This is the first article in a three-part series on the CARES Act, a $2 trillion stimulus bill that was signed into law on March 27, 2020. The law is designed to offer wide-ranging assistance to households and businesses alike, providing everything from cash infusions to hospitals and expanded access to COVID-19 testing to small business loans to expanded unemployment benefits.
This article provides an overview of aspects of the bill that provide relief for small business owners, including the greatly expanded small business loan program.
The CARES Act, signed by President Trump on March 27th, has set aside $377 billion to help small businesses weather the coronavirus crisis, with the vast majority of that funding going towards two loan programs through the Small Business Administration (SBA): a national Economic Injury Disaster Loan (EIDL) program and a new Paycheck Protection Program (PPP). The Act also greatly expands the number of small organizations that can receive loans from the SBA, so many businesses and non-profits with fewer than 500 employees are now eligible to apply.
Both EIDL and PPP loans are designed to offer significant assistance to small businesses, but businesses will only be able to receive either an EIDL or a PPL loan. In this article, we outline both programs, including loan structure, requirements, limitations, and application availability, to help business owners determine which program is best for their business. In addition, we review some of the tax breaks that the CARES Act offers to small businesses.
Economic Injury Disaster Loans (EIDL)
Who Can Apply: Most organizations with fewer than 500 employees
Loan Size: Up to $2 million
When to Apply: Now
Use of Funds: Working capital
Emergency Economic Injury Disaster Loans (EIDLs) are typically available to small businesses in the face of major disruption, but the CARES Act greatly expands eligibility. Under CARES, the following organizations are eligible for loans:
- Businesses who were already eligible for SBA loans remain eligible (see here for eligibility by industry)
- All organizations in all U.S. states and territories with fewer than 500 employees are eligible to apply, including:
- Sole proprietorships
- Independent contractors
- Non-profits, and
- Tribal small business concerns.
Organizations are eligible for the loan regardless of industry if they meet the size requirements and have been “substantially affected by COVID-19,” which, for the purposes of the Act, could include supply chain disruptions, staffing challenges, a decrease in sales or customers, or shuttered businesses.
Typically, these loans are only available to businesses that have been in operation for one year, but under CARES the only requirement is that your business or non-profit was in operation as of January 31, 2020.
EIDL loans can be used to cover a variety of ongoing expenses:
- Payments on fixed debts
- Accounts payable, and
- Other bills your organization is currently unable to pay.
Small businesses can expect to pay 3.75% interest and nonprofits will pay 2.75%. Loan terms will be flexible up to 30 years based on the individual business’s ability to repay, with the intention to keep payments affordable. For loans under $200,000, the SBA will not require a personal guarantee, but will take a collateral interest in your business’s assets if possible.
Apply for a loan and learn more about the program on the SBA’s website.
The Emergency Economic Injury Disaster Loan Advance
Who Can Apply: Organizations that are applying for the expanded EIDL
Loan Size: $10,000
When to Apply: As soon as possible
Use of Funds: Any business expenses
Businesses and non-profits that apply for an Economic Injury Disaster Loan are also eligible to apply for a $10,000 emergency advance that will be disbursed to you within three days of your application. As the larger SBA loans will take longer to be distributed, the emergency advance is intended to provide some immediate relief to businesses making applications. This EIDL advance will never need to be repaid, even for those businesses that are ultimately denied a loan under the program.
For those organizations who receive an advance and a forgivable loan under the Payment Protection Program (see more below), the amount forgiven under the PPP will ultimately be decreased by $10,000.
Importantly, the CARES Act only earmarked $10 million dollars for these advances, and the fund is first come, first served. Those who wish to apply for the advance should apply as soon as possible to ensure funds remain.
Apply for an advance and learn more about the fund on the SBA’s website.
Paycheck Protection Program (PPP)
Who Can Apply: Most organizations with fewer than 500 employees
Loan Size: Up to $10 million
When to Apply: To be determined, but likely after April 11, 2020
Use of Funds: Payroll and certain fixed expenses
The CARES Act created the Paycheck Protection Program (PPP), which is designed to encourage small businesses and non-profits to retain their employees through the coronavirus pandemic. The PPP has similar eligibility requirements to the EIDL, in that most organizations with 500 or fewer employees are eligible. Additionally, businesses that are classified as accommodation or food service that have 500 or fewer employees per physical business location are also eligible to apply. The organizations must have been in operation as of February 15, 2020.
Owners will be asked to make a good faith certification that their business is being impacted by the coronavirus pandemic and that the funds will be used to cover approved costs incurred between February 15 and June 30, 2020. Qualifying expenses include:
- Payroll costs, which are defined under the Act as
- Salaries, wages, commissions, tips, and paid time off for U.S. employees with a cap of $100,000 per employee
- Group health care expenses
- Retirement benefits
- Payments to independent contractors
- State and local taxes assessed on compensation
- Interest on mortgage payments or rent payments
- Interest on other debt
PPP loans will be available through any bank that is an approved SBA lender and will be 100% backed by the Federal government. The maximum principal of a PPP loan is 2.5x the average total monthly payroll costs incurred in the one-year period before the date of the loan, with a cap of $10 million. The interest rate will not exceed 4% and the term can be as long as 10 years. The SBA will not require any collateral or guarantees, and no payments will be required on interest or principal for 6-12 months.
Businesses that received an EIDL after January 31, 2020 are allowed to refinance their current loan and roll it into a PPP.
Importantly, significant portions of the PPP loan can be forgiven if the business or non-profit maintains its workforce. Organizations are eligible for loan forgiveness equal to the amount spent in the eight weeks following the date of the loan on payroll costs (as defined above), rent, mortgage interest, and utilities. The amount of the loan that must be repaid will be based upon employee retention and payroll:
- The amount forgiven will be reduced if an organization reduces its number of employees or if the amount of compensation paid to workers earning less than $100,000 declines by more than 25% during that eight-week period.
- If a business hires back employees or reinstates compensation by June 30, the reduction would then be decreased.
Essentially, if a business or non-profit keeps all of its employees and pays them on average more than 75% of their normal rate for the eight weeks following the receipt of the loan, up to 100% of the loan could be forgiven.
Guidance on the application process and disbursement of loans will be provided by April 11, 2020. While waiting for applications to become available, employers should consider the following steps:
- Contact your SBA-approved lender (probably your local bank) about your intention to apply or find an approved lender if you don’t have one, and
- Collect records of payroll costs, lease or mortgage payments, and utility payments for the past year, plus documentation to prove your business existed before February 15, 2020.
Learn more about the program, find an approved lender, and follow progress towards an application on the SBA website.
The CARES Act also provides a number of additional provisions to provide tax relief to small businesses. While the details of these provisions are best discussed with your accountant, the most significant changes are outlined below:
- If your business was fully or partially suspended due to COVID-19 but you continue to pay your employees, you may be eligible for a credit against employment taxes up to 50% of wages paid between March 12, 2020 and January 1, 2021, depending on the number of employees. If you receive a loan under the CARES Act, you may not be eligible for this credit.
- The employer’s share of Social Security taxes on employee wages (6.2% of wages) required to be paid between March 27, 2020 and January 1, 2021 may be deferred for up to two years. If an employer receives a PPP loan and the loan is forgiven, the employer is not eligible for this tax relief.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy”, dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment or other professional advice. The views expressed are those of the author(s) as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions. Although information has been obtained from and is based upon sources Pekin Hardy believes to be reliable, we do not guarantee its accuracy.