Breaking the Code: The CARES Act Loan Programs
By: Rachel Speigle Dunnigan, CPA, MSA, CFP®
The CARES Act, a $2 trillion financial aid package that includes $350 billion in desperately needed relief for small businesses impacted by the COVID-19 pandemic, was passed on Friday, March 27th, 2020. Its components include stimulus payments to individuals, expanded unemployment coverage, student loan changes, different retirement account rules and more.
We wanted to get ahead of the coverage and share some details on two main loan programs that are covered in this package: the Economic Injury Disaster Loan and the Paycheck Protection Program. During this current economic slowdown, these loan programs will be vital for small businesses. While there are other forms of relief in this package, briefly mentioned at the end of this summary, we will revisit those at a later time.
Eligible businesses are encouraged to apply for both loan programs below but be sure to track the uses of each loan. EIDL allows a broader use of funds while PPP limits to operating expenses. There are no industries that are excluded from these programs and self-employed individuals allowed to participate in both.
Economic Injury Disaster Loan (EIDL)
This loan program was initiated by the Small Business Association (SBA), but has been updated with the CARES Act. Applications are currently open online directly through the SBA in a more simplified process from previous uses: https://covid19relief.sba.gov/#/. SBA will make the determination of the company’s actual economic injury.
While up to $2M may be available as a loan, these funds are available as a grant up to $10,000 for working capital needs provided as early as 3 days of application date. These loans do not require personal guarantees and SBA loans may be deferred by lenders up to six months with submitted request. The interest rate for businesses is 3.75%.
Paycheck Protection Program (PPP)
This is a new loan program established by the CARES Act for small businesses (500 or fewer employees). The loans are made through banks and other lenders for companies that have been operating and paying salaries prior to February 15, 2020. While applications for these loans are currently unavailable, they have an expected start date of Friday, April 3, 2020 with an implementation period of 30 days.
When calculating the loan amount for the PPP, companies will use a rolling 12-month (for seasonal employers, rolling 12-week) average of monthly pre-tax payroll costs. These costs include salaries, wages, vacation pay, health benefits, retirements, etc. Once the average has been calculated, the company must multiply this amount by 2.5 in order to get their maximum loan amount. This loan is available up to $10M.
The funds from these loans can be used for operating expenses for the company – including, but not limited to payroll, mortgage interest or rental payments, utilities, group health benefits, transportation costs, and other debt obligations. If companies keep the same workforce during the 8-week period following the application date or restore their payroll afterwards to pre-crisis levels, these loans will be forgiven for those operating expenses. This forgiven loan is excludable from gross income.
The stipulations on these workforce restrictions include number of employees as well as reduction in pay greater than 25%.
When applying for these loans, the documentation needed falls in three categories with some examples below:
Verification of employees and payrates: Payroll tax filings, state income
Permissible payment verification: Rental leases, cancelled bank checks
Certification from businesses that funds are used appropriately
Typical affiliation rules for the SBA are waived under the PPP for businesses with 500 or fewer employees that are assigned a NAICS code beginning with 72, franchises with assigned identifier codes by the SBA, or those receiving financial assistance from a small business investment company. Additionally, all SBA fees are waived with no asset lien or personal guarantee required.
Stimulus Check
A maximum of $1,200 for individuals ($2,400 for joint filers) and $500 for each child will be provided as a one-time payment for US taxpayers. These amounts are subject to a phaseout of adjusted gross incomes greater than $75k (single) and $150k (married) up to $99k (single) and $198k (married). Individuals’ 2019 tax returns are used for eligibility determination, but if not yet filed, 2018 tax returns are acceptable.
If the IRS already has your bank account information from your 2019 or 2018 returns, it will transfer the money to you via direct deposit based on the recent income-tax figures it already has. The IRS will build a portal where individuals can update their information on file. Payment are expected to be received by April 17, 2020. These stimulus checks will not be subject to taxes for 2020. They are in essence an advance on a tax-credit for tax year 2020. If you are not eligible for the stimulus check based on your 2018 or 2019 returns, you may be eligible in 2020 based on the income earned in that year.
Washington Post has a helpful calculator that may be useful to you: https://www.washingtonpost.com/graphics/business/coronavirus-stimulus-check-calculator/
Expansion of Unemployment Benefits
Self-employed individuals and part-time workers are newly eligible for unemployment benefits. An additional $600 per week is available depending by state as a payout for up to 4 months through July 15, 2020. State-level unemployment insurance is also extended by an additional 13 weeks through December 31, 2020. Specifics and eligibility will be largely determined by the Labor Department and your state’s unemployment department pending additional guidance from the Labor Department.
Other Hot Topics
IRA (Traditional, Roth, & SEP) contributions are extended to 7/15/2020
Up to $100,000 allowed as an early distribution from retirement plans without 10% penalty but must be repaid over three-year period
One-year delay for Required Minimum Distributions
Student loans up to $5,250 can be made by an employer and can be excluded from gross income
Employee retention credit: Allowed 50% of the first $10,000 wages per employee as a credit against payroll taxes
Payroll taxes can be postponed and paid over next two years
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.