With the passage of the CARES Act and availability of assistance for businesses impacted by the coronavirus outbreak, business leaders need to know how these programs work. This is an overview of the what is available, some of the terms business leaders should be aware of, and guidance for how to apply.
Please note the Small Business Administration is still working to finalize the details for the SBA 7a Loans/PPP Loans, so this information is subject to change.
Under the CARES Act, small business owners have three options:
- Paycheck Protection Program Loans (SBA 7a Loan)
Apply through your SBA-approved bank
- Employee Retention Tax Credit
This is not applicable if applying for a PPP Loan
- Payroll Tax Deferral
Not applicable if applying for a PPP Loan
We will go into further detail on these options further down in this post. Click on a subject to go directly to that section.
The other options are:
- Economic Injury Disaster Loan
See section A, below, for details
- Economic Injury Disaster Loan Grant
This $10,000 grant will be available through the SBA website. In response to the coronavirus pandemic, small business owners in all U.S. states, Washington D.C. and U.S. territories are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000. The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million that can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing. The loan advance will provide economic relief to businesses currently experiencing a temporary loss of revenue. This loan advance will not have to be repaid. (Source: https://www.sba.gov/page/disaster-loan-applications)
Please note: You can apply for both an SBA 7a Loan and an EIDL as long as these loans are for different purposes.
Section A: Economic Injury Disaster Loans
- SBA’s EIDL Loan provides small businesses with working capital loans up to $2 million
- You apply for this loan directly with the SBA at sba.gov. This online loan application will take about 2.5 hours
- These loans can be used to pay fixed debts, payroll, accounts payable or other bills that cannot be paid because of the COVID-19 outbreak
- Interest rate is 3.75 percent for small businesses without credit available elsewhere
- Max term is 30 years. No personal guarantee needed for loans under $200,000
- Business has to have under 500 employees
- Typical timeline for approval is 2-3 weeks, disbursement can take up to five days
- For more information call 1-800-659-2955 or visit DisasterCustomerService@sbe.gov
Section B: Payroll Protection Program Loans (SBA 7a Loans)
- For businesses with fewer than 500 employees
- To qualify, you must have been in business on Feb. 15, 2020
- You can apply for these loans only through SBA lending banks; You will want to build a relationship with their SBA department
- Maximum loan amount is $10 million or 2.5 times your average total monthly payroll costs incurred during the year prior to the loan date
- How to calculate payroll cost:
- Sum of included payroll costs – sum of excluded payroll costs = payroll costs
- Included payroll cost made by employers is the sum of payments of any compensation with respect to employees that is a:
- Salary, wage, commission or similar compensation
- Payment of vacation, parental, family, medical or sick leave
- Payments of group health care benefits, including insurance premiums
- Payment of any retirement benefit
- Payment of state or local tax assessed on the compensation of the employee
- Excluded payroll costs:
- Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period of Feb. 15, 2020 – June 30, 2020
- Payroll taxes, railroad retirement taxes and income taxes
- Any employee that lives outside of the U.S. and any sick leave or credits that are covered by the Families First Coronavirus Response Act
- Loan proceeds may only be used for costs related to employee compensation and benefits including payroll costs, mortgage interest payments (not principal), rent, utilities and interest payments on other qualified debts
- Borrowers are eligible for loan forgiveness — see next section for details
- PPP Loans will have a maturity date of 2 years and 1 percent interest
- Traditional SBA 7a loans: Interest rate is to not exceed 4 percent and 10-year maturity date
- Borrowers are not required to demonstrate the inability to obtain credit elsewhere
- No personal guarantees or collateral is required; Loan is non-recourse to the shareholder, members or partners of the borrower
- No prepayment penalties
- Payments are deferred six months
- Waives both borrower and lender fees for 7a loans
- Business must provide a good faith certification, which is obtained from the Washington Secretary of State website and costs $20
- If you are an independent contractor, sole proprietor or self-employed individual, you can apply for an SBA 7a loan. Lenders will be also looking for certain documents such as payroll tax filings, forms 1099-MISC, and income and expenses from the sole proprietorship.
- You are not required to retain employees to get the loan. If you have laid off or furloughed your staff so they can get unemployment you can still get the 7a loan, but as we will see, the amount of the loan forgiveness will be reduced to the extent that staff is laid off or their pay is dramatically reduced.
