On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This law is the fourth and broadest bill in response to the COVID-19 outbreak, with an impact on the economy, public health, state and local governments, individuals, and businesses.
Part of the law focuses on relief funding for eligible businesses with less than 500 employees, and provides them with several ways to apply for government-backed loans to enable business continuity. Here is an overview on each of the available programs; you can relay the information to clients as well as use it for yourself during these unusual times.
Paycheck Protection Program
The Paycheck Protection Program (PPP) is intended to provide a way for business owners and other eligible businesses to keep their workers on the payroll and maintain wages. The Small Business Administration (SBA) classifies PPP loans as a 7(a) small business loan.
- The loan issued under PPP can be used for payroll, mortgage interest, rent, and/or utility costs.
- There are no personal guarantees or collateral required for PPP loans, and there are no prepayment penalties.
- The loan may be forgiven, in whole or in part, if certain eligibility criteria are met regarding employee levels and compensation. Thanks to the PPP Flexibility Act, at least 60% (down from 75%) of the PPP loan proceeds must go toward eligible payroll expenses in order to maximize loan forgiveness. If a borrower uses less than 60% of PPP funds for payroll costs, the borrower will only be eligible for partial loan forgiveness. No more than 40% of the forgiveness amount may be attributable to eligible non-payroll costs (mortgage interest, rent, utilities).
- If not forgiven, the loan is payable over five years (two years for those who received their PPP loans before June 5, 2020, unless the lender and borrower agree to extend the loan maturity period to five years) at a 1% interest rate.
There are a few important pieces of information to be aware of with this program. Businesses must find an existing local SBA lender to apply for this loan. Initially, businesses (for-profit, non-profit and other organizations) with less than 500 employees were eligible to begin applying on April 3. On April 10, independent contractors and self-employed individuals were able to apply for the loan. Household employers are not eligible to apply. In order to establish eligibility for a PPP loan, applicants must submit documentation such as payroll processor records, payroll tax filings, or Form 1099-MIS, or income and expenses from a sole proprietorship.
Borrowers can apply for approximately 2.5X their average monthly payroll costs, up to $10 million and subject to certain restrictions. Payroll costs include cash compensation, capped at $100,000 on an annualized basis for each employee, which includes salary, wages, commissions; cash tips or equivalent; benefits including vacation, parental, family medical or sick leave; and allowances for separation or dismissal. Payroll costs also include payments required for the provision of group healthcare benefits and insurance premiums; payment of any retirement benefits; and payment of state and local taxes assessed on compensation.
Loan forgiveness: The loan may be forgiven, in whole or in part, if certain eligibility criteria are met. Businesses must apply for loan forgiveness from the lenders by providing documentation that verifies how the loan was spent. Forgiveness amounts depend on whether or not borrowers maintained the number of employees and their pay rates and salaries at previous levels during the applicable Loan Forgiveness Covered Period (described below); if the number of full-time equivalent employees is reduced over this time period, or if payroll costs for employees who make less than $100,000 a year are reduced by 25% or more, then the amount of the loan eligible for forgiveness will be reduced. However, the loan forgiveness amount will not be reduced if reductions made between Feb.15, 2020, and April 26, 2020, are reversed by the earlier of (i) the date the borrower submits the application for loan forgiveness or (ii) Dec. 31, 2020. Additional safe harbors and reduction exceptions may also apply if other requirements are met. The lender who granted the loan (or servicing the loan) will determine the loan forgiveness amount based on the criteria above. Please note, certain borrowers are eligible to use a simplified version of the PPP loan forgiveness application (called the EZ Loan Forgiveness Application) when filing for forgiveness.
Businesses may only have one loan under the PPP, so unless there is another economic package down the line, this will be it. Businesses must apply for a loan with an approved SBA lender. This is the prescribed application, but the lender may also have their own.
The below chart explains the main changes that have been made to the PPP loan under the PPP Flexibility Act.
