We are just now entering the earliest phases of understanding the economic impact of COVID-19 on the US economy, and the weeks that lay ahead are filled with uncertainty. In response to these uncertain times, the United States government has implemented the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help alleviate the severity of the current economic shutdown. In this post, we are joined with NuORDER’s CFO, Adam Schneider as he breaks down what the CARES Act can mean for small businesses and how it can help during these precarious times.
Disclaimer: The following post is NuORDER’s advice and not meant to be construed as legal or financial guidance, although we do hope you find it helpful!
Here’s a brief overview of who and what the CARES Act covers:
For small businesses:
- Payroll Protection Program (PPP)
- SBA Economic Injury Disaster Loan program
- Payroll Tax Credit and Deferral
For individuals:
- Direct payments to individuals
- Increased/expanded unemployment benefits
- Mortgage forbearance
- Student loan forbearance
- Waives early withdrawal penalties from 401(k) accounts
CARES Act Highlights for Small Businesses
What is the Payroll Protection Program (PPP)?
The $350 billion Payroll Protection Program (“PPP”), is a loan available through the SBA 7(a) program. Small businesses can borrow up to 2.5x their average monthly payroll over the past twelve months, up to a maximum of $10 million. This loan has a maturity of 2 years with an interest rate of 1%. “Payroll” is defined as all costs, including salary, variable compensation (commissions and bonuses), employer-paid benefits (health and retirement), employer-paid state and local taxes - it’s effectively your gross cost for an employee, excluding payroll taxes.
There is one major exception to note: you cannot count payroll costs above $100,000 annualized for any individual employee.
Payroll Calculation Example Under the CARES Act
- Your company has 200 employees that have all been employed for the last twelve months
- 100 of those employees each cost you 120,000 per year, excluding payroll taxes
- Total cost for the last twelve months = $12 million
- 100 of those employees each cost you 80,000 per year, excluding payroll taxes
- Total cost for the last twelve months = $8 million
- Although your total payroll costs for the last twelve months is $20 million ($12mm + $8mm), you have to reduce 100 of the employees making $120,000 by $20,000 to stay at or below the $100,000 cap
- So your total payroll costs used in the PPP calculation will be $18 million
- Divide that total by 12 to get your average monthly payroll = $18mm / 12 = $1.5 million
- Multiply your average monthly payroll by 2.5 = $1.5mm x 2.5 = $3.75 million
To follow, the Small Business Administration (“SBA”) will forgive some or all of the PPP loan, depending on certain factors like any payroll costs, mortgage interest, rent and utilities for the eight weeks following the origination of the loan. As the name suggests, this loan is primarily focused on payroll costs, as such forgiveness is based on 75% of funds being used for payroll, and not expenses like rent.
SBA Economic Injury Disaster Loan Program
The Economic Injury Disaster Loan program (“EIDL”), unlike the PPP, is a loan that you can apply for directly through the SBA here. Under the EIDL program, a business can borrow up to $2 million at 3.75% for 30 years. Generally, this loan requires a personal guarantee, but only above $200k. For loans above $25k, the general security interest in business assets will be used for collateral. Payments are deferred for 1 year. While payments are deferred, there is no forgiveness of the loan.
Application times can be lengthy, so if this sounds like a good fit for your business, get started soon.
Payroll Tax Credit and Deferral (“PTCD”)
If your business experienced a shutdown or your revenue declined by more than 50% due to COVID-19, you can take advantage of PTCD, although you should note that you can’t also take a PPP loan. You are allowed a credit against payroll taxes for “qualified wages” (including amounts paid towards health insurance), not exceeding $10,000 per employee, paid to or for employees from March 13, 2020, to December 31, 2020.
Under the PTCD, you can defer payroll taxes owed for the remainder of 2020, up to $5000 per employee for the remainder of the year, ultimately repaid with 50% of the taxes are due by the end of 2021 and the remaining 50% by the end of 2022.
Have more questions about PTCD? Here’s a good article with FAQs on the credit program.
Phew! That’s a lot to consider. I’ve been reading tons of legal briefs and articles that attempt to explain these different options for small businesses. NuORDER is here to help. If any of our clients or prospective partners have questions about the CARES Act, while I’m not a lawyer, I’m more than happy to help in any way I can. My door is always open to you - adam.schneider@nuorder.com. Good luck to everyone!
