Small business owners face incredibly difficult times, both personally and professionally. The world is at an economic standstill, but you still have to pay your rent, your contracts, and your employees. Plus, with many states and regions implementing shelter-in-place and other lockdown mandates, you also have to balance new household dynamics with disruptions to your business’s daily operations and workflows.
Thankfully, the government has implemented a broad stimulus package, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, to ameliorate the economic shock rippling through the economy. But what, exactly, is available to you as a small business owner?
This article provides a comprehensive breakdown of the recently enacted CARES Act that was created to help support small business owners through the coronavirus-induced economic disruption.
Paycheck Protection Program (PPP) and Forgivable Loans
We compiled the PPP particulars into a reader-friendly FAQ since there is a lot to sift through.
It’s important to note that this program will be oversubscribed so it’s vitally important to speak with your financial and tax advisors, as well as your business banker, to determine if this program is appropriate for you, and if so, to expedite your application.
What is the Paycheck Protection Program?
The $349 billion Paycheck Protection Program (PPP) of the CARES Act provides relief to businesses and nonprofits with up to 500 employees. These organizations must have been substantially impacted by COVID-19 and in business as of February 15, 2020.
Borrowers must also self-certify that the funds will be used for approved purposes (discussed below) and they are not receiving other outside assistance.
Who can qualify for a PPP loan?
To qualify, the business must have no more than 500 employees, or, if applicable, the Small Business Administration (SBA)’s size standard for that particular industry.
Typically, the SBA will aggregate employees of affiliated businesses in the calculation, though there are exceptions for:
- businesses with a North American Industry Classification System (NAICS) code beginning with 72 (accommodation and food services), with no more than 500 employees;
- franchisees assigned a franchise identifier code by the SBA; or
- businesses backed by a small business investment company (SBIC).
How much can I borrow?
The maximum loan size is 2 ½ times the business’s average monthly payroll costs or $10 million, whichever is smaller. For non-seasonal employers, average monthly payroll is the average total monthly payments for payroll during the one-year period preceding the date of loan origination. For businesses that didn’t exist in 2019, the payroll calculation is the average total monthly payroll payments from January 1, 2020 to February 29, 2020.
What can PPP loans be used for?
Loans can be used for payroll costs (excluding prorated amounts above $100,000 for employees who make more than that figure), mortgage and debt interest, rent, and utilities.
Payroll costs are defined as:
- Salary, wage, commission or other compensation (not to exceed $100,000 per year, as prorated for the covered period);
- Cash tips (or equivalent);
- Payment for vacation, parental, family, medical or sick leave (unless the employer receives a credit under the Families First Coronavirus Response Act (FFCRA));
- Group healthcare benefits, including insurance premiums;
- Retirement benefits; and
- State or local payroll taxes, but not federal payroll taxes.
Mortgages, leases, and service contracts have to have been originated prior to February 15, 2020, for those payments to be eligible.
Independent contractors can avail the program as well, though the payroll calculation also cannot exceed $100,000 per contractor per year.
Are PPP loans forgivable?
A key benefit of the PPP is potential loan forgiveness if the loan principal is used for payroll costs, mortgage interest, rent, and/or utilities during the first eight weeks after the issuance of the loan.
In order to qualify for forgiveness, the business has to maintain the same number of employees that it had from either February 15, 2019, through June 30, 2019, or from January 1, 2020, through February 29, 2020. The business must maintain these employment numbers during the eight weeks following the date the loan was originated.
Business owners do have the opportunity to restore employment and salary levels until June 30, 2020, for any changes that occurred between February 15, 2020, and April 26, 2020.
Compensation for employees who receive less than $100,000 cannot be reduced by more than 25 percent when compared to the most recent quarter.
If these provisions are not met, the amount that can be forgiven will be reduced.
Additionally, no more than 25 percent of the loan proceeds can be used for non-payroll items, like mortgage, rent, or utility payments. The SBA has indicated it will provide additional guidance on how the loan forgiveness provision will function by April 26, 2020.
How do I apply for a PPP loan?
Small business owners can apply for a PPP loan through an SBA-approved lender, or any other federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating in the program.
What do I need to provide to get a PPP loan?
Borrowers will also have to provide payroll documentation along with their application. The information likely required includes the business’s most recent IRS Form 941 (Employer’s Quarterly Federal Income Tax Return), expense information related to loan sizing, and complete 2019 financials, if available.
Given that the PPP will be administered through approved lenders, it’s best to consult with your current lender to determine what information is required to submit with the application.
Will applying for a PPP loan affect my credit?
Given that there are no personal guarantees, nor collateral, required for the loan, PPP loans should not materially affect your credit.