Is it preferable to lay off or furlough staff and send them to Unemployment, or keep them on the payroll and get a 7(a) Loan?
There are two viable approaches you can take. The first is more conservative and less disruptive; the second is more aggressive but probably better for most.
- If you have not already let your staff go and think that doing so will be difficult in terms of employee morale, then consider taking the 7(a) loan at the beginning of the loan application process, as early as the end of next week. The benefit of this loan is a tax-free gift, via loan forgiveness, to pay 8 weeks worth of your payroll costs, rent, interest on your debt service and utility bills.
- $349 billion has been allocated to this program, and it’s conceivable that this money will be depleted before the last day these loans are authorized to be made.
The best way to handle this for most practices will be a two-part approach that takes advantage of unemployment benefits and the 7(a) loans. This is more disruptive to the practice as it requires furloughing or laying off the employees. However, if you’ve already done this, then that is a non-issue:
- If your practice is shut down or largely shut down, then furlough staff and have them apply for unemployment. Thanks to the CARES Act, they will get traditional unemployment benefits plus a $600 kicker. This will replace all or most of their normal pay, and in some cases give them a raise.
- When you are ready to reopen your practice, rehire your staff and obtain the 7(a) loan then. Just do this by the June 30 deadline — better yet, a couple weeks before then, in order to give yourself a cushion. You will use the loan proceeds to pay your overhead when the practice reopens. You should get the benefit of loan forgiveness for the 8 weeks following the date you take your loan (so into July and August). And, so long as the employees are rehired by June 30, the loan forgiveness will not be reduced. In this way, you are taking advantage of unemployment insurance to cover your employees’ wages during the shutdown period and also getting the tax benefits of the 7(a) loan once your practice reopens.
How Do You Apply?
The SBA is guaranteeing these loans, and businesses will need to apply through their banks and credit unions. Approximately 1,800 lenders are already approved to issue 7(a) loans. The bank at which you’ve set up your business banking account will be a great place to start. Many banks are servicing existing clients and not taking loan applications from those who are not clients already.
Since the maximum loan amount will equal 2.5 times your average monthly payroll costs during the 12-month period preceding the loan, you will need to submit an application that includes a sizable amount of documentation, including:
- Employee wages for the last 12 months — contact your payroll provider for the report
- This report must also show paid time off, vacation, sick pay, family medical pay, etc. All of this is eligible to be included. The more you can show the better, as this will increase the loan amount
- Withholding for state and local taxes on employee compensation
- Documentation showing how much, you, the employer, paid in employee group health insurance premiums for the past 12 months. Your insurance company should be able to provide this
- Documentation showing the amount of retirement plan funding the employer made for employees over the past 12 months (profit sharing 401(k) plans, cash balance plans, SIMPLE and SEP IRAs). If your 2019 plan administration has been completed, you should use this as the basis for these figures. (Employees’ own 401(k) salary deferrals won’t count for these purposes.)
This will take some time and effort, so use the next few days to start assembling these materials. Be prepared to apply for and get the loan as soon as they are available.
Borrowers will also need to make a good faith certification that:
- The uncertainty of the current environment makes the loan request necessary
- You intend to use the funds to retain workers and maintain payroll OR make mortgage payments, lease payments and utility payments
- You haven’t applied for another section 7(a) loan.
Other documents to prepare:
- Signed LLC agreement
- IRS letter w/ assigned EIN (proof of EIN)
- Signed bylaws
- Corporate resolution
- IRS letter w/ assigned EIN (proof of EIN)
- Completed BOC form attached
- Accumulated monthly rent or mortgage interest, and utilities over the last 12 months
- Accumulated interest on any other debt obligations that were incurred before February 15, 2020
- Personal info on all authorized business signers:
- Copy of driver license
- Copy of second form of identification (VISA, AMEX, etc.)
Loan Forgiveness Details
What portion of the loan will be forgiven?
The amount of loan forgiveness will equal the sum of all of the employer's following (incurred during the 8-week period that begins on the origination date of the 7(a) loan):
- Payroll costs (as broadly defined above)
- Interest (not principal) on any business debts that were incurred prior to February 15, 2020
- Utilities, including electricity, gas, water, transportation, telephone and internet access
Keep in mind:
- The amount forgiven cannot exceed the original principal amount of the loan.
- The loan forgiveness concept encourages employers to keep everyone employed. The amount of loan forgiveness will be reduced proportionally by the reduction in full-time equivalent employees during the covered period of February 15, 2020 – June 30, 2020, compared to February 15, 2019 – June 30, 2019.
