This is Part 3 of our Caring about the New CARES Act series. Check out Part 1, an Overview, here and Part 2, for Individuals and Families, here.
As discussed in our overview of the CARES Act, small businesses nationally may be struggling to stay open, retain their employees, and keep up their cash flow all while making sure they keep themselves, their employees and their clients safe and healthy. The CARES Act has several programs that can help small businesses through these unprecedented times including two different loan programs and some tax provisions. You can read a great article by Michelle Black from Forbes.com (here) that we reviewed in putting together this blog.
Economic Injury Disaster Loans (EIDL) – These loans were previously available through the U.S Small Business Administration (SBA) to businesses affected by a federally declared disaster. This program was expanded through the CARES Act and now all small businesses in the U.S and U.S. Territories can apply for these loans during the COVID-19 crisis. Small businesses can apply for a low-interest loan up to $2 million dollars with a 3.75% interest rate. The term for repayment of the loan can be up to 30 years. Under this expanded program, small businesses can also request an advance on the loan of $10,000 while the application for the loan is being processed. Even if the small business is subsequently denied for the loan, they may not have to repay the advance. Small business owners can apply for these loans online through the SBA website. These loans require credit underwriting, personal guarantees, and collateral.
Paycheck Protection Program (PPP) Loans – This is a new temporary loan program created under the CARES Act geared towards helping small businesses cover their payroll costs through the crisis and retain their employees. The Cares Act allocated $349 billion dollars to this program. Small businesses that meet SBA requirements, have under 500 employees and were operational on February 15, 2020, are eligible to apply for one of these loans. Small business can borrow the lesser of $10 million dollars or 2.5 times their payroll costs (excluding any employee’s salary over $100,000), plus the balance of any EIDL loan they have received. The term for these loans is two years and the interest rate is 1%. The first payment on these loans is deferred for six months after disbursement, but interest will start to accrue immediately. These loans are first come, first serve so applying as soon as possible is recommended. Small businesses do have until June 30, 2020, to apply for these loans and can apply for a loan through any SBA 7(a) loan lenders. If you run a small business and are interested in one of these loans, it is recommended to reach out to your bank that you have a relationship with first to see if they are able to offer the PPP loans. These loans are meant to cover eight weeks of payroll through this crisis but may also be used to cover rent, mortgage interest, and utilities. These loans do not require the normal credit underwriting, personal guarantee or collateral. In addition to the low-interest rates, these loans may be forgiven in whole or in part depending on if the small business owner can maintain payroll and wages through June 30, 2020; however, no more than 25% of the loan may be forgiven for non-payroll expenses. There should be more guidance on the forgiveness of these loans in the coming weeks as the loans are processed and disbursed.
As you can see from above there are several differences between these loans and one may work better than the other for some small businesses. Small businesses can apply for both loans at the same time and can carry both loans; however, the business cannot use the loans for the same purposes and expenses. If a small business owner uses the PPP loan for payroll costs, they can’t also use the EIDL loan for payroll costs. There is also an option to refinance an EIDL loan into a PPP loan to take advantage of the lower interest rate and possible forgiveness option.
There are also a few tax options available that small business owners can take advantage of under this act. If a business owner does not have a PPP loan forgiven, they can delay paying employer payroll taxes this year and can stretch out the tax owed by paying 50% in 2021 and 50% in 2022. Additionally, small business owners may be eligible for an employee retention tax credit.
At Family Estate Planning Law Group, we care about your small business as it is one way you provide for and care for your family. The CARES Act implemented and expanded some programs to help business owners tackle the COVID-19 situation. We can also help you care for your family during this difficult time by reviewing your estate plan and making sure your assets, including your business, are in line with your estate plan.
To learn more about how we can help you take care of your family, visit our website, explore our blog, and schedule your complimentary consultation today!