The CARES Act Impact on Households and Small Businesses
OVERVIEW
Given our current situation which seems like a scene out of a movie, households and businesses are looking for ways to shift focus and operate in an unfamiliar way. The COVID-19 pandemic has created a new wave of entrepreneurs who are maximizing this #QuarantineAndChill opportunity. It has also created more moments of panic for entrepreneurs and businesses who never thought of or prepared for something like this and the adverse impacts it would have on their businesses.
In response to COVID-19, the CARES Act — The Coronavirus Aid, Relief, and Economic Security Act was enacted by Congress to provide assistance to small businesses, households, and even our freelancing friends who are usually excluded from things like this because of their 1099/contractor status.
The CARES Act is 800+ pages but I created this guide to share key points from the CARES Act that directly impact you, your business, and your family. There are stimulus payments, disaster loans, business grants, payroll tax credits, expansion of the Family and Medical Leave Act, a plethora of options for you to apply for to ensure you keep the lights on at the house and in your business. Some things in the Act (based on my reading of it) are still open to interpretation and things are very fluid right now. The goal was to get relief out quickly and figure out what-if options later, there are exceptions to the rule and special circumstances, but the priority was to provide resources in an effort to stabilize the economy in light of COVID-19.
The following pages will answer common questions I’m asked about stimulus payments and small business loans including eligibility, payment amounts, repayment terms, and how this will impact your taxes next year.
EXTENDED TAX FILING DEADLINES
The April 15th tax filing deadline and amounts due have been extended to July 15, 2020. This includes Forms 1040 for individuals, 1120s for corporations, and 709 for Gift Tax Returns. Partnership returns were still due March 15th. Estimated payments due April 15, 2020, are also now due on July 15, 2020.
THE PAYCHECK PROTECTION LOAN
What is the Paycheck Protection Loan?
Loans are available from February 15, 2020 — June 30, 2020, and available through SBA & Treasury-approved banks and credit unions. The SBA has guaranteed these loans at 100% until 12/31/2020. After 12/31, loans under 150K are guaranteed at 85% and loans over that amount are guaranteed at 75%. There is no collateral or personal guarantee required for the loan. There are no fees or prepayment penalties associated with this loan. The Paycheck Protection Loan proceeds are designed to fund your payroll, pay rent/mortgage or utilities obligations to support the ongoing operations of your business.
Who is eligible?
The CARES Act defines a small business concern as a small business or nonprofit that generally has less than 500 employees. Your employee count includes full & part-time workers as well as temps or contractors working at your company through an agency. Speaking of contractors: certain self-employed individuals like proprietors, freelancers, and gig economy workers are eligible (you must provide proof of your status) to apply. Also eligible are businesses with less than 500 employees per location who operate under the NAICS Code 72 food & beverage code. These entities are defined as those who provide lodging and/or meal, snack, or beverage preparation for immediate consumption — our hotels, restaurants, and convenience stores.
How much money can you get for your small business from a Paycheck Protection Loan?
Once you’ve determined the number of employees, you will determine your payroll costs — either over the prior 12 months or if you’re a new business, you will use your average payroll costs from January 1 through February 29, 2020. Payroll costs include wages, salaries up to 100K, commissions, tips, vacation, severance, group insurance premiums, most of the expenses you incur in paying your employees. Excluded from the payroll cost calculation are payroll taxes, compensation beyond 100K, employees living outside the U.S., and any sick or medical leave pay under the Family First Coronavirus Response Act.
Example: All of your eligible payroll costs total $240K for the last 12 months. That means your average monthly payroll costs — the 240K divided by 12 months is 20K per month. You can receive either $10 million or 250% of your average payroll costs, whichever is less. In this case, you would receive 50K, 250% of the 20K per month payroll costs.
What can I use the money for? Do I have to pay it back?
During the covered period of February 15 — June 30, 2020, you may use the funds for:
- Making payroll
- Paying rent/mortgage and utilities
- Interest on any mortgages or debt obligations incurred prior to February 15, 2020.
What are the terms of the loan?
You get up to 10 years to pay the loan back at a maximum interest rate of 4%. There is a guaranteed deferral period from 6 up to 12 months. If you use the money to do things that like making payroll, utilities, or interest on mortgages, the first 8 weeks of the payment are forgiven tax-free. If you cut any employees or their pay during the 8-week period, part of that forgiveness goes away.
Going back to the example where you had 20K a month in average payroll costs and you received a loan equal to 250% of that 50K. You received your 50K loan proceeds in your bank account today. For the next 8 weeks, you pay your normal payroll costs, your rent or mortgage and utilities and that totals $45K. That means that $45K of your $50K loan will be forgiven — meaning you don’t have to pay it back because you used the money the way it was intended. The 5K balance that remains must be paid back but it has an automatic deferral of 6 months, up to 1 year. There’s some documentation you must provide to verify your payroll information and rent/mortgage & utilities. You must also certify that the information you’re providing is correct.
You can also apply for the 10K emergency grant while applying for the PAYCHECK PROTECTION LOAN or EIDL loans. Just know that any amount you receive from the 10K emergency grant will reduce your loan forgiveness amount. There’s some additional fine print about calculating the number of employees and how that calculation could also reduce your forgiveness amount so make sure you are working with a professional — an accountant or attorney who can talk you through these things. There’s also a situation where if your forgiveness amount was reduced by you cutting hours or pay if you restore the employees and/or pay, the forgiveness amount can also be restored.
