Update, 7/6/20: The federal government has extended the deadline for new applications to the Paycheck Protection Program to Aug. 8, 2020. As of July 6, you can apply for a PPP loan through an SBA-approved lender of your choice, or start the PPP application process now through Fundera.
Overview of the CARES Act
A $2 trillion coronavirus aid bill—also known as HR 748/the “CARES” Act—was signed into law on March 27, and provides economic support for a wide swath of Americans, small businesses, hospitals, and some struggling sectors of the economy.
The impact of the novel coronavirus on small businesses has been devastating, as many businesses have been forced to close or restrict their hours, and are unable to make ends meet as foot traffic has halted and disposable income is limited. The need for economic relief for small businesses—in the form of grants, low-interest loans, and other support—is unprecedented in its depth and scope.
That being said, how does this new coronavirus bill affect your small business? What has the federal government allocated for small businesses across the country? Let’s review the details of how the bill impacts small businesses.
Funding for Small Business Loans
The bill contains more than $350 billion earmarked specifically for small business loans that will go to businesses affected by the coronavirus outbreak. The allocation of this funding is laid out under the Keeping American Workers Paid and Employed Act as part of the larger CARES Act.
This act has four main components:
Paycheck Protection Program
The vast majority of funding is for the Paycheck Protection Program (PPP), a new initiative under the SBA 7(a) loan program. This program received $349 billion to disseminate to small business owners, self-employed individuals, gig economy workers, certain nonprofits, and tribal business concerns.
According to the U.S. Senate Committee on Small Business and Entrepreneurship: “The Paycheck Protection Program would provide eight weeks of cash flow assistance through 100% federally guaranteed loans to small employers who maintain their payroll during this emergency. If the employer maintains its payroll, then the portion of the loan used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven.”
The emergency period covering when these loans will be available runs retroactively from February 15, 2020 to June 30, 2020.
Further details on Paycheck Protection Loans include:
- The size of the loans equals 250% of an employer’s average monthly payroll, with a maximum loan amount of $10 million.
- Payroll costs include salary, wages, and payment of cash tips; and employee group health care benefits such as insurance premiums and covered leave.
- Costs of participation will be reduced thanks to fee waivers, automatic deferment of payments of up to one year, and no prepayment penalties.
- Unlike typical SBA 7(a) loans, no “credit elsewhere” test, personal guarantees, or collateral are required.
- During the emergency loan period, interest rates will be set at 1%.
- The amount of the loan that is forgiven may be reduced if the employer reduces its workforce (or salary or wages paid to their workforce) during the 24-week covered period. (Note that this covered period was just eight weeks before the passage of the PPP Flexibility Act.) That reduction can be avoided if the employer rehires or increases pay within a certain time period.
- SBA Express loan amounts are increased from $350,000 to $1 million.
These loans are 100% guaranteed by the federal government through the end of 2020, at which point loans over $150,000 will have a 75% guarantee and loans under $150,000 will have an 85% guarantee.
Loans are available through SBA-certified lenders.
Emergency EIDL Loans and Grants
An additional $10 billion has been allocated to the Emergency Injury Disaster Loan program. This allows for expanded eligibility for businesses suffering economic harm due to the coronavirus, and give the SBA more flexibility to disperse smaller dollar loans directly.
It also allows businesses to apply for an emergency grant of $10,000 that is delivered within three days to help maintain payroll, provide sick leave, and serve other debt obligations.
According to the office of Marco Rubio (who chairs the Committee on Small Business and Entrepreneurship), “a borrower who has an EIDL loan related to COVID-19 can apply for a PPP loan, with an option to refinance that loan into the PPP loan. However, the emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the Paycheck Protection Program. Existing EIDL borrowers not related to COVID-19 are also eligible to apply for PPP for payroll assistance but they cannot refinance into a PPP.”
You can apply for an EIDL directly on the SBA’s website.
Small Business Debt Relief
An additional $17 billion is available for the SBA to pay all principal, interest, and fees on existing SBA loan products for six months for businesses affected by the coronavirus.
Finally, the bill also delivers funding to SBA resource partners, including Small Business Development Centers, Women’s Business Centers, and Minority Business Centers, to provide counseling, training, and other assistance to businesses affected.
Payroll Tax Credits
Also included in the CARES Act is a provision that allows businesses to get a tax credit against its 6.2% share of Social Security payroll taxes for keeping employees on their payroll during the pandemic. This is called the Employee Retention Credit. These businesses would get a refund for half of what they spent on wages, capped at $5,000 per worker.
Businesses will need to prove they took a 50% loss compared to the same quarter in years past to qualify.
In addition, employers will be allowed to defer payment of the 6.2% Social Security tax that would otherwise be due in December 2020 until December 31, 2021 (50%) and December 31, 2022 (50%). Self-employed taxpayers can defer paying 50% of their self-employment tax until the end of 2021 (25%) and 2022 (25%) as well.
You won’t be able to take these deferments if you take out a PPP loan, so discuss the specifics of this with your accountant to understand how you can best utilize these provisions. Your accountant will also help you take full advantage of other net operating loss regulation changes outlined in the bill.
Expanded Unemployment Benefits
Already, businesses across the country have had to lay off workers in response to coronavirus cash flow crunches. This is a heartbreaking but common reality for many small businesses and their employees.
As part of this bill, unemployment insurance has been boosted and extended. Workers laid off as a result of the pandemic will receive an additional $600 per week on top of their regular weekly unemployment benefits, and can receive these payments for up to a total of 39 weeks (up from 26 weeks previously).
This may help American workers weather the storm of being laid off until their employers are, hopefully, able to hire them back.