employed workers can defer the employer’s 6.2% portion of the Social Security tax for the 2nd, 3rd and 4th quarters of 2020. The tax must be repaid over a 2-year period, with 50% due by the end of 2021 and the remainder paid by December 31, 2022.
5 YEAR CARRYBACK OF NET OPERATING LOSSES: For net operating losses incurred in 2018, 2019 and 2020, this provision enables a 100% income offset with the option to carry back the loss for 5 years.
EMPLOYEE RETENTION CREDIT: This program is for eligible businesses that are forced to suspend or close operations due to COVID-19 or otherwise have a significant revenue decrease and continues to pay its employees while not currently working. Here’s how the credit works:
- CREDIT EQUALS 50% OF QUALIFIED WAGES: For each quarter that a business is eligible, the business will receive a refundable credit against its 6.2% employer portion of the payroll tax equal to 50 percent of qualified wages paid. For example, say you pay an employee $5,000 of qualified wages. You would get a credit equal to 50%, or $2,500.
- WAGES CAPPED AT $10,000: The amount of qualified wages per employee for all quarters cannot exceed $10,000.
- EMPLOYER SIZE: If you have more than 100 employees, you can only claim the credit on employees who were not working due to a mandated shutdown. If you have fewer than 100 employees, the credit applies to all employees. However, we are unsure of whether or not businesses with employees deemed as “essential” will qualify until further guidance is received.
- MUST NOT PARTICIPATE IN THE PPP LOAN PROGRAM: A business cannot participate in both the “Employee Retention Credit” program and the “Paycheck Protection Program” described at the beginning of this article. (HINT: You should strongly consider the PPP program. It has generous forgiveness provisions.)
Rebate checks are intended to assist low and middle-income individuals and families afford what they need during this public health crisis.
- WHO QUALIFIES TO RECEIVE A REBATE? Checks (or direct deposits) for $1,200 will be sent to most adults. For every qualifying child under age 17, families will receive an additional $500. Retirees and people on disability are also eligible to receive a check subject to the income limitations outlined below.
- WHO DOES NOT QUALIFY TO RECEIVE A REBATE? Rebate payments are not available to nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, estates and trusts.
- ARE THERE ANY IDENTIFICATION REQUIREMENTS TO RECEIVE THE REBATE? An individual must have a Social Security number. If an individual has qualifying children, they also need to have a Social Security number.
- HOW MUCH WILL I GET? The amount of the rebate depends on family size.
- WILL I GET THE ENTIRE AMOUNT? Higher-income citizens may see a reduced payment or no payment at all. Here are the thresholds:
- Single adults with income of $75,000 or less would get the full amount. Reduced checks will go out to single adults making up to $99,000 a year (the $1,200 payment is reduced by $5 for every $100 in income above $75,000).
- Married couples with zero children with income of $150,000 or less would get the full amount. Reduced checks will go out to married couples who earn up to $198,000.
- “Head of Household” adults (normally single adults with children or other dependents) will receive the full $1,200 check if they earn less than $112,500. Reduced checks will go out to “Head of Household” adults who earn up to $136,500.
- HOW WILL I RECEIVE THE CHECK? If you provided the IRS with direct deposit information on your 2019 tax return, your payment will be automatically deposited into your bank account. If you didn’t provide the IRS with direct deposit details on your 2019 tax returns, the IRS will mail you a check. If you haven’t filed your 2019 tax return, the IRS will use information from your 2018 return.
- HOW WILL MY INCOME BE CALCULATED? Your 2019 tax return will be used to determine your income for purposes of whether you receive the full amount of the stimulus check and how many qualifying children you have. If you haven’t filed your 2019 tax return, your 2018 return will be used.
- WHEN WILL I GET MY CHECK OR DIRECT DEPOSIT? Treasury Secretary Steve Mnuchin wants to get the first batch of direct deposit payments sent out the week of April 6. It may take up to a month for everyone to get their payment. If your payment is arriving via mail in the form of a check, you might have to wait between 6 and 12 weeks to see your payment.
- ARE THE CHECKS TAXABLE? These payments are not taxable. It is, however, considered an advance on your 2020 taxes and will be reconciled against amounts owed at that time.
The CARES Act provides $250 billion in unemployment benefits for workers who have lost their job and business owners who have been forced to close their doors or significantly scale back operations.
- WHO QUALIFIES TO RECEIVE STATE UNEMPLOYMENT BENEFITS? In addition to full-time workers who were laid off or furloughed, the Act provides a set amount of unemployment compensation to individuals who are not already eligible for state and federal unemployment programs, including self-employed workers, freelancers, independent contractors, gig workers and part-time workers.
- HOW MUCH WILL I RECEIVE? There are two different components to the new law’s unemployment benefits: a.) Each worker will receive unemployment benefits based on the state in which they work, and b.) In addition to their state unemployment benefits, each worker will receive an additional $600 per week from the federal government.
- HOW WILL BENEFITS FOR SELF-EMPLOYED WORKERS BE CALCULATED? Benefits for self-employed workers would be calculated based on previous income and would also be eligible for up to an additional $600 per week.
- HOW LONG WILL THE STATE UNEMPLOYMENT BENEFITS LAST? Most states already provide 26 weeks of unemployment benefits. The CARES Act will extend state-level unemployment benefits by an additional 13 weeks. These extended benefits will therefore last a total of 39 weeks through December 31, 2020.
- HOW LONG WILL THE FEDERAL GOVERNMENT’S $600 PAYMENT LAST? The federal government’s $600 weekly payout to unemployed workers will last for a period of up to four months through July 31, 2020.
- WHEN WILL THE UNEMPLOYMENT BENEFITS TAKE EFFECT? The bill incentivizes states to pay out unemployment benefits as early as possible by having the federal government pay the first week of benefits for states that pay recipients as soon as they become eligible. (There is normally a customary one-week waiting period before a worker begins collecting unemployment compensation.)
- HOW DO I FIND OUT IF I’M ELIGIBLE FOR UNEMPLOYMENT COMPENSATION? You must apply for unemployment benefits through your state’s unemployment office. Most state applications can be filled out via their website. Workers who normally don’t qualify for unemployment benefits, such as self-employed individuals, freelancers and independent contractors, should monitor their state’s unemployment office’s website to find out when they can begin filling out an application, as many states need to first update their computer systems to reflect every type of worker who is eligible to apply for unemployment benefits under the CARES Act.