The CARES Act offers aid to small business. Here is what small business owners need to know to take advantage of this aid.
What is the CARES Act?
The CARES Act is short for the Coronavirus Aid, Relief, and Economic Security Act. President Trump signed the bill into law on March 27, 2020. The stimulus package offers $2.1 trillion in aid to individuals and businesses. Some of this money is earmarked for small businesses.
Employee Retention Credit
While not limited to small businesses, the bill offers a refundable payroll tax credit of up to $10,000 of wages paid to an eligible employee during the crisis. The credit is available to both for-profit and non-profit businesses whose operations have been disrupted by government restrictions that have resulted in a full or partial suspension of their business operations. The credit is also available to business whose quarterly receipts are down by 50% or more on a year-over-year basis.
The wages of employees who were either furloughed or whose hours have been reduced are eligible for the credit. For employers with 100 or fewer employees, all employee wages for full time employees are eligible regardless of whether the employee was furloughed.
The credit is 50% of up to $10,000 in qualified wages paid to an employee after March 12, 2020 and before Jan. 1, 2021. Eligible wages include not only the employee’s cash compensation, but also eligible healthcare cost paid by the employer. The employer will receive the credits, and any refund if eligible, through their quarterly payroll tax filings.
Paycheck Protection Program
The CARES Act allocated $350 billion to small businesses under the Paycheck Protection Program. The program provides 100% federally guaranteed loans to small businesses with the goal of helping them keep their employees employed during the COVID-19 pandemic and any resulting economic downturn. The program is administered by the Small Business Administration (SBA) and applications can be made to banks starting on April 3, 2020.
A key feature of this program is that all or part of the loan may be forgiven if the business are able to maintain their payroll during the crisis and/or if they restore employees to the payroll afterwards.
Some of the eligibility requirements include:
· A small business, a 501(c)(3) or a small business that other meets the SBA criteria with 500 or fewer employees.
· Individuals who operate as a sole proprietor, independent contractor or who is self-employed and regularly operates an ongoing business.
· Eligible tribal businesses and 501(c)(3) Veterans organizations that meet the SBA’s size criteria are also eligible.
· Some businesses operating as a franchisee and receiving SBA assistance may be eligible, as might some businesses in the accommodations business (hotels, etc.) and in the food service business. In the latter two cases the 500 employee limit may be applied on a per location basis.
· The 500 employee limit includes employees of all statuses, full-time, part-time and others.
Working with lenders
The SBA will be directing participating lenders to ensure that the business was in operation prior to February 15, 2020, and that they had employees to who they paid wages to and payroll taxes for. Payments to independent contractors will also be considered.
Lenders will not:
· Consider whether the borrower sought and was refused credit elsewhere.
· Require a personal guarantee for the loan.
· Require collateral for the loan.
Lenders will ask perspective borrowers for a good faith certification that the loan is due to economic hardships due to the pandemic, that the loan proceeds will be used to retain employees and the borrower does not have a duplicate application for a similar loan outstanding elsewhere. Independent contractors and those who are sole proprietors or otherwise self-employed will need to provide documentation such as payroll tax filings or 1099 forms as part of the application process.
How much can be borrowed?
The loans can be for an amount up to 2.5 times the employer’s average payroll costs, not to exceed $10 million.
Items that can be included in the calculation of average payroll costs include:
· Salaries, other wages, commissions, or other types of compensation
· Tips or equivalent payments
· Vacation pay and parental, family, medical, or sick leave
· Severance pay
· Payments for group health care benefits, including insurance premiums
· Payment of any retirement benefits
· Payment of state or local taxes assessed on the payment of employee compensation
Items that would be excluded from average payroll costs include:
· The prorated compensation of any single employee for the period of February 15 to June 30, 2020 that would exceed $100,000 on an annualized basis.
· Payroll taxes, railroad retirement taxes and income taxes
· Any compensation associated with an employee whose principal residence is outside of the United States
· Qualified sick leave or family leave pay that is already eligible for a credit under existing rules.
How does the loan forgiveness feature work?
Borrowers may be eligible to have some, or all of the loan amount forgiven. The amount is based upon the amount spent on the following items during the eight week period from the loan origination date:
· Payroll costs as discussed above
· Interest on a mortgage related to the business
· Rental payments on a business lease
· Utility payments made
· Additional wages over and above tips earned paid to applicable employees
The amount of loan forgiveness may be reduced if there is a reduction in the number of employees or a reduction greater than 25% in the amount of wages paid to the employees of the business. Any reduction in the amount of loan forgiveness can be reduced or eliminated if the business restores the reduced wages or brings back any laid off employees by June 30, 2020.
Overall this is potentially an excellent program for many small businesses. At this writing there are still many questions about some of the details of the program, check with your banker, business advisers or the SBA for more details.
Tips and suggestions
Mike Kutchin, a business consultant and president of See Change Management offers some survival tips for business owners during this period.
He urges business owners to take advantage of any and all governmental programs in place to address these unprecedented times. Beyond this, Kutchin suggests:
· Contact your bank and seek immediate suspension of principal payments on term debt and/or leases. Virtually all banks have these programs in place for the asking. ASK TODAY!
· Contact any equipment lessors and seek some negotiated relief on lease payments.
· Contact your building lessor (if you don't own the real estate) and begin discussions on rent suspension.
· Look at all business expenses and your suppliers. Reach out to them seeking extended payment terms ASAP.
· Anticipate the collection of your accounts receivable balance will not proceed as planned. You will need to make provisions for late/deferred payments.