Up-to-date as of April 24, 2020
Going, going, gone — that was the theme for the first round of small-business relief funding set in motion under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Now, after some back and forth in Congress, the bill to allocate $484 billion in additional funding for small businesses, hospitals, and COVID-19 testing has made its way into law.
Many small businesses breathe a short (perhaps momentary) sigh of relief as they hurry to capture some form of financial relief under the CARES Act. To help you understand the options, let’s dive into:
- Two loan options under the CARES Act
- Who’s eligible for each option
- Maximum loan amounts
- Loan forgiveness and payment terms
- Other tax deferral and credit options
Paycheck Protection Program (PPP)
Designed to help small businesses sustain their operations and retain employees during the COVID-19 crisis, the Paycheck Protection Program (PPP) is the Act’s cornerstone provision for small businesses. Since all or some PPP loans are forgivable, it’s a desirable option for many businesses. These small business loans can be used for:
- Payroll costs (e.g., wages, salaries, commissions, state/local taxes assessed on compensation).
- Costs related to group health care benefits during periods of paid sick, medical, or family leave, as well as employer health insurance premiums.
- Interest on a mortgage obligation (not payment or prepayment of principal).
- Rent, under lease agreements in force before February 15, 2020.
- Utilities for which service began before February 15, 2020.
- Interest on any debt incurred before February 15, 2020.
The PPP is guaranteed by the Small Business Administration (SBA). Small businesses, sole proprietors, independent contractors, and self-employed individuals can apply for PPP loans. The program is retroactive going back to Feb. 15, 2020, which enables employers to adjust and reinstate salaries and rehire recently laid-off or furloughed employees.
Who’s eligible for a PPP loan?
Any business with 500 employees or fewer is eligible — including nonprofit organizations, veterans organizations, tribal businesses, sole proprietorships, self-employed individuals and independent contractors. The 500-employee threshold includes all individuals employed on a full-time, part-time, or other basis. There are limited exceptions to the 500-employee eligibility requirement for certain industries.
Among other factors addressed in the application, lenders providing PPP loans are required to consider whether: a) the business was in operation on Feb. 15, 2020, and b) had employees or independent contractors for whom the business had paid salaries, compensation and payroll taxes.
What is the maximum PPP loan amount?
The maximum loan amount under the Paycheck Protection Act is $10 million. An eligible business’s maximum loan amount is based on the business’s average total monthly payroll costs. Each eligible business may receive up to 2.5 times its average monthly payroll costs. Certain payroll costs, such as individual employee compensation over $100,000, are excluded in calculating the maximum loan amount.
Under what circumstances is the PPP loan forgiven?
PPP loans will be forgiven in full if companies meet certain requirements. For full forgiveness, businesses must:
- Keep workers on their payrolls for an eight-week period after the loan is granted.
- Maintain (or restore) employee retention and compensation levels.
- Use the loan for the qualifying purposes outlined above and allocate at least 75% of the loan for payroll costs and no more than 25% for non-payroll costs like interest on mortgages, rent and utilities.
- Have adequate documentation and records to prove that all conditions and requirements were met.
If businesses do not meet the requirements, loan forgiveness will be reduced or eliminated accordingly. If a business must pay back the loan, the amounts that aren’t forgiven will carry a low fixed interest rate of 1%. Loans mature after two years. No personal guarantee or collateral is required. And loan payments will be deferred for six months.
How do I apply for a PPP loan?
Businesses can apply through any existing SBA-certified lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to facilitate these loans once they are approved and enrolled in the program.
When the first round of PPP loans rolled out, many lenders were only accepting applications from existing clients. Lenders likely still have long queues of applications to process, which doesn’t fare well for new applicants. With that said, the latest round of funding allocated $60 billion (on top of the $261 billion in additional PPP funding) for smaller community banks and credit unions to provide assistance to small businesses that have been poorly served by larger banks.
To apply for the loan, businesses still need supporting documentation. The exact documentation varies from lender to lender, but includes payroll reports. If you are a Payroll Data client and you’re gathering reporting for a PPP loan, email firstname.lastname@example.org for help pulling reports.
For answers to other frequently asked questions about the PPP program, review the most recent FAQs put out by the SBA (in consultation with the Department of Treasury).
Expansion of Economic Injury Disaster Loan (EIDL) Program
In response to the epidemic, the CARES Act included an initial $10 billion package that expanded the SBA’s existing EIDL program by relaxing eligibility requirements under the program and increasing funding available. With funds running out quickly, the latest relief package infuses an additional $60 billion to replenish funds for EIDLs and grants.
