The CARES Act: What Small Business Owners Need to Know
Updated: Jan 10
On March 27, 2020, President Trump signed into law another phase of COVID-19 legislation called the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act is the largest COVID-19 relief bill at this time costing roughly $2 trillion, including, among other programs, an estimated $560 billion in payments to eligible individuals, a $500 billion loan facility to corporations, $339.8 billion to state and local governments for various programs including increased unemployment benefits, and $377 billion to small businesses.
The $337 billion available to small business is spread across several relief programs to be administered by the Small Business Administration (“SBA”). These programs are (1) the Paycheck Protection Program “(PPP”); and (2) the Economic Injury Disaster Loan (“EID Loan”).
I. Paycheck Protection Program
The “PPP” provides for loans of up to $10 million to certain qualified small businesses, and under this program, the loan is forgiven to the extent the loan was spent on:
Payroll during the covered 8-week period compared to the previous year proportionate to maintaining employees and wages but excluding compensation of employees in excess of an annual salary of $100,000,
Interest on any mortgage incurred before February 15, 2020 (not including any prepayment or payment of principle),
Payment of covered rent on a lease in force before February 15, 2020, and
Any payment of covered utility costs for a service that began before February 15, 2020.
Payroll costs is a very broad term under the PPP. It consists of compensation to employees whose principal place of residence is the United States in the form of salary, wages, commissions, or similar compensation; cash tips or equivalent; payment for vacation, parental, medical, or sick leave; severance or dismissal allowances; group health care coverage payments for employee benefits including insurance premiums; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment of similar compensation. There are excluded costs that must be kept in mind, which are listed in Section I(d).
Note, however, that in order for dollars spent to be forgiven under the PPP, these amounts must be spent during the 8-week period following the loan origination date. Also worth noting is if you do receive a PPP loan, you are no longer eligible for the Employee Retention Tax Credit. (1) Finally, Applicants must certify:
They do not have an application pending for other payroll assistance under the CARES Act (2),
Current economic conditions make the application necessary to support ongoing operations, (3) and
The funds will be used to retain employees and make payroll.
b. Businesses Eligible for PPP Loans
Small businesses qualified for this program include (4):
Individuals operating as a sole proprietorship, independent contractor, and other eligible self-employed individuals. (5)
Small businesses with 500 or fewer employees (unless the applicable SBA size standard allows for more employees based on your NAICS code (6), including 501(c)(3) non-profits, 501(c)(19) veterans organizations, or Tribal business concerns.
Any business employing 500 or less employees per physical location of the business and is assigned a NAICS code beginning with 72 (for which the affiliation rules are waived).
If you represent a corporation, LLC, or other business with fewer than 500 employees, you are likely eligible. However, if you have over 500 employees, do not assume that you do not qualify. Certain employers with more than 500 employees can still qualify, so check with your attorney before forgoing a PPP loan.
c. Favorable Lending Requirements
In addition, to the broadly qualified businesses eligible for stimulus funding under the PPP Loan program, the following list details additional incentives to participation:
All expenditures forgiven under the PPP (See Section 1(a)) shall be not considered taxable income to your business in your 2020 filings. (7)
There are no collateral requirements or prepayment penalties of any kind.
PPP Loan monthly payments are automatically deferred for at least 6 months but potentially up to a year depending on your lender, though interest will accrue during the deferral period.
d. Non-Qualified Expenditures
The following expenditures do not qualify as payments under the PPP Loan program:
Employee/owner compensation over $100,000 annualized,
Taxes imposed or withheld under chapters 12 (Gift Tax), 22 (Railroad Retirement Tax), and 24 (Withholdings) of the IRS code such as FICA,
Compensation of employees whose principal place of residence is outside of the US, or
Qualified sick and family leave for which a credit is allowed under the Families First Coronavirus Response Act.
e. Calculating Eligible Funding under the PPP Loan Program
The maximum PPP loan for your otherwise qualified business will be calculated based on whether your business was in business for different periods of time. For example, if you were in business between February 15, 2019 and June 30, 2019, your loan maximum is equal to 250% of your average monthly payroll costs for that period (in other words, take your monthly payroll and multiply it by 2.5), subject to adjustment based on whether you employ seasonal workers.
If you were not in business during the above referenced period, your maximum loan is based on 250% of your average monthly payroll costs between January 1, 2020 and February 29, 2020.
Regardless of the way your max PPP loan is calculated, this amount is then added to any other debt approved for refinancing such as the Economic Injury Disaster Loan (“EID Loan”) discussed in Section II of this document. And, under no circumstances can the combined amount for which you are eligible under PPP Loan and EID Loan exceed $10 million. The SBA has clarified that interest rates on PPP loans will be 1.00%, and these loans will be for two year terms.
