Small Business Aid from the CARES Act

Pathways Advisory Group, Inc.
Evon Mendrin, CFP®

Our journey through the recent CARES Act continues! We’ve written about the individual direct payments and charitable portions of the bill. We’ve also touched on changes to retirement accounts. Now, we’ll tackle aid for small businesses.

It’s hard to overstate how important aid is for small businesses right now. Customers are directed - in some states mandated - to stay home. Many businesses are directed to stop operations. Fortunately, there are provisions to help small businesses and nonprofits in need. Let’s take a look at what the CARES Act provides.

Table of Contents

Paycheck Protection Program Loans

There are two primary loan programs given or expanded by the CARES Act. First up is the Paycheck Protection Program (PPP). Things are changing rapidly as the government issues new guidance and everyone involved tries to interpret and prepare on a quick timeline. Let’s look at what we know based on recent guidance from the Treasury and the Small Business Administration.

What is the Paycheck Protection Program? The PPP is a $349 billion 7(a) loan program backed by the Small Business Administration (SBA) to help small businesses and nonprofits. Its aim is to “expeditiously” give aid to businesses and (as the name implies) keep employees on payroll. The biggest benefit of this program is it’s a forgivable loan if used for certain expenses! It’s also a non-recourse loan requiring no collateral.

What are the terms of the loan? The loan’s duration will be 2 years with a 1% interest rate. Payments on all loans, however, will be deferred for 6 months. Interest will accrue during this period.

How long does the Program last? The program lasts until June 30, 2020 - but it’s first come, first served.

Who qualifies for the PPP? Generally, any American small business impacted by the coronavirus with fewer than 500 employees (including affiliated businesses). Sole proprietors, independent contractors, self-employed, and 501(c)(3) nonprofits are also eligible. You’ll need to have already been in business on February 15, 2020.

Check out the SBA’s website for other entities eligible, as well as certain exemptions from the 500-employee and affiliation rules.

What can the loans be used for? PPP loans can be used for:

● Payroll costs, including benefits

● Interest (but not principal) on mortgages incurred before February 15, 2020

● Rent, under a lease agreement in force before February 15, 2020

● Utilities which services began before February 15, 2020.

● Refinancing Economic Injury Disaster Loan (EIDL) already taken out between January 31st and April 3, 2020 (explained below).

How much money can be borrowed? Businesses can apply for 2.5-times the average payroll costs over the previous 12 months up to $10 million. The payroll costs are capped at $100,000 per year for each employee.

Meaning, if someone earns higher than $100,000 per year, the amount above the limit is ignored for calculating the loan amount.

If you already took an SBA Economic Injury Disaster Loan between January 31st and April 3rd, you can include this as part of the calculation.

What’s included in “payroll costs”? You can include the following:

● Salary, wages, commissions, or tips (up to the $100,000 per year limit per employee)

● Employee benefits - including group healthcare coverage, retirement, and certain leave payments

● State and local taxes on compensation

● For a sole proprietor or independent contractor - great news! You can specifically count wages, commissions, income, or net earnings from self-employment as “payroll costs” (capped at the $100,000/year limit).

The SBA clarified that the $100,000 limit only applies to cash compensation (salary, wages, etc.)! It doesn’t limit the other non-cash items, such as benefits and state and local taxes.

What time period do you base your payroll costs on? You can use payroll data from either the previous rolling 12-months or from calendar year 2019.

Seasonal businesses can use the average monthly payroll from February 15, 2019 (or March 1, 2019) to June 30, 2019. Newer businesses who weren’t up and running at that time can use January 1 - February 29, 2020.

Also know that “payroll” is gross payroll. Don’t subtract out taxes withheld from the employee’s paycheck when calculating the loan amount. However, you cannot include the employer’s portion of FICA taxes in the loan calculation.

Do independent contractors (that aren’t regular employees) count as your employee for “payroll” calculations? The SBA indicated they do not, as independent contractors are eligible to apply on their own.

Working closely with your lender and accountant is key in making sure this is calculated correctly.

What amount of the loan is forgivable? Ah, the question on everyone’s mind and the biggest benefit of the program.

The amount used for payroll costs, interest on mortgages, rent, and utilities for the 8-week period after taking the loan is forgivable. This includes principal and any accrued interest. At least 75% of the loan must have been used for payroll.

You can submit a request for forgiveness to the lender that is servicing the loan - including any required documentation to verify employees on payroll and how the funds were used. The SBA is planning to issue more guidance on forgiveness, but it seems pretty important to keep detailed records on payroll and other forgivable costs during the 8-week period.

What’s the catch? Okay, there is a catch. As the PPP is meant to keep employees on payroll, the amount forgivable is reduced if you decrease your number of full-time employees. It will also be reduced if you decrease employee pay by more than 25% (for employees earning less than $100,000).

