Latest Relief Package: Options for Small Businesses
The CARES Act signed into law on March 27 is aimed at providing relief in a wide range of areas in response to the COVID-19 pandemic. Here’s what the package offers to small businesses.
The federal government has acknowledged that small businesses may be especially hard hit by the COVID-19 pandemic and has responded by establishing provisions aimed at lessening some of the impact. The latest measure, known as the CARES Act, includes some of the most extensive small business relief to date. Here’s an overview of the small business-related relief provisions in the CARES Act.
Details on these provisions, as well as on other pandemic-related resources, are available from the U.S. Small Business Administration, the U.S. Chamber of Commerce, the U.S. Department of the Treasury, and the Internal Revenue Service.
Paycheck Protection Program Loans
The legislation creates the Paycheck Protection Program, a new loan product within the Small Business Administration’s 7(a) Loan Program. Existing and new SBA lenders will be able offer these loans to eligible small businesses.
The new loan, with an interest rate of up to 4%, will be 100% guaranteed by the SBA. Funds may cover payroll costs, including continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; employee salaries and commissions; payments of interest on any mortgage obligation, rent, and utilities; and interest on any other debt obligation incurred before February 15, 2020.
Businesses and charitable nonprofits with fewer than 500 employees, sole proprietors, independent contractors, and self-employed individuals are eligible for the loans.
A business can borrow up to 2.5 times the average monthly payroll based on the business’s prior year’s payroll, capped at $10 million. All borrower and lender fees for Paycheck Protection loans will be waived, as well as collateral requirements, the Credit Elsewhere Test, and all requirements for personal guarantees. Deferrals of principal, interest, and fees for six months will be built into the loans.
Emergency Economic Injury Grants
The CARES Act allows $10,000 of SBA economic injury disaster loans (EIDLs) to be provided to small businesses and nonprofits without a requirement for repayment. EIDLs are loans of up to $2 million that carry interest rates up to 3.75% for companies and up to 2.75% for nonprofits, as well as principal and interest deferment for up to four years. The loans may be used to pay for expenses that could have been met had the disaster not occurred, including payroll, paid sick leave to employees, increased production costs due to supply chain disruptions, and business obligations, including debts, rent and mortgage payments.
The $10,000 grant portion of an EIDL does not need to be repaid, even if the grantee is subsequently denied an EIDL for amounts beyond the $10,000. Eligible grant recipients must have been in operation on January 31, 2020. The grant is available to small businesses, private nonprofits, sole proprietors and independent contractors, tribal businesses, as well as cooperatives and employee-owned businesses.
The relief package establishes that the borrower of an SBA loan is eligible for loan forgiveness equal to the amount spent by the borrower on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020. The loan forgiveness period extends to eight weeks after the origination date of the loan.
Debt Relief for Existing and New SBA Borrowers
The stimulus package includes $17 billion to provide immediate relief to small businesses through standard SBA 7(a), 504, or microloans. Under this provision, SBA will cover all loan payments for existing SBA borrowers, including principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out an SBA loan within six months after March 27, 2020.
The measure also encourages banks to provide further relief to small business borrowers by allowing them to extend the duration of existing loans beyond existing limits, and enables small business lenders to provide a temporary extension on certain reporting requirements for new and existing borrowers. While SBA borrowers are receiving the six months of debt relief, they also may apply for a Paycheck Protection Program loan that provides capital to keep their employees on the job. Borrowers may not apply the six months of SBA payment relief to Paycheck Protection loan payments.
Employee Retention Credit for Employers Subject to Closure due to COVID-19
The CARES Act provides a refundable payroll tax credit for 50% of wages paid by employers during the COVID-19 crisis. The credit is available to employers whose operations were fully or partially suspended due to a COVID-19-related shut-down order, or whose gross receipts declined by more than 50% compared with the same quarter in the prior year.
For employers with greater than 100 full-time employees, the credit is based on wages paid to employees while they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee between March 13, 2020, and December 31, 2020.
Delay of Payment of Employer Payroll Taxes
The stimulus package allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax on employee wages. The provision allows for half of the amount to be paid by December 31, 2021, and the other half by December 31, 2022.
Modification of Limitation on Losses for Taxpayers Other Than Corporations
This provision of the act modifies the loss limitation applicable to pass-through businesses and sole proprietors, so they can use excess business losses to access critical cash flow.
Modification of Limitation on Business Interest
The relief legislation temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns from 30% to 50% of taxable income (with adjustments) for 2019 and 2020. This provision allows businesses to increase liquidity with a reduced cost of capital.
Modifications for Net Operating Losses
Net operating losses are typically subject to a taxable income limitation, and they cannot be carried back to reduce income in a prior tax year. The legislation allows a net operating loss arising in a tax year beginning in 2018, 2019, or 2020 to be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to amend prior year returns to take advantage of operating losses.