Critically, the SBA provided interim guidance clearly stating that independent contractors can apply for a PPP loan on their own and therefore do not count as employees. This has a significant effect on borrower's loan calculation. Moreover, the SBA has determined that no more than 25% of a PPP loan can be used for non-payroll costs for loan forgiveness to apply.
Bottom line: If you are a small business owner who was in business on February 15, 2020 and paid salaries/taxes for employees or were a 1099-MISC independent contractor, you should consult your attorney regarding your business’s eligibility for the Paycheck Protection Program loan.
II. Economic Injury Disaster Loan
The EID Loan Program is an existing program with which many Gulf Coast businesses are familiar; however, the program has changed significantly under the CARES Act by allowing certain disbursements and waiving borrower requirements that are explained below.
Due to decisive action by the Louisiana and Texas state governments, Louisiana and Texas businesses are immediately eligible to apply for benefits under the amended EID Loan Program. Further, as our respective Governors sought this declaration early on, eligible Louisiana and Texas small businesses could apply for SBA EID Loans event before March 27, 2020, the effective date of the CARES Act.
After the CARES Act, EID Loans can be more favorable and are subject to lower requirements. For example, applicants can request expedited disbursements not to exceed $10,000 and which can be used only for certain costs. The EIDL also required that borrowers not be able to secure credit somewhere else and that the borrower have been in business for at least a year, but now, the CARES Act requires just that the business have been in operation on January 31, 2020. Moreover, the SBA at this time will not require collateral on EID Loans over $25,000 and will not require personal guarantees for loans up to $200,000. For loans in excess of $200,000, SBA will require personal guarantees by owners of more than 20% of the borrower. The interest rate on EID Loans are favorable with 3.75% fixed interest rate for small businesses and 2.75% for non-profits. EID Loans can have a term of up to 30-years with amortization.
EID Loans are not subject to the same forgiveness programs as under the PPP, so businesses that apply for and receive loans under both programs must show that the basis for the loan disbursements, i.e., what you plan on spending the loans on, are different. For example, you cannot receive both an EID Loan and a PPP loan to cover the same payroll. If you already applied for an EID Loan before March 27, 2020, then you may wish to consider whether re-financing your loan as a PPP loan would be appropriate as this could make the PPP’s loan forgiveness rules applicable to your former EID Loan.
The CARES Act is lengthy and will require significant guidance from the SBA on implementation, so consult with your attorney regarding eligibility and keep diligent records to ensure you can properly document any benefits your business could be eligible to receive.
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Your receipt of the PPP loan will not affect the payroll tax credit available to you under the Families First Coronavirus Response Act.
The U.S. Senate Committee on Small Business & Entrepreneurship has clarified that this applies to EIDLs, 7(a) loans, 504 loans, and other SBA financial assistance. As stated in their guide, PPP loans cannot be used for the same purpose as other SBA loans and you cannot use PPP and other SBA loan products to cover the same payroll costs. You can use a different SBA loan product to cover payroll not during the 8-week covered period or for different workers. The guide is available at https://www.sbc.senate.gov/public/_cache/files/9/7/97ac840c-28b7-4e49-b872-d30a995d8dae/F2CF1DD78E6D6C8C8C3BF58C6D1DDB2B.small-business-owner-s-guide-to-the-cares-act-final-.pdf.
Essentially, that your business needs a loan because of COVID-19’s impact on the economy. This certification is required as part of your loan application.
Businesses who have received financing from a Small Business Investment Corporation or franchisees holding a franchise listed on the SBA’s registry of approved franchise agreements are also qualified under the PPP.
Self-employed individual is defined using the same meaning as in the COVID-19 paid sick leave legislation that became law on March 18, 2020. If you are an individual who regularly carries on a trade or business and would be entitled to paid leave in 2020 under the Emergency Paid Sick Leave Act, then you may be eligible under the PPP. To establish eligibility, you will have to submit documentation to establish eligibility including a Form 1099.
NAICS refers to the North American Industry Classification System, which is used by federal agencies to classify business establishments based on what they do, for example, hospitality, legal, or agricultural industries have various codes.
If you do receive a loan and seek loan forgiveness, the amount forgiven will be reduced proportionally by any reduction in your number of employees between Feb. 15, 2020 and Ap. 26, 2020 as compared to the previous year. Of course, you can avoid this penalty by re-hiring by June 30, 2020. You also cannot reduce your employees’ wages by more than 25% without a reduction in your loan forgiveness.