THE ECONOMIC INJURY DISASTER LOAN (EIDL) PROGRAM
There’s another loan available under Section 7(b)(2) of the Small Business Act as known as the Economic Injury Disaster Loan or EIDL. This is a disaster loan up to $2 million to help small businesses stay afloat when there has been a qualified disaster — COVID-19 has been deemed a qualified disaster. This loan covers January 31st to December 31st. It’s still available to businesses and nonprofits with less than 500 employees; contractors and proprietors are also eligible. Even if you have applied for a Payroll Protection Program loan, you can still apply for this loan under Section 7(b)(2) of the Small Business Act. The catch is you have to use the funds for something other than payroll — since you applied for the Payroll Protection Program Loan to handle that part. If you end up getting both, you can finance this loan into the Paycheck Protection Loan because the rates are actually lower. The 7(b)(2) loan is guaranteed by the SBA, both for-profit and nonprofit businesses can apply, and business assets may be pledged as collateral.
THE 10K EMERGENCY ADVANCE GRANT
In addition to applying for the Section 7(b)(2) loan, you can also apply for an emergency advance grant up to 10K. It’s an emergency because the funds are advanced to you within 3 days of your application. This money can be used to make payroll, buy materials, pay rent/mortgage or other obligations. This is a grant, meaning it does not have to be repaid. Even if you don’t get the disaster loan, this grant is still yours to keep your business afloat or satisfy obligations. If you get the advance and the Paycheck Protection Loan, your forgiveness amount is reduced by the grant amount.
COVID-19 STIMULUS PAYMENTS
Taxpayers will receive a $1,200 payment for single or $2,400 for married taxpayers plus $500 for each dependent under 17 years of age. This payment is an advance payment of a tax credit that individuals are entitled to on 2020 tax returns — your return that you will file in 2021. Your payment amount is based on your 2019 return, or 2018 if you haven’t filed yet. You will not receive a stimulus payment if you don’t have a valid social security number, if you can be claimed as a dependent on someone else’s return and you most likely won’t get one if you owe child support. If you file a joint return the credit starts to phase out after $150,000 of Adjusted Gross Income (AGI). Single taxpayers gradually phase out at $75,000, and Head of Household at $112,500. The IRS is working to issue payments as quickly as possible, but payments will be made by December 31, 2020, either through direct deposit information included on your tax return or mailing you a check and letter detailing your payment. The IRS is also relaxing the offset rule so even if you owe taxes you could still receive a payment. Keep in mind this will show up on your next year’s return and if your advance payment is less than the credit you get, you’ll get the difference. If the opposite is true, the way the Act reads, there isn’t a penalty to the taxpayer.
OTHER RELIEF OPTIONS
Then there’s the traditional 7(a) loan from the SBA. This is the normal small business loan you can apply for, disaster or not. You can get up to 10 million dollars at rates around 3% or less and have up to 25 years to pay the loan. There is collateral required and there are more options on what the loan proceeds can be used for. The SBA guarantees most of it, up to 85%. There’s no forgiveness on this one but you may be entitled to up to 6 months of subsidy payments on principal, interest, and fees.
CHOOSING A LOAN OPTION
Receiving the Payroll Protection Program loan is what creates other caveats so if you don’t have a lot of payroll or if it’s just you, the disaster loan under Section 7(b)(2) could be the better option for you. The loan amount is up to $2 million dollars, guaranteed by the SBA for less than 500 employees. Disaster loans are available through December 31, 2020.
Keep in mind the $10K advance grant available and its impact on other loans you apply for. The traditional SBA loan is available at any time.
OTHER TAKEAWAYS
There’s a number of payroll credits available to businesses as incentives to keep employees and keep them at their current salaries. You still have to go through the motions of the payroll cost calculation — less any credit for medical and sick leave expansion payments. Employers will receive a credit to payroll taxes (not to be confused with income taxes). The IRS is also delaying remittance of payroll tax payments so that employers can divert those funds to maintaining the business. As the employer, you get a refundable credit against the employer portion of Social Security tax, which is 6.2%. There are also some tax implications to retirement plan contributions, charity, and employer-paid student loan payments. Who are these employers paying back your student loans?! Kudos to you!
Revisiting the Payroll Protection Program loan, you do not get payroll tax credits if you have a Payroll Protection Program loan forgiven.
The thing to keep in mind is that if you get a Paycheck Protection Loan it is designed to help you make payroll and “keep the lights on.” You cannot use other SBA loans to also make payroll if you have a Paycheck Protection Loan. Enter fine print: while you cannot use an SBA loan product for payroll costs if you have a Paycheck Protection Loan, you can have another SBA loan product for payroll costs either for other employees or for a different time period. You cannot use different SBA loans to pay the same expenses. Remember the 10K advance grant reduces any loan forgiveness you’d receive on other loans.
Also, from a tax perspective, NOLs are back. Net Operating Losses are back and can be carried back 5 years or forward through 2021 to offset taxable income. Learn more about The CARES Act and apply for assistance here.
ABOUT ME
I’m Nikki Winston, founder of The Winston CPA Group. I’m a Certified Public Accountant with a mission of educating entrepreneurs on understanding the story of their business through numbers. Followers don’t matter, no other metrics are more important than understanding the numbers in your financials. I also coach & tutor future CPAs as they prepare to take what’s known as the hardest professional exam, the CPA exam.
If you have any questions about any of these loan programs from the SBA, I’m @NikkWinstonCPA on IG and Twitter. Share this guide with your business besties and your network. Let’s make sure we support each other as we all work to sustain our businesses.
