Small businesses, independent contractors, and sole-proprietors are facing their own dramatic financial challenges as the COVID-19 crisis changes the employment landscape. Under the CARES Act, expanded programs through the Small Business Association (SBA) and changes to Unemployment Insurance (UI) programs are–or will be–available to qualified small business owners. What works for a sole proprietor or independent contractor might not be the best fit for a company with 40–or 400–employees. Let’s take a look at who may qualify, and what these programs offer.
If your business (which may include certain non-profit, veteran, or tribal organizations) was operational on or before February 15, 2020 and has 500 or fewer employees (this total includes full-time, part-time, seasonal, and temporary employees), you may qualify for Payroll Protection Plan (PPP) loans under the CARES Act. The same is also true of sole proprietors, independent contractors, and certain self-employed individuals.
The CARES Act extends eligible entities under the Economic Injury Disaster Loan Program through December 31, 2020. Eligible entities include business interests, ESOPs, cooperatives, or tribal small business concerns with 500 or fewer employees, and individuals operating under sole proprietorships or as independent contractors that were in existence on January 31, 2020.
If your business is funded by venture capital or private equity investment, that may disqualify you from these programs. Your bank or the SBA can help determine if this aspect of your business prevents accessing these resources.
For businesses with over 500 employees, the US Treasury has established the Main Street Lending program with similar benefits.
The CARES Act and Taxes
If you pay payroll taxes or self-employment tax, under the CARES Act you may defer payment of the employer share of those taxes due from March 27, 2020 through December 31, 2020. Half of such deferred payments would be due by year-end 2021 and 2022. However, if you take a PPP loan and any amount is forgiven, you are ineligible for this deferral.
If you have a federal tax return due April 15, 2020, the IRS has offered an automatic extension for 2019 tax filings and payments to July 15, 2020.
If you do not participate in the PPP and your business was subject to closure, either wholly or partially, or your gross receipts this quarter were below 50% of the same quarter in 2019 due to COVID-19, you may qualify for the Employee Retention Credit. The credit amount is 50% of qualified wages (including health benefits), up to $10,000 per employee, paid after March 12, 2020 through December 31, 2020.
If your state offers income tax filing or payment relief, assess your eligibility and review your options.
The Paycheck Protection Plan (PPP)
Is your business closed due to quarantine, etc., or partially operating? If so, consider the impact of near-term layoffs (employees file for unemployment), and rehiring when PPP funds become available.
The PPP expands eligibility requirements for SBA 7(a) loans through June 30, 2020. Qualifying business owners should apply as soon as possible, given the program caps.
Under the PPP, you may be able to borrow up to 2.5 times your monthly average payroll costs (incurred during the one-year period prior to the date of the loan, typically), capped at $10 million. PPP loans have a maximum term of 2 years and fixed rate of 1.0%. Principal and interest payments are deferred for 6 months. Borrowed funds must be spent on “allowable uses” such as payroll support, certain health care benefits, employee compensation, mortgage interest, rent payments, utilities, and interest on existing debt obligations.
The PPP loan may be forgiven to the extent it is used during the initial 8 weeks of the loan to cover qualifying costs, up to 100%. The amount forgiven will be decreased by reductions in full-time employees and wages. Rehiring employees and restoring wages by June 30, 2020 can reinstate your forgiveness eligibility. Forgiveness would render you ineligible for the deferral of payroll taxes, otherwise allowed through year-end.
If you have other SBA loans in place, the government will subsidize certain qualifying loans, paying 6 months of principal, interest, and fees. This will not affect your credit, and payments made on your behalf won’t count as taxable income. There is an opportunity to fold emergency loans made between January 31, 2020 and the date that PPP loans become available into a new loan.
A PPP loan must be applied for thorough a participating bank. Your best bet is to start with the bank you already have a relationship with, however other entities like Paypal, Lendio, Intuit and Square have stepped up to offer these loans as banks become overwhelmed with applications.
The Economic Injury Disaster Loan (EIDL) Program
EIDL loans have a maximum term of 30 years, a rate of 3.75% for businesses and 2.75% for nonprofits. EIDL loans are capped at $2 million, though as of mid April the maximum amount issued has been capped at $15k as the SBA seeks further funding for the program. EIDL loans may be used to cover payroll, fixed debts, accounts payable, and other bills that can’t be paid due to the impact of the coronavirus.
You can also apply for an Emergency Economic Injury Advance of up to $10,000 to be made within 3 days of your loan application. The advance is based on the number of employees, with the advance amount determined at a rate of $1,000 per employee. An approved EIDL loan is not a prerequisite to this advance. You are not required to repay the advance, provided that it is spent on permitted costs (in effect, this is a grant). If you also take a PPP loan, this advance will reduce your PPP loan amount. If you apply for both a PPP loan and an EIDL loan, duplicate funds from each program cannot be used for the same expenses, nor can the same expenses be used to obtain forgiveness under both programs.
Funds may be limited
The PPP and EIDL programs are on track to exhausting the initially allocated funds as of mid-April. While Congress is expected to add to these programs so all eligible businesses may participate, we recommend applying as soon as possible. In addition, banks and the SBA are significantly backed up with applications, causing delays of weeks before processing. Applying quickly will get your spot in line and one step closer to funds to support your business.
The Self-Employed May Qualify for Unemployment Insurance (UI)
The CARES act extends unemployment benefits to part-time and contract workers as well as self-employed individuals. While each state’s process varies, and the programs will roll out over time, unemployed individuals who were previously ineligible for UI should apply as soon as possible in order to avoid delays later on. This guide contains information on state UI applications, compensation amounts, and length of benefit.
Beyond these small business and self-employment assistance programs, there may be additional assistance available to you as an individual. Be sure to check our guides on Mortgage and Rent Relief, Food Assistance, Health Insurance, and Debt Management for more information. Together with actionable financial advice from SAVVI, you’ll be prepared to handle the unprecedented challenges we’re all facing.
If you've been financially impacted by the Coronavirus crisis, click here to take advantage of our free interactive tool. The questionnaire will help you determine if you qualify for assistance to maintain financial stability in this time. If you qualify, you will also have access to a free financial plan from SAVVI. Your SAVVI plan will take into account the effects of the current crisis, while helping you achieve your long-term goals.
SAVVI Financial LLC (‘SAVVI’) is an investment advisor registered with the Securities and Exchange Commission. SAVVI does not guarantee investment results and past performance is no guarantee of future results. Information provided is for educational purposes and does not constitute investment advice, which is only provided to registered users who have a valid Investment Agreement in place with SAVVI. No information on this presentation should be construed as an offer to buy or sell any security or insurance product. SAVVI is not a certified accountant, lawyer, tax professional or HR professional. Nothing in this document may be considered as tax, accounting, employment or legal advice. Please consult with your accounting, tax, human resources or legal professionals before taking any action.