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April 2, 2020

Provisions for Small Business Owners Under the CARES ACT

by Shalmali Kulkarni
If you are a small business owner, there are a few programs that have been put in place in light of the COVID-19 crisis to relieve some of your financial burden. We have broken down these programs for you, explaining what is covered by each and how to see if you are eligible. Please read through to see what forms of aid may be applicable to you.

Small Business Debt Relief Program

This program will provide immediate non-disaster assistance loans such as 7(a) loans, 504 loans and micro loans. Furthermore, SBA (Small Business Administration) will cover payment on these loans including principal, interest and fees for 6 months. This does not include loans made under disaster assistance or loans under the Paycheck Protection Program.

Eligibility: To be eligible, you must be a small business and

i. Be a for profit business
ii. Do business in the US
iii. Have invested equity in the business (money and time)
iv. Have exhausted all other financing options

What is a 7(a) Loan? A 7(a) loan is an affordable loan of up to $5 million for borrowers who lack credit to get a loan elsewhere and need access to financing to meet working capital needs, refinance debt, purchase furniture, etc.

What is a 504 Loan? A 504 loan is a loan up to $5.5 million to approved small businesses with long-term fixed rate financing used to acquire fixed assets. It is a good option to purchase real estate, buildings, machinery, etc.

What is a Microloan? A Microloan provides loans up to $50,000 to small businesses and certain not-for-profit childcare centers to start up and expand.

You can apply for a loan under the Small Business Debt Relief Program as well as a PPP loan; however, debt relief under this program will not apply for funds received under the PPP program.

Economic Injury Disaster Loans (EIDL) and Emergency Economic Injury Grants

These grants provide an emergency grant of up to $10,000 to small businesses and private nonprofits within 3 days of applying for EIDL. To access the grant, you must first apply for the EIDL and then request the advance. This advance does not need to be repaid under any circumstances and can be used to keep employees on payroll, pay for sick leave or pay business obligations such as rent, mortgage, etc. To be eligible you have to suffer substantial economic injury due to COVID-19.

What is an EIDL and who is eligible for it? An EIDL is a low interest loan of up to $2 million with principal and interest deferment that is available to pay for expenses that could have been met had the disaster not happened. An EIDL loan has an interest rate of 3.75% for businesses and 2.75% for nonprofits, payable up to 30 years. To take an EIDL loan, the SBA will place a lien against the assets of the business. It also requires a personal guarantee for loans >$200,000, owners of >20% of the business, managing members of LLCs and managing partners of LPs. However, no liens will be taken against real estate owned by the guarantor.

Those eligible for an EIDL and have been in business since Jan 31, 2020 are eligible for the grant. Furthermore, the grant does not need to be paid back even if the applicant is subsequently denied an EIDL loan.

If you have taken an EIDL grant, you are still eligible for a PPP Loan, only as long as you do not use the grant money for the same purpose as the PPP loan funds.

Paycheck Protection Program (PPP)

This program allows small business owners with employees <500 to take a loan up to the lesser of $10 million or 2.5 times the average monthly payroll costs over the previous year, excluding annual compensation of amounts over $100,000 per person. This loan can be used to pay a variety of costs such as the following:

1. Payroll
2. Health Insurance premiums and other health care costs
3. Salaries/Commissions
4. Rent
5. Mortgage interest (excluding pre-payment)
6. Utilities
7. Other business interest incurred prior to Feb 15, 2020

To be eligible for this loan, the business has to make a good-faith certification that the loan is necessary due to the uncertainty of current economic conditions due to COVID-19. Please note, a business does not need to prove that they are currently facing economic hardship, but only make a good-faith appeal for an anticipated future need. This loan can be applied for through the SBA or an approved SBA lender backed by the SBA.

The primary benefit of this loan is the ability to have it partially or fully forgiven if the loan proceeds are spent on certain expenses. Loan proceeds spent on the following expenses during the first 8 weeks after the loan is made are eligible for forgiveness:

1. Payroll costs excluding amounts over $100,000 in annual compensation for any one individual
2. Group health insurance costs and other health care costs
3. Rent pursuant to a lease in force before Feb 15, 2020
4. Payment of interest on any mortgage obligation (not including prepayment or payment of principal)
5. Interest on any other debt obligations that were incurred prior to the covered period
6. Utilities (electricity, gas, water, phone, internet and transportation)

An important caveat to this forgiveness program is that in order for the loan proceeds for the above to be forgiven, the business has to maintain the same number of employees from Feb 15th – June 30th as it did during the same period in 2019 or from Jan 1st until Feb 15th. If this requirement is not met, the amount eligible for forgiveness is ratably reduced.

Additional reductions will occur if employees with income less than $100,000 per year see a reduction in their compensation by more than 25% as compared to the most recent quarter.

Any debt forgiven will not be included as income in the year forgiven.

A secondary benefit of this loan is that any debt not eligible to be forgiven will have a maximum interest rate of 4% and can be repaid over a term of up to 10 years. Payment will be deferred for a period no less than 6 months and no more than 12 months.

The last date to apply for a Paycheck Protection Program Loan is June 30, 2020.

Employee Retention Credit

Under this provision, eligible employers can claim a refundable credit of 50% of wages paid to each employee to a maximum of $10,000 per employee during the COVID-19 crisis. To be eligible for this credit, you have to be a small business (including nonprofits) who has had your business partially or fully suspended due to the government ban on travel and group gatherings or employers who have experienced a greater than 50% reduction in quarterly receipts measured on a year-over-year basis.

Wages include compensation and health care costs per employee. It does not include wages paid under ‘Paid sick leave’ or ‘Expanded Family Leave’ under FFCRA.

This credit, however, is not available to anyone asking for loan forgiveness under the Paycheck Protection Program.

Delay of Payment of Employer Taxes

This provision allows an employer to delay the payment of the employer portion of payroll tax through Dec 31, 2020. The delayed payments are to be paid in two installments, with the first half due by Dec 31, 2021 and second half due by Dec 31, 2022.

Payroll taxes that can be deferred include the employer portion of FICA, the employer and employee portion of Railroad Retirement Taxes (that are attributable to the employer FICA rate) and half of the SECA tax liability.

This deferral also is not available to anyone asking for loan forgiveness under the Paycheck Protection Program.

If you are a small business owner, we hope that in reading this, you have felt some relief during this stressful time.

Remember that although we cannot be certain when this pandemic will end, we do know that it will end eventually! In the meantime, we encourage you to take advantage of the programs established to help alleviate your financial burden during these difficult times.

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