First off, please keep in mind that this article is summarizing and generalizing facts to make it easier to read. If you think any of this applies you should be talking to the appropriate professional to best help you (banker, CPA, attorney), and not directly rely on what I am saying for your specific situation.
As a fellow small-business owner, I am seeing and experiencing the effects of the COVID-19 pandemic. While I run a very small business I do have an employee, that employee’s family, and my family relying on my ability to navigate today’s turbulent waters. Every business is being affected, mostly negatively. The more positive calls I am having involve my business owner clients who run truly essential businesses that are actually helping us through this crisis (think healthcare and cleaning). There are some great business ideas coming out of this, but consumers are only doing so much. Everyone is tightening their belts, as no one knows how long this will last.
Where should small business owners be looking for help?
The CARES Act has been passed by Congress to provide some economic relief. The two key ways I want to focus on is through an SBA loan they’re calling the Paycheck Protection Program or through a variety of business tax provisions.
The Paycheck Protection Program appears to be a great opportunity to keep supporting your employees while making the necessary adjustments in your business. The CARES Act is making this particular SBA loan much more attainable and possibly forgivable. The goal here is to help businesses keep their employees. If you’ve laid off or reduced salary levels, there is forgiveness if those employees are quickly rehired or restored to previous salary levels. Here are a few key factors:
- The loan is available to all small businesses (under 500 employees) who were in business on March 1, 2020, and had employees (nonprofits, independent contractors, veteran organizations and tribunal concerns also qualify).
- There is no requirement of collateral nor a guarantee.
- The amount received will be calculated based on what your business has been paying for payroll.
- The borrower and lender fees are waved
- The maximum interest rate is .5%, with a 2-year term, and payments deferred for 6 months.
These terms and rates are already pretty great, but it gets better (and really why everyone should take a hard look at whether this loan is a good fit). Up to 100% of the loan may be forgiven. The amount forgiven will be based on how the loan is used over the initial 8 weeks, starting at the loan origination date. If all employees are kept on the payroll for 8 weeks, then portions that are used for payroll, rent, mortgage interest or utilities are forgivable. Up to 75% of the forgiven amount needs to be used for payroll.
Starting April 3 small businesses and sole proprietorships can apply. Starting April 10, independent contractors and self-employed individuals can apply.
At worst this looks like an extremely cheap way to get access to cash. At best your business is being given a chance to keep paying those people who are relying on you as a business owner while you figure out how to adapt. Even if the manner in which you use it ends up not getting forgiven a business is not going to find loan terms this generous anywhere else, and possibly (hopefully!) never again.
Now for a couple of the possibly helpful business tax provisions. The CARES Act is also helping through the tax code. Two notable modifications involve payroll taxes.
- Employers may be eligible for a 50% refundable payroll tax credit on wages paid up to $10k during the crisis. This is for businesses who were disrupted due to COVID-19 and saw a decrease in gross receipts of 50% or more when compared to the same quarter last year. The credit is for all employee wages if the company has 100 or fewer employees, or for employees who have been retained but are not currently working due to the crisis in companies with more than 100 employees
- The social security tax part of the employment taxes (6.2% of the 7.65%) can be deferred. This means for those payroll taxes the business is paying out-of-pocket for their employees, they can basically get an interest free loan from the government, and not have to make a payment on those taxes for a long time. Please remember that deferred means you still have to pay, but payment looks to be done in two payments (50% of what is owed) with the first paid on December 31, 2021, and the last paid on December 31, 2022. From what I can tell, this deferment may not be available for a business that receives a forgivable loan through the Paycheck Protection Program.
There is a lot more to the CARES Act than what I am discussing today, including help for individuals. The government is going way beyond what I would have expected them to do to help us through this.