However, there are provisions that borrowers will need to certify, in good faith, on the application. While the full list is available on the application, it’s worth highlighting a couple certifications:
- That current economic uncertainty makes the loan necessary to support the borrower’s ongoing operations;
- That the funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments;
- That the borrower has not and will not receive another loan under this program; and
- That all the information provided in the borrower’s application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program is punishable by law.
What are the terms for PPP loans?
The interest rate on the loan is 1.00 percent and the term of the loan for all borrowers is two years. By law, principal and interest payments will be deferred for at least six months. Payments may also be deferred for up to one year. Further, there is no prepayment penalty for the loan. Lastly, borrowers can only take out one PPP loan.
When can I apply for a PPP loan?
Lenders can start accepting PPP applications starting April 3, 2020. The CARES Act deadline for application submission is June 30, 2020.
Will receiving a PPP loan violate the covenants of my existing loan?
The CARES Act didn’t provide any guidance on this issue. It’s best to consult with your existing lender to determine whether or not receiving a PPP loan is in breach of your existing loan covenants.
Will the amounts forgiven be taxable?
No, any PPP debt forgiveness will be excluded from gross income for federal tax purposes.
Will getting a PPP loan affect my ability to get other aid?
Yes, depending on the program. Receiving a PPP loan will make a business ineligible for the Employee Retention Credit (ERC) (discussed below). Forgiveness of a PPP loan will make a business ineligible for the deferral of payroll taxes (also discussed below).
Payroll Tax Payment Deferral
While the Paycheck Protection Program is arguably the most generous program for small businesses within the CARES Act, there are other valuable provisions to help with current business cash flow needs.
The CARES Act allows for employers to defer payroll taxes from the date of enactment through the end of the year until the end of 2021 and 2022.
Specifically, Section 2302 of the CARES Act allows 50 percent of Social Security taxes due for this period to be deferred until December 31, 2021. The rest is due by December 31, 2022.
This applies to self-employed individuals as well, though it’s only for half of self-employment taxes (effectively, the “employer” half of self-employment taxes). Thus, 50 percent of a self-employed individual’s Social Security taxes (again, from date of Act enactment to year-end) may be deferred, with 50 percent due at the end of 2021 and the other 50 percent due at the end of 2020.
Note, though, that Medicare tax or other applicable unemployment taxes (such as federal income taxes) are not able to be deferred as part of this section of the CARES Act.
It’s also worth reiterating that if a business received a loan under the Paycheck Protection Program and subsequently received forgiveness on the loan’s principal, then that business would not be able to defer Social Security taxes through Section 2302.
Employee Retention Credit
The Employee Retention Credit allows a business to receive a payroll tax credit equal to 50 percent of an employee’s wages, up to $10,000 of wages per employee.
Specifically, Section 2301 of the CARES Act introduced a quarterly payroll tax credit that businesses can qualify for if:
- The operations of the company have been fully or partially suspended during a quarter as the result of a government authority; or
- Revenue in 2020 was lower by 50 percent, or more, when compared to the same quarter in 2019.
The business will continue to receive the credit until the earlier of:
- The end of 2020; or
- If there is a quarter without a government-required suspension of operations in that quarter or if gross revenue from the current quarter exceeds 80 percent of the equivalent 2019 quarter.
It’s worth highlighting that the pertinent metric is revenue, and not sales, profits, or margins.
It does get a bit more complicated, unfortunately. While the general rule is that 50 percent of wages (up to $10,000) per employee qualify, the definition of wages will differ based on the number of employees in the firm.
For companies with 100 or fewer employees, all wages will count in the calculation. For firms with more than 100 employees, only wages for those not working during a government shutdown, or if revenue has declined by more than 50 percent, may count toward the credit. Note that employer healthcare expenditures can count toward the wage calculation.
Like the Social Security tax deferral above, the Employee Retention Credit is affected by the Paycheck Protection Program. In this case, if a business receives a PPP loan, they will not be able to receive an Employee Retention Credit.
Given the complexity of this calculation, especially when compared to the loss of eligibility of the PPP program, it’s best to speak with your tax, legal, or financial advisor.
Net Operating Loss Rules
The rules to apply net operating losses (NOLs) against income were also loosened as part of the CARES Act.
Specifically, corporations (excluding REITs) can carryback NOLs from calendar years 2018, 2019, and 2020 up to five years. The remaining NOL can also be carried forward indefinitely; this did not change relative to the prior rule.
Further, NOLs for calendar year 2020 can now be applied against 100 percent of taxable income. The prior rule, updated as part of the Tax Cuts and Jobs Act, only allowed for NOLs to offset up to 80 percent of taxable income.
