How Does the CARES Act Help Small Businesses With the COVID-19 Crisis?

The Coronavirus Aid, Recovery, and Economic Security (CARES) Act (H.R. 748) is expected to become law as soon as Friday, after it passed the Senate on a 96-0 vote and is expected to clear the House on a voice vote Friday on its way to President Donald Trump’s desk. It has several significant provisions aimed at helping small businesses weather the coronavirus (COVID-19) pandemic ― here’s what you need to know:

Forgivable Small Business Loans

• The CARES Act provides $350 billion to fund a new loan program within the Small Business Administration's (SBA) 7(a) program known as the Paycheck Protection Program (PPP).
• PPP loans would have a 100% federal guarantee with no collateral or personal guarantee required. Borrowers would have to make a good faith certification that the loan is necessary due to economic uncertainty related to COVID-19, the funds will be used to retain workers & maintain payroll, lease, and utility payments, and they aren’t receiving duplicative funds from another SBA program.
• Eligible businesses would include those with 500 or fewer employees or that otherwise meet current SBA size standards; self-employed individuals & “gig economy” workers; and certain non-profits (including 501(c)3 organizations, 501(c)19 veteran organizations, and tribal businesses) with fewer than 500 employees.
• Maximum PPP loan amounts would be 250% of an employer’s monthly payroll, up to a maximum of $10 million.
• Loan forgiveness would be available for amounts spent on covered payroll costs & overhead during an 8-week period after the loan origination date.
• Covered payroll costs include salary, wages, and payment of cash tips up to an annual pay rate of $100,000 for an employee; employee group healthcare benefits, including insurance premiums; retirement contributions; and covered leave.
• Covered overhead would include interest payments on any mortgage incurred prior to February 15, 2020, rent payments on a lease in force prior to that date, and utility payments for service which began prior to that date.
• Loan forgiveness couldn’t exceed the principal amount of the loan. Forgiveness amounts would be reduced proportionally by any reduction in employees retained compared to the prior year & reduced by the reduction in pay of any employee beyond 25% of their prior year compensation.
• PPP loan amounts not forgiven after one year would be carried forward as an ongoing loan with a maximum term of 10 years, a maximum interest rate of 4%, and the 100% federal loan guarantee would remain in effect.
• PPP borrowers that re-hire workers previously laid off during the crisis wouldn’t be penalized for having a reduced payroll at the beginning of the loan period.
• PPP loan payments could be completely deferred for at least six months but no more than one year.
• Loans would be available immediately after the enactment of the CARES Act through more than 800 existing SBA-certified lenders, including banks, credit unions, and other financial institutions. It would also streamline the process for bringing in new lenders that could participate in the PPP (but not traditional 7(a) loans).
• Borrowers with an existing Economic Injury Disaster Loan (EIDL) could apply for PPP payroll assistance, but if it isn’t a COVID-19-related EIDL loan they wouldn’t be able to refinance into the PPP loan. The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the PPP.
• The SBA would be required to pay all principal, interest, and fees on all existing SBA loan products (excluding PPP loans) to provide relief to small businesses negatively affected by COVID-19.

Tax Relief

• Employers whose operations were fully or partially suspended due to a coronavirus-related shutdown order, or whose gross receipts declined by more than 50% compared to the same quarter the prior year, would be eligible for an employee retention credit.
• It would be a refundable payroll tax credit for 50% of wages paid by employers to employees during the COVID-19 crisis and based upon qualified wages paid to the employee.
• For employers with over 100 full-time employees, qualified wages are wages paid to employees when they aren’t providing services due to the above-described COVID-19 circumstances.
• For employers with 100 or fewer full-time employees, all employee wages would qualify for the credit, whether the employer is open for business or subject to a shut-down order.
• The credit would be provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee or incurred from March 13, 2020 through December 31, 2020.
• Employers & self-employed individuals would be allowed to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government (employers are responsible for paying a 6.2% Social Security tax on employee wages).
• The deferred employment tax would be required to be paid over the following two years, with half to be paid by December 31, 2021, and the other half by December 31, 2022.
• The limitations on the ability of companies to use net-operating losses (NOLs) from prior years in the current tax year would be relaxed. Currently, they’re subject to a taxable income limitation and they can’t be carried back to reduce income in a prior tax year.
• This provision would allow losses from 2018, 2019, or 2020 to be carried back five years, and would temporarily remove the taxable income limitation to allow an NOL to fully offset income.
• These changes would allow companies to utilize losses & amend prior years’ returns to free up cash flow & liquidity during the COVID-19 pandemic, and would also be available to pass-through businesses & sole-proprietors.
• The amount of interest expense businesses can deduct would be temporarily increased from 30% to 50%.
• Businesses (especially those in the hospitality industry) would be enabled to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building.
• The federal excise tax on distilled spirits would be waived for spirits used or contained in hand sanitizer produced or distributed in a manner consistent with guidance issued by the Food & Drug Administration for calendar year 2020.

RESOURCES

• Small Business Administration - COVID-19 Resources
• Small Business Administration - Disaster Loan Assistance

— Eric Revell

(Photo Credit: iStock.com / andresr)