The CARES act, otherwise known as the Coronavirus Aid, Relief, and Economic Security Act, was signed into law as of March 27th. This relief option was approved by the House and then signed by President Trump. As a business owner, you may be unsure how this act can help your business in this uncertain time. At Fricke & Associates, LLC, we want to help you understand the benefits so your business can take advantage of vital support.
A Breakdown of the CARES Act:
- The Paycheck Protection Program—This aspect of the act allows for up to $349 billion of federally guaranteed loans for qualified small and medium businesses. These loans are available for up to 10 million per business. They are forgivable if the business’ payroll is maintained through June 30, 2020. Essentially, the Paycheck Protection Program has been modified from the SBA’s 7(a) Loan Program. The four key ways that it has been changed include expanding the businesses which would be considered eligible for loans, changing the loan terms where guarantee and collateral requirements of the borrower have been waived, offering partial or complete loan forgiveness if a company keeps their payroll through June, and encouraging banks through incentives to make the process of getting a loan simpler and quicker.
- Businesses and Non-Profits’ Eligibility—As a general rule, if your business or non-profit has fewer than 500 employees, including employees of affiliates or meets the industry standard mandated by the SBA, you are eligible for loans with the Paycheck Protection Program. The SBA defines employees as anyone employed by your company on full-time, part-time, or any other arrangement. Eligibility is possible for some sole-proprietors, independent contractors, and self-employed individuals as well. All eligible businesses must also be considered “a business concern” based upon the SBA’s definition. There are a couple eligibility requirement exceptions, including waiving the employees of affiliates for accommodation and food service companies, certain franchises listed in the SBA’s Franchise Directory, and small businesses financed by the SBIC program and overlooking the 500 employee limit for accommodation and food service companies as long as there are not more than 500 employees in one business location.
- Credit Elsewhere Available—Usually, businesses are required to explore options for capital, including liquid assets, equity, and the owners’ debt investments before receiving a Paycheck Protection Loan. The CARES act eliminates this step which is usually typical for SBA loans.
- Types of Eligible Businesses has Not Changed—If your business was ineligible for SBA business loans, you are unlikely to be eligible now. Businesses including financial businesses, private clubs, gambling businesses, passive business, and foreign businesses are likely still ineligible. There may be some additional business types which are deemed ineligible as well. If you are unsure about your eligibility, the Fricke & Associates, LLC team will be glad to help you determine your status.
- Loan Terms—
How Much?–Qualified businesses and non-profits can receive loans for up to 2.5 times their monthly payroll costs (based upon the previous 12 months) or 10 million, whichever number is smaller. Your payroll costs could include salaries, employee benefits, state and local taxes, and some forms of compensation to independent contractors and sole proprietors, not exceeding $100,000. Be prepared that your payroll costs cannot include compensation of foreign employees, FICA and income tax withholdings, employee compensation in $100,000 annually, and some paid leave associated with COVID-19. If your company is a seasonal employer or only in operation for under a year, your amount is calculated differently. Equally important, your interest rate cannot exceed 4%.
How It Can Be Used—The Paycheck Protection Loans can be used for payroll costs, healthcare benefits, interest on a mortgage, insurance premiums, rent and utility payments, and debt accrued prior to February 15th, 2020. The loan cannot be used to prepay debt, however.
What if?—If there is a portion of your loan that is not forgiven, you will have up to 10 years and the loan will amortize in the same way as 7(a) loans, using fixed monthly principal and interest payments. If you cannot meet your payments, you are granted automatic deferments for a minimum of six months, but not exceeding a year. If you have obtained an SBA Disaster Loan after the date the Paycheck Protection Loans were available, you cannot get a Paycheck Protection Loan for the same cause.
- Loan Forgiveness—Your Paycheck Protection Loans can be forgiven equal to the amount used in an 8-week period after the beginning date of the loan. The extent of your loan forgiveness can be reduced based upon a reduction in employees during the 8-week period. The amount could be impacted by pay reductions of employees exceeding 25%. There are some exceptions for tipped workers though. In an attempt to encourage companies to rehire laid off staff due to the Coronavirus, borrowers that choose to rehire these employees will not be penalized for their reduced payroll at the start of the period and their payroll costs for these rehired employees will be up for forgiveness. Loan forgiveness requires the borrower to provide documentation which verifies their payroll, pay rates, and use of the loan. The forgiven loan amounts under this act will not be considered taxable income.
- Speeding up the Process with Bank Incentives—The CARES act allows for a 100% guarantee for the rest of 2020. Additionally, the requirements and procedures for the lending banks have been been greatly expedited and simplified. The Act allows for new lenders, who typically do not make 7(a) loans, to make Paycheck Protection Loans. Other incentives include waving some fees, limiting the bank’s liability, and paying certain fees to lenders. There are additional incentives for lenders offering Paycheck Protection Loans to borrowers with SBA existing 7(a) or 504 loans.
The CARES Act can provide much needed relief to many small and medium sized businesses. If your business has been impacted, you may be able keep or rehire previously laid off employees based upon the pandemic. If you need help determining your eligibility, we are glad to help you explore your options for help. Fricke & Associates Certified Public Accountants has commercial finance, tax, and employment attorneys as well as a multi-disciplinary team ready and willing to advise on such matters. Please contact Fricke & Associates, LLC for assistance.