As the novel coronavirus pandemic sweeps the globe, over 40% of the world’s population has been quarantined indoors. For context, there are more people in lockdown than were alive during the Second World War, and while restrictions are easing in some areas, others may face lockdowns for months to come.
For businesses, this presents a huge challenge as 7.5 million small businesses are on the brink of closure, hospitals across the country on the verge of bankruptcy, and even massive organizations are far from immune to the financial woes of this pandemic. The unique combination of social distancing guidelines and shelter-in-place orders has created a whirlwind of hurdles for most businesses in the United States.
Fortunately, the CARES Act was passed on March 27, 2020, and it contains multiple stimulus relief options for struggling businesses.
In this post, we’ll break down the CARES Act and help you decide which stimulus relief program works best for your business.
What is the CARES Act?
Due to social distancing guidelines and closures, the federal government has stepped in with a +$2 trillion economic relief package called the CARES Act, which is meant to help businesses secure liquidity until the pandemic has ended. Of course, we’re already seeing multiple rounds of cash injections into the program, which may continue until the end of the quarantine.
Included in the CARES Act are Economic Injury Disaster Loans (EIDL), the Paycheck Protection Program (PPP), Social Security Tax Deferrals, Employee Retention Tax and Credits — all of which are designed to provide critical stimulus funds to suffering businesses. Unfortunately, you can’t simply tap into all of those programs. Figuring out which programs your business should utilize in the face of this pandemic is crucial. We’re here to help.
Here’s a breakdown of each program, a pros-and-cons list and how each program in the CARES Act is related.
Economic Injury Disaster Loan
Small Business Association (SBA) Economic Injury Disaster Loan (EIDL) are low-interest loans provided by the SBA that have a $2 million ceiling. According to the SBA, these loans should be used to pay for “expenses” that could have typically been paid if the COVID-19 disaster hadn’t occurred.
Both private and public entities can apply for these loans — meaning that virtually every small business can find relief via EIDL. These loans come with a 12-month automatic deferral and have an interest rate of 3.75% for up to 30 years (2.75% for non-profits).
These loans can be used to pay for fixed debts (e.g., rent, utilities, etc.), payroll, AP and other debts. Currently, businesses can also apply for an EIDL grant after they apply for EIDL. This is a $10,000 grant (meaning it doesn’t have to be repaid) that can be used for virtually any business debt, payroll or accounts payable.
EIDL FAQs
Can you apply for both EIDL and PPP?
Yes! But be careful. If you apply for PPP and EIDL, don’t use EIDL funds for payroll. You can’t use both your EIDL and PPP loan for the same purpose. So, you could use PPP for payroll and EIDL for fixed debts like rent without issues. It’s also important to note that the EIDL grant is subtracted from your PPP if you enroll in both.
However, generally speaking, applying for both gives your business a more significant stimulus package. There are exceptions to this rule. For example, if you’re a sole proprietor without employees, it may make the most sense to enroll for an EIDL and not a PPP.
How do I figure out if I’m a “small business”?
While the answer is usually a business that employees under 500 people, it can get a little more complex. The SBA has a size calculator on their website. According to Senate documents, this is the calculator they use to determine if you’re eligible for SBA loans — so the results of those calculators should give you an indication of your eligibility.
Is the loan forgiven?
No. But there is a 12-month automatic deferral. The $10,000 emergency grant is automatically forgiven under all circumstances–but you will still have to make payments on your EIDL loan in one year.
What counts as a “utility”?
Sec. 1106 (a)(5) defines utilities as “electricity, gas, water, transportation, telephone, or internet access.”
Can you prepay mortgage or utilities?
No. The CARES Act specifically states that mortgages or other utilities cannot be prepaid with the loan.
Pros
- Amazing low-interest loan of up to $2 million that you can use on almost any business debt
- You can use the money for fixed debts like utilities and rent
- No specific business requirements outside of size
- You can score a $10,000 immediate relief grant
Cons
- Can’t use EIDL for payroll if you have PPP
- Isn’t completely forgiven
Paycheck Protection Program
By far, the most championed relief program is the Paycheck Protection Program (PPP). This is a low interest (1% over two years) loan of up to $10 million that can be completely forgiven as long as you keep your current employees on payroll. This is a loan for eight weeks of expenses from the date your loan is accepted. The standard method of calculating your loan amount is 2.5x your average payroll costs for 2019.
There are some caveats to forgiveness. For starters, there’s a 75% rule. You must spend 75% of the loan on payroll costs, with the other 25% available to use on mortgage, utilities, or rent. You must also keep paying employees at least 75% of their original salary. As it currently stands, the PPP has an employee payroll cap of $100,000 — meaning that even if employees earn more than that, you can only count them as earning $100,000.
Let’s look at some examples of how this forgiveness works.
Example 1: You have three employees on your staff. You apply for the PPP loan and receive $25,000. In the previous quarter, your employees earned $4,000. However, due to COVID-19 related troubles, you have cut pay to $2,500 for each employee. Since75% of $4,000 is $3,000, you are paying employees $500 less than required under loan forgiveness. Since you have three employees, $3,000 ($1,500 x two months) will be subtracted from your forgiveness. Therefore, only $22,000 of your loan can be forgiven.
