While the CARES Act has many provisions that could assist taxpayers, the small business loans and grants discussed below should have an immediate benefit to small businesses by providing cash flow to survive during, and recovery after, the coronavirus pandemic.
Since it may take some time for the related agencies and banks to be ready to fulfill these loans, as a small-business owner, it is in your best interest to have your financial statements in order so when you apply for these relief loans, you can be first in line.
Paycheck Protection Program
The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, provides $349 billion for the new “Paycheck Protection Program” (PPP).
The PPP is available to any business that has already qualified as a “small business concern,” as well as businesses, 501(c)(3) charities, 501(c)(19) veterans organizations, and tribal business concerns that employ not more than either: 500 employees; the size standard established by the Small Business Administration (SBA) for their industry; or a business that has more than one physical location (with 500 or fewer employees per location) and is assigned a North American Industry Classification System (NAICS) code beginning with 72. Additionally, sole proprietors, independent contractors, and self-employed individuals are eligible for PPP loans.
It is critical to note that the PPP is open only to non-profit organizations tax-exempt under Section 501(c)(3) or veterans’ organization tax-exempt under Section 501(c)(19) of the U.S. Internal Revenue Code. All other non-profit organizations are not eligible to participate.
The Act seeks to streamline processing by delegating authority to make and approve loans to qualified lenders (thus eliminating the need to go through SBA), waiving fees for both borrowers and lenders, and limiting a lender’s consideration only to whether the borrower was in operation on Feb. 15, 2020, and had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors. Current 7(a) lenders can provide PPP loans but will need to opt into the program. The Treasury Department, in consultation with other financial regulatory agencies, will establish criteria for allowing other lenders to participate in PPP within 15 days of enactment.
Amount and use of loan: Through the PPP, small businesses and other eligible entities such as 501(c)(3) and 501(c)(19) organizations can receive a loan of up to $10 million with loan repayments deferred for up to a year. Importantly, the SBA will grant forgiveness up to an amount equal to eight weeks of payroll and other certain costs if the borrower retains its employees and maintains salary levels. All loan fees are waived for borrowers and lenders. Unlike traditional 7(a) loans, an applicant does not need to demonstrate that it is unable to obtain credit elsewhere, nor does it have to provide a personal guarantee, or provide collateral, to receive a PPP loan. The maximum loan amount for each borrower is $10 million, and the Act provides a formula by which the loan amount is tied to payroll costs incurred by the business. Loan proceeds may be used for: (1) payroll costs; (2) employee salaries; (3) interest payments on mortgages entered into before Feb. 15, 2020 (but not prepayment or payment of principal); (4) rent for a lease entered into before Feb. 15, 2020; (5) utilities, including electricity, gas, water, transportation, telephone, or internet; and (6) interest on any debt incurred before Feb. 15, 2020. Loans would be backed by a 100% federal guarantee through Dec. 31, 2020, at which time the guarantee percentage would revert to the standard Section 7(a) loan-guarantee.
PPP loan payment deferment and forgiveness: The Act provides that PPP loans will be eligible for payment deferment for at least six months and no more than one year, as well as forgiveness for the total amount borrowers spent on payroll costs and mortgage interest, rent, and utility payments between Feb. 15, 2020, and June 30, 2020. Any canceled indebtedness will not be included in the borrower’s taxable income. However, a borrower whose PPP loan is forgiven is not eligible for deferral of the payroll tax. There are a few restrictions on the amount of loan forgiveness an eligible entity can receive. First, the forgiven amount cannot exceed the loan principal. Second, the amount forgiven will be reduced proportionally by any reduction in employees compared to the prior year and reduced by the reduction in pay of any employee beyond 25% of their compensation the prior year. To encourage employers to rehire employees who may already have been laid off due to COVID-19, the CARES Act provides an exception to the reduction if the eligible entity re-hires employees and/or eliminates the reduction in salaries by June 30, 2020.
Impact on other relief provided by stimulus package: By participating in the PPP, however, otherwise eligible entities may become ineligible for other relief provided in the Act. For example, an employer who receives a PPP loan is ineligible for the employee retention credit. In addition, as explained below, there are consequences for having the PPP loan forgiven. However, the CARES Act does allow an eligible entity to receive both a PPP loan and an economic injury disaster loan (EIDL) from the SBA under certain circumstances, such as if the EIDL is made before the PPP loans are available and for a purpose other than covering payroll costs.
Emergency Economic Injury Disaster Grants
The CARES Act includes $10 billion for SBA to provide emergency EIDL grants until Dec. 31, 2020.
All “private non-profit organizations” are eligible for purposes of the EIDL program, including any entity exempt under section 501(c), including trade associations, advocacy organizations, unions, and social clubs otherwise excluded under the Payroll Protection Program, in addition to certain organizations tax-exempt under 501(d) (apostolic organizations) or 501(e) (cooperative hospital service organizations).
For EIDLs made before Dec. 31, 2020 due to COVID-19, the SBA will waive the requirement for a personal guarantee on advances and EIDLs below $200,000, the requirement that an applicant needs to have been in business for the one-year period before the disaster, and the requirement that a business does not have credit available elsewhere. In addition, the Act establishes that a federally declared emergency qualifies as a new trigger for the EIDL program, thus making EIDLs available nationwide.
Amount and use of EIDL grants: The emergency EIDL grant is an advance of $10,000 to small businesses and non-profits that apply for the SBA’s EIDL program. The advance will be provided within three days of applying for the loan, and organizations will not be required to repay the advance, even if they are denied an EIDL. Generally, EIDLs provide up to $2 million for working capital and have a 3.75% interest rate for small businesses and a 2.75% rate for non-profits. Under current law, EIDLs are available to small businesses, small agricultural cooperatives, small businesses engaged in aquaculture, and most private, non-profit organizations. The CARES Act expands eligibility for EIDL to include tribal businesses, cooperatives, and ESOPs with fewer than 500 employees or any individual operating as a sole proprietor or independent contractor between Jan. 31, 2020 and Dec. 31, 2020. Private non-profits are also eligible for both grants and EIDLs. Until Dec. 31, 2020, the SBA can approve EIDLs based solely on an applicant’s credit score or an alternative appropriate method for determining an applicant’s ability to repay.
Considerations for Non-Profit Organizations: As detailed above, the PPP program is limited in scope to 501(c)(3) and 501(c)(19) non-profit organizations, while all non-profit organizations are eligible for emergency EIDL grants. The CARES Act requires the SBA to issue regulations under the title within 15 days of enactment, under emergency rulemaking authority. While the Act provides deadlines for the SBA and Treasury Department, the agencies could face delays in issuing regulations and guidance to implement the PPP and emergency EIDL grants fully, among the other new initiatives in the Act. Henssler Financial is working to establish a resource center about these programs to provide additional clarity for small businesses and non-profits so they can take advantage of these funds, as many questions remain about how these programs will work in practice. Every business should consider the various assistance programs available under the Family First Coronavirus Response Act and the CARES Act to determine which one will provide the most flexible benefits and agreeable terms.
We will be monitoring these programs closely to be able to provide you with the most current information. If you have friends or family that need expert guidance, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: firstname.lastname@example.org
- Phone: 770-429-9166
- Join the Conversation in Our Coronavirus Facebook Group