As part of the EIDL program, the SBA offered loans of up to $2 million to help small businesses recover from temporary losses following a statewide economic injury declaration, including losses they are experiencing due to the COVID-19 outbreak. EIDL loans can be used to pay fixed debts, payroll, accounts payable, and other costs, but are not intended to replace lost sales or profits. They cannot be used to refinance debt, make payments on loans owed by another federal agency, to pay tax penalty obligations, repair physical damages, or to pay dividends to stockholders.
Small businesses throughout the U.S. are also eligible to apply for an EIDL emergency loan advance of up to $10,000. The loan advance is aimed at providing economic relief to businesses that are currently experiencing a temporary loss of revenue. Funds are made available within three days of a successful application, and the loan advance will not have to be repaid.
Who’s eligible for an EIDL?
Any business with 500 employees or fewer is eligible. There are limited exceptions to the 500-employee eligibility requirement for certain industries. The EIDL eligibility requirements have been expanded to include:
- Private nonprofit organizations.
- Small agricultural cooperatives.
- Sole proprietorships, with or without employees.
- Independent contractors.
- Any business, cooperative, employee stock ownership plan or tribal small business with fewer than 500 employees (with industry-specific size exceptions).
Under the CARES Act, the SBA is waiving its credit-elsewhere test, meaning that small businesses with credit available elsewhere are eligible for loans under the EIDL program. Previously, EIDL applicants were required to be in business for one year prior to the date of their EIDL application. However, the CARES Act has waived this requirement, and businesses are now eligible as long as they’ve been in operation since Jan. 31, 2020.
Eligible businesses can receive both a PPP loan and an EIDL, but only if they use the loans for different purposes. For example, a business can receive an EIDL for working capital and a PPP loan to cover payroll costs. However, if a business receives an EIDL, it will offset a PPP loan.
The same is true with credits received via the Families First Coronavirus Response Act (FFCRA). If a business receives these credits, their PPP loan will be offset. The reverse however, is not true. If a business takes a credit under the FFCRA, that credit amount is not impacted by participation in certain relief options, such as the PPP, an EIDL, Employee Retention Credit, or payroll tax deferral.
Can an EIDL be forgiven?
While EIDL advances do not need to be repaid, there is no loan forgiveness for EIDLs. However, companies that have already applied for or received EIDLs due to economic injury as a result of COVID-19 can seek to refinance their EIDLs under the PPP. This allows them to take advantage of the PPP’s loan forgiveness provisions.
What are the terms of an EIDL?
The interest rate for EIDLs is 3.75% for small businesses, and 2.75% for non-profits. The SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay. The CARES Act waives the requirement for personal guarantees on EIDL loan amounts less than $200,000.
How do I apply for an EIDL?
Qualifying entities can apply for EIDLs directly through the SBA, and the approval process can take up to a month.
Are there other assistance options under the CARES Act?
In addition to the above loan options, the CARES Act features other provisions that are favorable to small businesses, including but not limited to:
Employee Retention Tax Credit. Small businesses may be eligible for refundable payroll tax credit for 50% of wages paid after March 12, 2020, and before Jan. 1, 2021. The credit is available to employers whose: a) operations were fully or partially suspended due to a COVID-19 related shut-down order, or b) gross receipts declined by more than 50% when compared to the same quarter in the prior year. Employers can file Form 7200 to request an advance of the employee retention credit or work with their payroll provider for an alternative solution. For more information on the Employee Retention Credit, review this IRS notice, the agency’s FAQ page, and our latest FFCRA article. If you receive loan forgiveness under the CARES Act, you are not eligible for the Employee Retention Tax Credit.
- Payroll Tax Deferral. Any employer (regardless of size) can defer payment of their share of Social Security taxes. Self-employed individuals can also defer certain self-employment taxes. The deferral applies to deposits and payments of the employer's share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020, and ending Dec. 31, 2020. If an employer decides to defer taxes, they must keep track of amounts accrued and pay 50% of what’s owed by Dec. 31, 2021, and the remaining 50% by Dec. 31, 2022. Employers also taking advantage of PPP loans can defer their portion of Social Security taxes, but only through the date they are notified that their PPP loan is forgiven. The deferral can also be accounted for before the Employee Retention Tax Credit is applied. After that point, the deferral is no longer an option. These IRS FAQs provide more information.
For other small business relief options available under the CARES Act, check out this guide for a quick summary.