Example 2: You take out a $20,000 PPP loan. However, due to debts, you have to use $10,000 of the loan to pay for direct debts like utilities and rent. You can only use 25% ($15,000) of the loan for non-payroll debts for maximum forgiveness. Since you used an extra $5,000, only $15,000 of the loan would be eligible for forgiveness.
PPP FAQs
Can I deduct expenses I paid with PPP from my taxes?
No. Since PPP is already “free money,” you can’t double-dip with your taxes for further economic relief.
Can I use PPP with EIDL?
Absolutely. Remember, a good rule-of-thumb is to use EIDL for working capital debts and PPP for payroll. Since EIDL doesn’t have a 75% rule, it’s ideal to use for utilities. Using EIDL and PPP for payroll will subtract one from the other — leaving you with less overall economic relief.
Pros
- Can be completely forgiven
- Can take a loan of up to $10 million depending on payroll costs
- Can be double stacked with EIDL relief
Cons
- May not be attractive for businesses with few employees and high overhead costs due to the 75% rule
- Full forgiveness requires keeping employees at 75% salary or higher
- Must have impeccable record-keeping to prove expenses
Social Security Tax Deferral
The Social Security Tax Deferral is probably the least known stimulus program in the CARES Act. It allows employers to defer their social security taxes (around 6.2% of payroll) for a year. The payback dates for the taxes are December 31, 2021, for 50% of the taxes and December 31, 2022, for the other 50%.
Now, this gets a little interesting. You can still take out a PPP loan and use Social Security Tax Deferrals. According to the IRS’s recently updated FAQs (see #4), you can still use the Social Security Tax Deferral until the time that your PPP loan gets forgiven. At that point, the tax deferral stops. However, you still have until the original payback dates to pay those deferred taxes. In a nutshell, this means that businesses can leverage Social Security Tax Deferral until PPP loans are forgiven — which is expected to be around October. This is great news for businesses dealing with liquidity issues, since you can essentially triple dip into EIDL loans, PPP, and Social Security Tax Deferrals.
Social Security Tax Deferral FAQs
Can self-employed individuals leverage Social Security Tax Deferral?
Yes!
Pros
- Can be leveraged with PPP for immediate liquidity relief
- Can also be used by the self-employed
Cons
- Can’t use once PPP forgiveness has been decided
Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is another payroll-oriented stimulus program that gives businesses a 50% tax credit on up to $10,000 per employee from March 12st to January 1, 2021. To qualify for ERTC, your business has to show a “significant decline in gross revenue” — which is set at 50%. Alternatively, your business can have been subjected to a full or partial shutdown, which also qualifies you.
Let’s get a couple of the major points out of the way. For starters, you can’t qualify for both ERTC and PPP. ERTC also covers health plan expenses. This may sound like a worse deal than PPP. But that isn’t necessarily the case. There are three major benefits to ERTC.
- It doesn’t have a 75% employee pay rule.
- It doesn’t have a minimum requirement for employee retention.
- You can get an advance on your ERTC credits — which opens up massive liquidity for businesses on the verge of shuttering.
This is going to be a complicated decision.
Let’s look at an example of PPP vs. ERTC for two specific business situations.
Example 1: Cool Business recently furloughed half of its ten-person staff due to COVID-19. Cool Business would qualify for a PPP loan for its full 10 employees (since it’s calculated by the previous quarter). However, since Cool Business let 50% of its staff go, only half of that loan can be forgiven. Unfortunately, Cool Business also had to cut wages by 40%. That means that 15% of that will be deducted from PPP — since you can only cut wages by 75%. That leaves Cool Business with 65% of the loan burden.
Now, let’s say that Cool Business took out an ERTC. They would get 50% on five employees for up to two quarters. If they remained impacted into the next quarter, they would save up to $50,000 (due to the $10,000 cap per employee). In this situation, ERTC could save Cool Business more money.
Example 2: Awesome Corp has 10 employees making $50,000. They didn’t furlough any employees, and they are only reducing wages by 25%. They would also qualify for a $104,000 PPP loan. However, all $104,000 would be forgiven. If Awesome Corp took out an ERTC, they would only save a maximum of $100,000.
In this case, Awesome Corp would get the maximum benefits from PPP, making ERTC a worse situation.
ERTC FAQs
Can you stack ERTC credits with FMLA or the Work Opportunity Tax Credits?
No.
Pros
- No requirements for furloughs or wage reductions
- Larger business pool applies
- Better than PPP for some businesses
Cons
- Can’t be combined with PPP
- May be worse than PPP for some businesses
Which Option is Right For You?
Is your practice or agency suffering due to COVID-19? Are you trying to select the right stimulus package for your unique situation? As it currently stands, most small businesses will probably apply for PPP, Social Security Tax Deferrals, and EIDL loans. However, ERTC credits an amazing option for some businesses. It really depends on your unique situation—so be sure to consider all of your options.