What if you already let employees go? If you’ve already made cuts to salary or employee count, you have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

Where can we apply? Any participating lender, including lenders that don’t already process SBA loans. Check out the SBA's Find a Lender page to find one in your area. There have been some reports of banks only taking applications from current lending customers, and others who’ve stopped taking applications altogether, so check first with your bank. Also check with smaller local lenders (who might be quicker to communicate).

When can I apply? Applications were supposed to have started last Friday, April 3rd, for businesses and sole proprietors. Self-employed and independent contractors can apply beginning April 10th.

Planning Thoughts - the program is first come, first served. If you’ve been affected by the coronavirus, it makes sense to apply as soon as you’re able.

This is also a one-time deal. You can only apply once, so apply for the maximum amount you’re eligible for.

As part of the application, you’re certifying that your business has been negatively impacted by the pandemic. “Economic uncertainty makes the loan necessary to support your ongoing operations.”

There have been reports of some banks not taking sole proprietor applications until April 10th. It’s unclear what the difference is between “sole proprietors” and “self-employed” under PPP. The golden rule in all of this is to work closely with your banker.

You can apply for both the PPP and the EIDL (discussed next), but you can’t use them for the same expenses. You can refinance the EIDL into a PPP. . If you used the EIDL loan for payroll, you must refinance the loan to the PPP. This does not include any amount received under the Loan Advance, as that is a “grant” that is not required to be repaid.

It helps to understand that everyone’s absorbing new information as it comes out. There have been several pieces of guidance issued by the Treasury and the SBA over the last week. It seems everyone is working with incomplete information in a crunched timeline, so keep in touch with your professionals as things progress.

You can read through the Treasury’s Fact Sheet, as well as most recent SBA guidance HERE and Frequently Asked Questions HERE.

Economic Injury Disaster Loan and Loan Advance

The CARES Act expanded the Economic Injury Disaster Loan (EIDL) loan program to include businesses affected by the coronavirus.

Who is eligible for EIDL? Any small business with less than 500 employees (including sole proprietors, independent contractors and self-employed). Cooperatives, ESOPS, and tribal small businesses. Nonprofits and veteran’s organizations affected by the pandemic are also eligible. Businesses in certain industries may still be eligible if they meet the SBA’s size standards. You’ll also need to have been in business before January 31, 2020.

How much can I apply for? You can apply for up to $2 million of working capital. Up to $200,000 can be approved without a personal guarantee. No collateral is required for loans of $25,000 or less.

What are the terms of the loans? The interest rate is a fixed 3.75% (2.75% for nonprofits). The repayment length is up to 30 years and payments are deferred for one year. There are no prepayment penalties.

What can I use the EIDL for? The loan can be used for payroll, accounts payable, fixed debts, and other bills you can’t pay due to the coronavirus.

Where do I apply? The EIDL is provided through the SBA directly, and the application can be found on the SBA website.

What is the EIDL Loan Advance? To get funds quickly into the hands of businesses in need, the CARES Act created a loan advance that does not need to be paid back under any circumstances. The Advance amount is up to $10,000, and you must say you’re applying for the Advance on the EIDL application.

It’s important to understand this is up to $10,000. The earliest information said (and many sources still say) that the Advance was $10,000. End of story. However, at least one Senator and the Massachusetts SBA have said that it’s now $1,000 per employee, up to $10,000 total. This is definitely to the dismay of those who applied right away and are still waiting for funds.

Speaking of waiting, the law states that the Advance shall be paid within 3 days of the application. However, I’ve yet to hear of anyone who has received the Advance grant at all. We can assume there are extreme amounts of volume for this.

Planning Thoughts - For businesses in need, the EIDL is a decent place to look for relatively low interest loans that can be paid over long periods of time. It’s a good next step if ineligible for the PPP or need additional aid.

Businesses need to show some level of “economic injury” as a result of the coronavirus. However, you won’t need to certify that the loan is “necessary” as you do with the PPP.

As mentioned above, you can apply for both the PPP and the EIDL. However, you cannot use the funds for the same expenses. For example, you can’t apply both loans to the same payroll expenses. It may make sense to use the EIDL to supplement what’s received through the PPP.

Also, if you already took an EIDL (as mentioned above), you can refinance the loan into the PPP application. This is in addition to the 2.5x payroll calculation.

If it was used for payroll, it must be refinanced into the PPP (you can’t take a PPP for that amount to use for payroll). But on the bright side it’s now at a favorable interest rate and potentially forgivable. The amount of the Loan Advance grant cannot be refinanced, as it’s not required to be paid back.

Employee Retention Credits

The CARES Act also provides for an Employee Retention Credit to incentivize businesses that have closed or face decreased revenue to keep employees on payroll.