- So, if you employed 15 full-time employees in 2019 and you employee 10 now, the forgiveness will be reduced by one-third. It will be further reduced to the extent that employees are being retained but are having to take pay cuts of more than 25 percent.
- The CARES Act encourages employers to rehire workers and/or restore the pay of employees who were kept but took big pay cuts. If by June 30, 2020, you rehire the laid-off employees and/or restore the salaries of the employees who took pay cuts, then your loan forgiveness will not be reduced.
- Note that a large pay cut to a highly paid employee won’t proportionately reduce your loan forgiveness.
- Say you have a highly paid associate who is barely working, and you can drop their pay to $8,333.33/mo. That will be fully covered by loan forgiveness and you will not have your loan forgiveness proportionately reduced. (On the other hand, if someone earning less than $100,000/yr. suffers a greater than 25 percent pay cut, say 30 percent, then your loan forgiveness will be reduced by that 5 percent excess amount.)
What you have to do in order to obtain loan forgivenessThe borrower has to show evidence that they actually spent money on the things that are eligible for loan forgiveness by submitting an application to the bank that includes:
- Documentation verifying the number of employees on payroll during the 8-week period of eligible loan forgiveness, including payroll tax filings reported to the IRS as well as state income, payroll and unemployment insurance filings
- Documentation, including cancelled checks, payment receipts, accounting reports, etc. verifying payments on business debts, rent and utility payments
- A certification from an officer or owner of the borrower that the information being submitted is true and that the amount for which forgiveness is being requested was used to retain employees, make interest payments on business debts, lease payments and pay utilities
This will take some effort, but it has to be done. There will be no debt forgiveness without it.
Within 30 days of enactment of the CARES Act, the SBA administrator will issue guidance and regulations to implement the loan forgiveness provision of the PPP. Within 60-90 days of when a lender determines an amount to be forgiven, the SBA will repay the lender the forgiven amount, plus any interest accrued through the date of the payments by the SBA.
How could forgiveness be reduced?
The amount of loan forgiveness is reduced if there is a reduction in the number of employees or a reduction of greater than 25 percent in wages paid to employees. See graphic below:
Section C: Employee Retention Tax Credit
This credit is not available to employers receiving Paycheck Protection Loans as described earlier.
- The Employee Retention Credit is available for wages paid after March 12, 2020 and before January 1, 2021.
- Eligible employers will receive a credit against applicable employment taxes for each calendar quarter in an amount equal to 50 percent of the qualified wages with respect to each employee.
- The amount of qualified wages taken into account for each eligible employee cannot exceed $10,000 for all calendar quarters, and the credit will not exceed the applicable employment taxes owed for such calendar quarter.
To be considered an eligible employer, employers must have carried on a trade or business during 2020 and satisfy one of the following two tests:
- Business operations were fully or partially suspended during any quarter of 2020 due to orders from a governmental authority that limited commerce, travel or group meetings in response to COVID-19
- The business remained open, but during any quarter in 2020 experienced a year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50 percent. The business is entitled to the credit for each quarter until gross receipts for a quarter exceed 80 percent of receipts from the same quarter in 2019.
For purposes of the credit:
- For those with more than 100 full-time employees, qualified wages are those paid to employees when they are not providing services due to the COVID-19 outbreak
- For those with 100 or fewer full-time employees, essentially all wages qualify for the credit
Section D: Deferral of payroll and self-employment taxes
This credit is not available to employers receiving Paycheck Protection Loans as described earlier in this document.
- Employers struggling to make payroll can gain some relief under the CARES Act by deferring their share of the Social Security payroll tax
- The payroll taxes normally due from March 27, 2020 through December 31, 2020 may be deferred with 50 percent payable by December 31, 2021 and the other 50 percent payable by December 31, 2022.
- If you have immediate cashflow needs, apply for a $10,000 EIDL Grant
- At the same time, you should apply for the Paycheck Protection Program Loan
- You should then apply to have your Payroll Protection loan forgiven — when this becomes available
- If the options above are not sufficient, go to the SBA website to apply for the traditional EIDL Loan
- If you have adequate cashflow, consider one of the FICA tax credit options or the employee retention credit if you have to suspend your operations or if gross receipts have declined substantially.
Work with an expert to figure out the best option for your business.