Retirement Plan Distributions
Recognizing the need to increase cash availability to consumers, Congress adjusted the rules for retirement plan distributions by creating a new type of distribution called the Coronavirus-Related Distribution. Coronavirus-Related Distributions can be made up to $100,000 from retirement plans (IRAs and employer plans) in 2020 if that account owner has:
- Been diagnosed, or has a spouse or dependent diagnosed, with COVID-19;
- Experienced financial consequences as a result of being quarantined, furloughed, or laid off;
- Can’t work because of a lack of childcare due to the coronavirus;
- Owns a business that’s closed or has reduced hours because of the disease.
The Coronavirus-Related Distributions are also exempt from the 10 percent penalty (for those younger than 59 ½), not subject to mandatory withholding requirements, eligible to be repaid over three years, and can be ratably spread over three years for income-tax purposes.
Additionally, the provisions for loans from employer-sponsored plans were adjusted. The maximum loan amount has increased to $100,000 (from $50,000) and 100 percent of the vested balance may be used. Loan payments are also allowed to be delayed for up to one year.
For those above their required beginning date (72 in 2020), required minimum distributions for 2020 have also been waived. This applies to traditional IRAs, 401(k)s, 403(b)s, 457(b)s, and SEP and SIMPLE IRAs.
Expanded Unemployment Benefits
The CARES Act, through the Relief for Workers Affected by Coronavirus Act, expanded unemployment benefits in multiple ways.
Federal Pandemic Unemployment Compensation (FPUC) provides for an additional $600 per week benefit to certain employees receiving unemployment benefits.
Additionally, the CARES Act also provides for an additional 13 weeks of unemployment benefits, over and above the usual 26 weeks.
States can also now waive the typical one-week waiting period for unemployment compensation benefits, though it’s up to the individual state to institute this policy.
Finally, the Pandemic Unemployment Assistance (PUA) allows those typically unable to receive unemployment benefits, such as self-employed individuals or independent contractors, to receive unemployment benefits.
Those seeking PUA will be eligible to receive up to 39 weeks of unemployment insurance payments. While the benefit level is set by the state, it can’t be less than half of the average regular weekly unemployment payment in that state.
SBA Bridge and Disaster Loan Programs
States can also activate their emergency loan programs, if available, to help “bridge the gap” between a major catastrophe and normal business operations. The rules differ by state, but the Florida Small Business Emergency Bridge Loan Program offer 12-month loans of up to $50,000 (or $100,000 in special circumstances) at a 0 percent interest rate. There are more strict qualification criteria, though those are state-specific.
Additionally, the SBA offers an Economic Injury Disaster Loan (EIDL) program to provide small businesses with working capital loans of up to $2 million. The term of the loan is (up to) 30 years at an interest rate of 3.75 percent.
Let’s shift gears to discuss an important but non-business specific provision within the CARES Act. The Recovery Rebates are a refundable income tax credit of up to $2,400 (for married filing jointly returns). All other filers can receive up to $1,200. Further, the credit amount is increased by up to $500 for each child the taxpayer has under the age of 17.
The Recovery Rebates are phased out based on adjusted gross income (AGI). The pertinent AGI thresholds are:
- Married Filing Jointly: $150,000
- Head of Household: $112,500
- All Others: $75,000
For every $100 a taxpayer’s AGI exceeds the relevant threshold, the Recovery Rebate is reduced by $5. While the reduction rate is constant, the starting point will depend on filing status and the number of children, so the full phaseout AGI will differ from household to household.
What year’s AGI counts in the calculation? The short answer is, it depends. The calculation will be based on 2020 income, but clearly that isn’t yet available. Given this, the most recent tax return available at the IRS will be used to calculate the Recovery Rebate, and then adjusted to 2020 income levels.
Thankfully, if your 2020 income is above the thresholds from either 2018 or 2019 (whatever is the most recently filed at the IRS), the Recovery Rebate will not be clawed back.
This, in effect, creates a tax return filing analysis: Will you be above or below the threshold for 2019, relative to 2018? If your 2018 AGI is below the threshold but 2019 will be higher, it makes sense to wait to file your 2019 return. Notably, the filing deadline has been extended to July 15, 2020.
If income in either 2018 or 2019 is above the threshold but 2020 is not, the IRS will eventually true-up your income for the Recovery Rebate, but you will not receive that cash refund until sometime in 2021.
Small Business Planning with Harbor Crest Wealth Advisors
We are all trying to navigate a new world, one thrust upon us unexpectedly. We will be writing about the financial, economic, regulatory, and political changes occurring in these new, uncertain times in our newsletter, which you can sign up for here.
From our team at Harbor Crest, we hope you’re safe, healthy, and well. Don’t hesitate to reach out to us for a call on how to handle these difficult times.