What is it? It’s a refundable tax credit for 50% of “qualified” wages paid to each employee, up to $10,000 per employee. So, the max credit per employee is $5,000. The credit is allowed against the employer portion of social security taxes (6.2% of gross wages), allowing you to use those tax dollars to pay wages.

Qualified wages are paid after March 12, 2020 through the end of 2020. This also includes employer-paid qualified health plan expenses that can be attributed to those wages.

There is a catch when calculating the credit. For larger businesses with more than 100 employees, you can only count wages paid to employees that are not providing services (not working) due to the virus. Essentially, this is an incentive not to let those employees go but to keep them on payroll.

For smaller businesses (100 or less employees), all wages are eligible to calculate the credit (still working or not).

Who is eligible? The credit is available to all private employers regardless of size, including tax-exempt organizations. However, businesses that are taking an SBA loan under the CARES Act (such as Paycheck Protection Program or Economic Injury Disaster Loan) are not eligible.

To qualify for the credit, one of the two things must happen:

● Fully or partially suspend operations during any quarter in 2020 due to any government authority because of the coronavirus, or

● Gross revenue significantly declines. Specifically, gross revenue in one quarter must be 50% or less than the same calendar quarter in 2019.

How long am I eligible? You stop being eligible at the end of 2020 or when you have a quarter of revenue that’s more than 80% of the revenue for the same calendar quarter in 2019 (whichever is earlier).

How do I claim the credit? You should work closely with your tax professional here. Claiming the credit will take the form of either lowering employment taxes already withheld by the credit amount or by requesting an advance of the credit with Form 7200. The IRS has a helpful FAQ that walks through claiming the credit. There's also some coordination to keep in mind with other sick/family leave credits created by law due to coronavirus.

Planning Thoughts - This credit cannot be taken if you’ve taken a loan through the PPP or EIDL. Which one do you take? Ultimately, it’s a big “it depends”. It will take a bit of math to determine which option is right for you.

The PPP lowers the amount forgivable if you reduce full-time employees and/or wages paid. If you need to greatly lower payroll or your full-time headcount (e.g., having some employees work part-time) and don’t plan to bring them back to normal by the June deadline, then the Credit may be more beneficial. It’s also possible to combine this Credit with NON-SBA loan options.

The credit is calculated and reported by calendar quarter (when employment taxes are reported by the business). But the total amount for the whole year is $5,000 per employee.

The credit can be taken by employers of any size (outside of state and local governments). So, this may be a benefit to large businesses that don’t qualify for the credit.

It seems self-employment taxes, while meaning to replicate both sides of a business’s payroll taxes, are NOT eligible for the credit.

The credit also seems to assume some level of cash available in the business. This may be some continued revenue or cash reserves - how else can a business keep paying employees, even when subsidized by a tax credit? So, it seems this credit isn’t an immediate help to a business that’s completely shut down with no revenue.

Deferral of Payment of Payroll Taxes

Another payroll-related tax break! Businesses can defer paying the employer-portion of social security tax! Social security tax is 6.2% of gross wage (up to the wage limit), paid each by the employer and the employee. This is for taxes due from the period the law was enacted until the end of 2020.

The business can defer 50% of their portion of 2020 social security tax until the end of 2021. The other 50% is due at the end of 2022.

Self-employed and sole-proprietors can also benefit. If you’re in this camp, you pay both the employer’s and the employee’s portion of social security tax (12.4% total). You can defer 50% of the social security tax (the “employer’s” portion).

In practice, 25% of the 12.4% tax is deferred until 2021, and the other 25% is due at the end of 2022. This seems to include lowering estimated tax payments in light of that.

However, you cannot use this provision if you also had a loan forgiven under the PPP.

Planning Thoughts – Small business owners who don’t have loans forgiven under the CARES Act can combine this provision with other aid available.

Unlike the Retention Credit, you CAN take an EIDL loan and combine that aid with delayed social security taxes.

If you forego the SBA loan options under the CARE Act, it appears this can be coordinated with the Employee Retention Credit. If there’s still social security tax due after the ERC is applied, it seems that the remaining portion due is the amount that can be deferred over the next two years.

Net Operating Losses Rules Adjusted

The Tax Cuts and Jobs Act changes the rules for corporations with net operating losses (NOLs) - allowing them to be carried forward indefinitely. However, the CARES Act re-adjusted those rules.

NOLs from 2018, 2019, and 2020 can be carried back up to five years. This should allow companies to amend past returns and claim a refund for extra taxes paid.

The NOLs can also offset 100% of taxable income for 2018, 2019, and 2020 (TCJA also changed this to 80% of taxable income.)

There’s quite a bit of aid out there for businesses struggling due to the coronavirus. There are also other programs available through SBA and leave and unemployment benefits provided by Congress.

Information and clarification are still coming out about the programs - work closely with your banking, tax, and financial professionals to navigate these tough times!

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