The COVID-19 pandemic has taken its toll on our country and the world. The outbreak has expanded dramatically inside the U.S. and across the globe. Each country is struggling with health and economic issues as a result. All of the resources in our country – from federal agencies to doctors, and nurses – are working hard to contain this outbreak.
Many states and cities have either reactively or proactively shut down non-essential activities and implemented stay at home regulations. While these are the best efforts for health reasons, they are having a huge impact on our economy. Unemployment filings skyrocketed to more than 3 million in one week and many companies are struggling as their revenue has decreased or disappeared.
Reaction to economic impact has been broad and deep. The Federal Reserve has proactively implemented several programs, all designed to keep our financial systems and the economy rolling.
On March 28, after some hard negotiation between both sides of the congressional isles, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed. This stimulus package covers a lot of ground and allocates more than $2 trillion to support businesses and citizens as we struggle through these unprecedented times.
This complex stimulus bill has an impact on both businesses and personal finances, and while the personal side is important, businesses probably need to make faster decisions. So, we will address this in two parts: business support followed by a second email addressing personal finances.
The CARES Act provides temporary support for large and small businesses. Many large businesses have internal legal and accounting departments to address these issues. We see small businesses struggling to stay afloat, so we will cut right to the chase and summarize the support they can access.
Paycheck Protection Program: The Paycheck Protection Program may turn out to be the most valuable resource for businesses affected by COVID-19. $349 billion has been allocated to fund forgivable Small Business Administration (SBA) loans to small businesses affected by the outbreak, with the expectation that they will use the funds to keep their workers employed. After the law was passed, it took the U.S. Treasury a few days to issue clarification and the details, but now this program is ready to launch. The rules are complicated, and our explanation is a summary. More details can be found on via the U.S. Treasury or the U.S. Chamber of Commerce.
Do I quality for a PPP Loan? To qualify for the loan, the business or non-profit must have less than 500 employees. (There are exceptions, which can be found here.) Loans are also available to self‐employed individuals, independent contractors, and sole proprietors. Every applicant is required to make a good faith certification that confirms the loan is requested due to economic uncertainty caused by COVID-19, and the proceeds will be used to retain workers.
Where can I get a PPP Loan? Loans can be applied for through any bank or credit institution authorized to provide SBA funding. Businesses and non-profits can apply beginning April 3. Independent contractors and self-employed individuals can submit applications beginning April 10. The application deadline is June 30, 2020.
What are the terms? Loan terms are pre-defined across the board. Interest rates are 0.5%. Loan payments are deferred for six months. Loans do not require collateral or personal guarantees. Loans only last for two years, but applications for forgiveness can be submitted much sooner (details to follow), and any loan forgiveness does not result in taxable income.
How much can I borrow? The amount that can be borrowed is based specifically on previous payroll costs, which for these calculations include wages, salaries, and benefits with cap (per high income employees) of up to $100k per year. The maximum loan amount is 125% of two months of your average monthly payroll costs from the last year. For example, if total payroll costs were $700k last year, the amount that could be borrowed is $145,833. ($700,000 / 12 x 2 x 125%). Loans can’t be more than $10M in total and can only be taken out once.
How can I spend the money and qualify for forgiveness? The money can be spent on anything, but this type of loan should be used to retain workers, pay utilities, rent, and/or mortgage interest and if done properly will qualify for forgiveness. (Details on non-forgivable loan types will follow.) What qualifies for forgiveness is anything spent on payroll costs (with a similar cap on high-income employees), mortgage interest, rent, and utilities within eight weeks after getting the loan. As stated above, this loan is specifically intended to retain employees, so loan forgiveness will be offset pro rata for any decreases in full-time employees or reductions in compensation greater than 25% between February 15 and June 30. Please see the U.S. Chamber’s details for further clarity on calculations and limitations.
If employee retention at the level required for PPP is not possible, but you still need resources to keep the business up and running, consider an SBA Economic Injury Disaster Loan (EIDL). These loans are applicable to companies affected by COVID-19. These are more traditional, non-forgivable loans, the proceeds of which can be used with more flexibility. The terms are good – $2M limits, 4% interest rate, one-year deferral in payments, up to 30-year length, $10,000 emergency cash grant, and no personal guarantee for loans under $200,000. The applications can be started online and more details about the loans and the process can be found on the SBA website.
There are also provisions for debt relief of existing SBA loans and Express Bridge Loans for current SBA borrowers.
Employee Retention Credit Employers of any size, including small businesses, which have either suspended operations to some degree or experienced a loss of 50% of revenue (compared to the same quarter in 2019) are eligible to receive a refundable tax credit equal to 50% of the wages paid to their employees, to a maximum of $5,000 per employee. This is only available to businesses that have not applied for Paycheck Protection Loans. The tax credits can be claimed over the amount of time operations were suspended, or if based on reductions in revenue, until revenue increases back to 80% of the previous year’s quarter.
Deferral Employer Payroll Taxes
Employers who do not receive forgiveness of a PPP loan or qualify for the Employee Retention Credit are ineligible for the payroll tax deferral. Businesses and self-employed individuals can defer the employer’s half of payroll tax owed through the end of calendar year 2020. The deferred taxes would be paid 50% by the end of 2021 and 50% by the end of 2022. Employers are eligible to receive the credit either for the amount of time their operations were suspended or, if the credits were based on a diminution of gross receipts, until the quarter where their gross receipts reach the level of 80% of the prior year average.
Family First Coronavirus Response Act: This is a law passed in mid-March that requires employers to provide up to two weeks of sick leave and up to 10 weeks of paid family and medical leave for employees specifically affected by COVID-19. Thankfully, there are provisions to reimburse employers via payroll tax credits. Details on benefits can be found via DOL and reimbursement via IRS.
Net Operating Loss Rules: In addition, the CARES Act will allow any net operating losses (NOL) taken by businesses in 2018-20 to be carried back on amended returns for up to five years. If a business has significant NOL in 2020, prior year returns can be amending, which would result in refunds of previous taxes paid. Another safety net in these difficult times.
We will continue to update you as new information becomes available. A second post on personal finances will be added soon. As always, please call us at (901) 850-5532 if you have any questions.
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