|PPP loan under the CARES Act||PPP loan under the PPP Flexibility Act|
|Loan maturity on amounts not forgiven – two years.||Loan maturity on amounts not forgiven – five years (for loans after June 5, 2020). Loan maturity for loans made before June 5, 2020, remains two years. However, borrowers and lenders may agree to extend the period to five years. Loans are deemed made for this purpose on the date the SBA assigned a loan number to the PPP loan.|
|Borrowers can defer principal and interest payments for six months (interest accrues).||Borrowers who apply for forgiveness within 10 months after the last day of the 24-week forgiveness covered period can defer principal and interest payments until SBA pays the forgiveness amount to the lender or tells the lender that the borrower is ineligible for forgiveness. Borrowers who do not apply for forgiveness must begin making payments 10 months after the earlier of the end of the last day of the 24-week covered period or Dec. 31, 2020.|
|Not allowed to defer employer’s 6.2% share of 2020 Social Security tax if PPP loan forgiven.||Allowed to defer employer’s 6.2% share of 2020 Social Security tax if PPP loan forgiven.|
|Covered Period – earlier of eight weeks from loan origination or June 30, 2020, to incur costs eligible for forgiveness.||Loan Forgiveness Covered Period – earlier of 24 weeks from the date the borrower received the PPP funds or Dec. 31, 2020. If a borrower’s loan was made before June 5, 2020, the borrower can elect to use the eight-week covered period instead of the 24-week period.|
|No more than 25% of the loan forgiveness amount may be attributable to non-payroll costs (interest, rent, utilities).||No more than 40% of the loan forgiveness amount may be attributable to eligible non-payroll costs (mortgage interest, rent, utilities).|
|Borrower can avoid a reduction in forgiveness if FTE headcount reduction or salary / wage reduction are restored to the Feb. 15, 2020, levels by June 30, 2020.||Borrower can avoid a reduction in forgiveness if FTE headcount reduction or salary / wage reduction are restored to the Feb. 15, 2020 levels by the earlier of (i) the date the borrower submits the application for loan forgiveness or (ii) Dec. 31, 2020.|
|Exemption Based on Employee Availability – Between Feb. 15, 2020, and Dec. 31, 2020, loan forgiveness won’t be reduced when the borrower experiences a loss in FTEs if the borrower is able to document either of the following:
1) an inability to rehire individuals who were employees of the borrower on Feb. 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before Dec. 31, 2020.
2) an inability to return to the same level of business activity that was operated before Feb. 15, 2020, due to compliance with HHS, CDC, or OSHA requirements between March 1, 2020, and Dec. 31, 2020, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID–19.
Pros and cons to taking the loan:
- Pro: The money is to cover eligible payroll and possibly other expenses for 24 weeks, depending on the business’ situation and whether funding is available.
- Pro: The loan may be forgiven, in whole or in part, if certain eligibility criteria are met, including spending the funds during the 24-week loan forgiveness covered period (or if applicable, the eight-week period) and employee levels and compensation.
- Con: Businesses must find an SBA-approved lender and wait for the approval.
- Con: If things get worse, without additional packages you only get one loan.
- Con: If things get worse and the business doesn’t apply soon, the funds could be gone.
- Con: This doesn’t cover the federal sick time under FFCRA.
Overall, the PPP could be a tremendous opportunity to cover business and primarily payroll expenses during these trying times. As a point of advice and planning, be aware of the timing requirements. There is a lot of latitude with the timing requirements, particularly with the PPP and when you need to restore employees to the role.
For more information, see the U.S. Treasury’s PPP loans frequently asked questions.
Economic Injury Disaster Loan
The SBA’s Economic Injury Disaster Loan (EIDL) can help businesses, renters, and homeowners affected by declared disasters. The CARES Act expanded the EIDL program to meet the financial needs of struggling small business owners and other eligible applicants affected by COVID-19. This loan has a few rules and a few different options:
- Under the EIDL provisions of the CARES Act, small businesses and other eligible applicants can apply for working capital loans of up to $2 million.
- Borrowers can use funds to pay fixed debts, cover payroll, and pay other bills they could not otherwise pay due to the economic impact of the coronavirus.
- The EIDL interest rate is at 3.75% for small businesses and at 2.75% for non-profits. To keep payments low, the SBA offers long-term repayment plans to eligible borrowers of up to a 30-year term.
- Business owners can also apply for an EIDL emergency advance of up to $10,000. These funds will be made available within days of application and will not need to be repaid, even if the business’ application for an EIDL loan is denied.
- Eligible applicants can apply for a PPP loan as well as an EIDL loan but cannot use the funds from the loans for the same expenses, and may need to refinance the EIDL loan with the PPP loan. The amount of any EIDL advance will also be deducted from a PPP borrower’s loan forgiveness amount.
There are quite a few important considerations with this loan program, as with any loan, so advising clients on the necessity of this loan would be recommended.
The application for this loan is found directly on the SBA.gov website. The application begins by asking which business the borrower is using to apply for this loan. There is also a series of disqualifiers, such as illegal activities, farms, gambling, lobbying, government officials, no delinquent child support, and no sex-related businesses.
Like any business loan, there are several questions about the business structure and the owners. There is also a request to upload business and personal tax returns, as well as a personal financial statement for the owners.
At the end of the application, applicants are asked for banking information to deposit the funds once the application is processed, and if the business is interested in the $10,000 emergency advance.
Businesses that already have a relationship with an SBA lender may go to the lender and ask for the Express Bridge Loan for up to $25,000 in advance while their EIDL application is processing. This loan is much like any other SBA loan; because the business has an existing relationship with the lender, the additional paperwork should be minimal if it has been kept up-to-date with the lender. This loan is for up to seven years with an interest rate of 6.5% over the prime rate. This bridge loan is to be paid back from the proceeds of the EIDL loan if obtained. Additional details can be found at the SBA site.
