How the CARES Act Aims to Help Small Businesses Stay Afloat
Key Points:
On March 27th, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act—a $2.3 trillion stimulus package intended to support households and businesses—was signed into law.
One of the key elements of the CARES Act is support for the nation’s small business community. Combined, the affiliated programs provide over $350 billion of small business support.
Central to the financial support provided through the stimulus measures is new and expanded programs related to small business loans. These loans are intended to allow businesses to secure cash flow for operations that have been impacted by COVID-19.
Business and economic activity across the world are currently experiencing an unprecedented level of strain amidst the Coronavirus (COVID-19) pandemic. We have recently started seeing clear indications of the severity of that strain as record numbers of people have filed for unemployment in the United States.
All individuals and businesses are being impacted, some in more dramatic ways than others. With the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2.3 trillion dollar stimulus package intended to support American households and businesses in this environment was signed into law on March 27th.¹
According to a recent publication from the U.S. Small Business Administration’s Office of Advocacy, there are upwards of 30.7 million small businesses with fewer than 500 employees in the US, employing nearly 60 million people, almost half of the private workforce. Those same small businesses were responsible for around 65% of net new jobs created from 2008 to 2018.² With those numbers in mind, it is easy to understand why the CARES Act, through its Paycheck Protection Program (PPP), will allocate over $350 billion stimulus specifically directed towards the small business community.
Paycheck Protection Program (PPP) Loans
Small businesses with less than 500 employee (including self-employed individuals) and private non-profit organizations are eligible for loans through the PPP if they have established operations as of February 15th, 2020, and have experienced a business disruption as a result of the Coronavirus (COVID-19). Businesses or franchisees with more than one location could also be eligible if their individual locations employ less than 500 workers. Loans originated from the PPP are designed to provide cash flow assistance needed to maintain business operations.
The legislation loosens rules on eligibility by removing the requirement that loans or other credit not be available elsewhere. It also removes collateral and personal guarantee requirements from the borrower.
The amount of loan eligibility is based upon the amount of payroll cost that was in place for the business, for the year prior to the application. So, a business filing an application now would use 2019 payroll figures to determine total payroll costs. For businesses not in operation in 2019, January – February payroll incurred in 2020 determines eligibility. Maximum eligibility limits are based on the lesser of 2.5 times the average monthly payroll for the applicable period, or $10 million.
Loans through the PPP have 2-year terms with an annual interest rate of 1.0%. There are also no pre-payment fees on these loans. The loans are federally guaranteed and are intended to provide up eight weeks of cash flow support. Loans can be applied for with any lending institution that is approved to participate in the 7(a)-loan program, which is the Small Business Association’s (SBA) primary program for providing financial assistance to small businesses.
The SBA has provided official guidance for securing the PPP loans on their website. Approved lenders may begin processing loan applications as soon as April 3, 2020.³
PPP Loan Repayment Deferral and Forgiveness
Under the PPP, 7(a) SBA loans are allowed complete repayment deferment for up to six months. Note that loan interest will accrue during the deferment period. Loan proceeds utilized for certain business costs that are incurred by the borrower during the first eight weeks after loan origination are also eligible for loan forgiveness. Costs eligible for forgiveness include payroll, rent payments, mortgage interest expenses and utilities. The loan (principal and interest) is completely forgiven as long as non-payroll expenses are no more than 25% of the forgiven loan amount.
Staffing levels and compensation will also need to be monitored against required levels in order to qualify for loan forgiveness. Any reduction in staffing levels or compensation that occurs prior to June 30th, 2020 (as compared to prior measurement periods) may result in a reduction in the amount of the loan eligible for loan forgiveness.
Economic Injury Disaster Loans (EIDL)
The Economic Injury Disaster Loan (EIDL) program had been in place prior to the COVID-19 crisis and has been used for situations involving natural disasters like hurricanes, tornadoes, etc. in grief-stricken areas. The EIDL program has now been expanded and incorporated into the stimulus planning as well. Eligible borrowers include small business owners with no more than 500 employees, as well as self-employed individuals that have been in operation prior to January 31st, 2020.
Loans in the EIDL program can be approved for up to $2 million with terms up to 30 years at a fixed 3.75% interest rate.⁴ These loans are intended to provide fast, streamlined approval. In some cases, originated EIDL have been approved strictly based off credit score and without personal guarantees.
Included in the CARES Act is the potential for EIDL emergency grants of up to $10,000. Approved emergency grants are designed to be issued swiftly and are considered an advance. Emergency grants do not need to be repaid, even if an EIDL is not approved.
Those that are eligible can apply for both EIDL and PPP loans; however, the approved dollar amounts from each program cannot be used for the identical purposes. Additionally, if an EIDL emergency grant is approved, the amount approved will decrease the amount of PPP loan forgiveness eligibility by the same amount.
The EIDL application process is now open and is being facilitated directly on the SBA website.⁵
Our takeaways
It is important to keep in mind that the amount of loan eligibility through the PPP is based entirely on payroll, with the goal of helping businesses avoid personnel layoffs. Unlike the EIDL program, which generally has more stringent qualification requirements, there are no revenue loss considerations factored into the amount of loan eligibility through the PPP.
From a tax planning perspective, forgiven principal and interest will not be considered taxable income to the business. Additionally, a company can still deduct 100% of the payroll, rent and utility expenses that are paid for with forgiven loan proceeds.
The current health and business environments have many individuals and business owners managing several high priority demands, all of which are competing for limited time and energy amidst the backdrop of the global health pandemic. Although facilitating a loan application and the related processes may seem challenging to evaluate, it is worthy of consideration by any small business owner with concerns about their operations in this environment. For many companies, there may not be any economic disadvantages to accepting funds, if approved. These funds can also be a big help to manage near-term uncertainties.
If you need assistance with this process, please reach out to Capstone for additional information.
Sources
¹ https://www.congress.gov/bill/116th-congress/house-bill/748/texthttps://gop-waysandmeans.house.gov/the-senate-cares-bill-helping-small-business/
² https://advocacy.sba.gov/2019/09/24/whats-new-infographic-lets-you-see-the-answers-to-top-small-business-faqs/
³ https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp
⁴ https://www.sba.gov/disaster-assistance/coronavirus-covid-19
⁵ https://covid19relief.sba.gov/#/