SBA debt relief
For businesses with existing SBA Service Disaster (Home and Business) loans in “regular servicing” status on March 1, 2020, the SBA is automatically providing deferments through Dec. 31, 2020. Interest will still accrue, and the deferment will not cancel any established preauthorized debit (PAD) or recurring payments. The SBA will automatically pay the principal, interest, and fees of current 7(a), 504, and microloans for a period of six months as well as new loans closed prior to Sept. 27, 2020. This relief is not available for Paycheck Protection Program loans or Economic Injury Disaster loans.See SBA Debt Relief for more details.
Employee Retention Credit
If you or your clients don’t want to deal with banks or the SBA, there is another option for you under the CARES Act: the Employee Retention Credit (ERC). An eligible employer that continues to pay employees during a closure is entitled to a refundable tax credit for up to 50% of the total wages paid to employees during the closure, up to a maximum of $10,000 of wages ($5,000 of credit) per employee. This credit is not available to businesses that receive a loan under the PPP.
The qualifications are that the operation of the business is fully or partially suspended due to orders from an appropriate government authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or gross receipts are below 50 percent in comparison to the same 2019 quarter. A qualifying closure based on a decline in gross receipts continues until the earlier of Dec. 31, 2020, or the end of the first subsequent calendar quarter in which gross receipts exceed 80% of the gross receipts for the corresponding quarter in 2019. Businesses must carry on at some point during 2020 to be eligible for the credit, but all operations of a tax-exempt organization are treated as a trade or business under the statute.
Similar to the FFCRA, businesses will reduce federal tax deposits for withholdings related to payroll. If deposits are not enough to cover the credit, the business can apply for an advance from the IRS using Form 7200.
A very important detail concerning qualifying wages: For employers with more than 100 full-time employees in 2019, any wages paid to employees who are not working due to the closure can be claimed as a credit; and for employers with fewer than 100 full-time employees in 2019, any wages paid to employees, regardless of whether they were working or not, can be claimed as a credit. Qualified wages for purposes of the credit include the share of group health plan expenses that is allocable to qualified wages, and the maximum amount of the credit is 50% of qualified wages up to $10,000 of wages ($5,000 of credit) per employee paid between March 13, 2020, and Dec. 31, 2020.
Paid sick or family leave wages for which businesses receive a credit under the FFCRA are not qualified wages for purposes of the ERC. Employees for whom your client is claiming the Work Opportunity Tax Credit cannot be included in calculating Employee Retention Credit, nor may wages which they claim as paid family and medical leave credit under IRC Sec. 45S.
Pros and cons to taking the ERC
- Pro: Available to any size employer, small and large.
- Pro: There’s no paperwork or application to file beyond normal payroll filings.
- Pro: There’s no waiting period; businesses can begin reducing payroll tax deposits immediately.
- Pro: It may be faster to request an advance on Form 7200 than applying for PPP or EIDL.
- Con: ERC is not an option available to businesses that have received a loan under the PPP.
- The ERC is capped at $10,000 of wages ($5,000 of credit) per employee.
- Con: Businesses must already have the cash to pay employees to benefit.
- Con: For larger businesses with more than 100 employees, only employees who are not working can be claimed as credits.
Important details and advice
Note: there is no double dipping! Your clients can apply for either the PPP or the ERC. Additionally, these two programs shouldn’t include amounts claimed under the FFCRA sick pay credit or FMLA. Finally, your clients can’t take the ERC and the Work Opportunity Tax Credit.
Keep in mind, applying for the EIDL and its respective advances doesn’t prevent applying for the PPP or using the ERC as the EIDL is designed to cover lost revenues and other operating expenses.
If a small business has been affected by the COVID-19 outbreak, they may apply for both the EIDL and the PPP. The qualifications are broad for both of these programs. While those are great opportunities, don’t overlook the ERC as an alternative if the PPP funds run out or the business has more than 500 employees. Even though the qualifications to claim that credit are fairly narrow, considering the definition of qualified wages and the gross receipts thresholds, it is worth reviewing for those businesses that have had the cash flow to continue paying employees. Nevertheless, taking advantage of all these opportunities could be, in the long run, worth it not only to the individual business, but to the greater economy, once things open up again.
Editor’s note: This article was originally published on May 11, 2020, and was updated on June 24, 2020, to reflect the PPP Flexibility Act. Intuit® is helping tax and accounting professionals navigate the PPP for their clients. Find out how QuickBooks is enabling funding for the PPP as an approved lender, and send resources to your clients. Visit the Intuit Accountant and Tax Professional COVID-19 Resource Center for information and tools to help you and your clients navigate these challenging times.