As you may have heard, the Coronavirus stimulus bill was signed into law by president Trump last week. The package is called the CARES Act, and provides over $2 trillion of economic stimulus across a variety of channels.
My first thought here is sheer size of the package. $2 trillion is a TON of money. While at some point I’ll look into how the package will be paid for, I’ve spent more of my energy recently learning what’s in it. The bill includes a mix of forgivable loans to small businesses, bailouts to corporations in certain industries, and checks mailed directly to taxpayers falling under a certain amount of adjusted gross income.
For many of our clients at Three Oaks Capital, there is urgency surrounding the relief opportunities for small businesses. This post will cover the four sections I think are most relevant. I’ll circle back and try to cover implications and opportunities for individuals in a subsequent post.
Paycheck Protection Program
The section of the bill most interesting to many small business owners is the paycheck protection program. This is the forgivable loan program you may have heard about. Basically, you could be eligible for a loan if:
- You have fewer than 500 employees; and
- Can make a good faith certification that a loan is necessary due to the economic uncertainty caused by COVID-19
There are some caveats for businesses in certain industries employing more than 500 people, but since our clients predominantly fall under that number I didn’t much attention to them.
If your business qualifies, you may borrow up to the lesser of:
- $10 million; or
- 2.5 times your average monthly payroll costs over the previous year (capped at $100k per person for the year)
You may only use the loan for:
- Payroll costs
- Group health insurance premiums or other healthcare costs
- Salaries and/or commissions
- Mortgage interest (excluding prepaid amounts)
- Other business interest incurred prior to February 15, 2020
The terms of these loans are favorable. As long as you apply prior to 6/30/20, you can extend the amortization period all the way out to 10 years. And the maximum interest rate is 4%. On top of that, the payments will be deferred for at least six months, and no more than 12.
Any amount spent on the following items in the first eight weeks after you obtain the loan will be forgiven:
- Payroll (again, only the first $100k per person)
- Rent, for leases in force prior to 2/15/20
- Utilities, including electricity, gas, water, transportation, phone, etc. that were in place prior to 2/15/20
- Group health insurance premiums & other healthcare costs
And to top it off, the amounts forgiven are not counted as taxable income. The only catch here is that in order for any forgiveness to take place, the business must maintain the same number of employees from 2/15/20 to 6/30/20 as it did over either:
- The same period from the prior year; or
- 1/1/20 to 2/15/20
An initial question I had about the program was whether businesses need to satisfy the “credit elsewhere” test in order to qualify. With ordinary SBA financing options, you are not eligible unless you’re unable to find financing under typical terms. This is a decision the bank makes. That requirement has been waived for the Paycheck Protection Program, meaning the only criteria to qualify is what I’ve listed above.
**One caveat: businesses with outstanding SBA disaster loans are ineligible. Paycheck protection program loans may be used to refinance disaster loans taken out after 1/31/20.
To be clear, this is a very generous program. I suspect this will directly enable thousands of small businesses across the country to keep their doors open and/or keep their people employed.
There are two pretty glaring problems with it though. The first has to do with logistics. To apply for a paycheck protection program loan you’ll need to contact a bank approved for SBA financing. The bank will draft the paperwork, fund & disburse the cash, and make sure everything is compliant. While the SBA doesn’t participate from this aspect, it’s still responsible the process and the entire program.
The SBA is……not known for moving swiftly. I read somewhere recently that in 2019 the SBA had 3300 employees and only process total of 58,000 or so ordinary SBA loans. That’s about 18 per employee. There are over 30 million businesses with fewer than 500 employees across the country. That’s more than 9,000 per SBA employee. With the government doling out free money through this program, I’m unsure how the SBA will be capable of handling it.
The second is the concept of a “good faith determination” in order to qualify. Policy makers had some real urgency here to get something passed, and were not in an enviable position. But making a “good faith determination” that you need a loan is an unreasonably low bar to qualify. It’s naive to think that businesses with stable operations and cash flow will not take advantage of this. A better option would have been revenue qualifications, like those imposed on the payroll tax credit we’ll cover next.
How to Apply for a Paycheck Protection Program Loan
Call a local bank that’s approved for SBA financing by 6/30/20. There will be a bunch of paperwork involved, and you’ll need to gather business and personal financial documents.
Employee Retention Credit
Another financial incentive for businesses to keep people on payroll is the Employee Retention Credit. This credit is only eligible to employers who’ve faced substantial economic harm as a result of the virus, and who do not apply for a Paycheck Protection Program loan.
To qualify, your business must have:
- Experienced a quarterly revenue drop of 50% or more over the same quarter from the previous year (any quarter you choose); or
- Been fully or partially suspended as a direct result of government intervention
If you qualify, you’ll continue to qualify until the earlier of:
- 12/31/20; or
- The first quarter your revenues rise to 80% or higher from the same quarter of the previous year, or whenever the government intervention/suspension ends (depending on how you qualified in the first place)
The amount of the credit is 50% of w-2 wages paid to employees up to $10,000. Remember – this is a payroll tax credit. Which means that it’ll end up being a payroll tax holiday for quite some time, since 50% of wages is far more than the 7.65% you pay each cycle.
The catch for this provision is that the total amount forgiven falls when your total wages fall by more than 25% from the applicable period from the year before. (Which can be mitigated by rehiring, though).
This is another area that will help some industries more than others. Think about retailers that run on 10% margins, for example. A 50% drop in revenue would be devastating to a business running 10% profit margins. While not fun for any business, it’s far less crippling to companies running profit margins of 25% or above.
Payroll Tax Deferral
Unless you’re participating in the Paycheck Protection Program outlined above, employers are able to defer payroll taxes from the date of enactment until the end of 2021 & 2022. Of the payroll taxes you’d otherwise pay, 50% of the deferred amounts will be due on 12/31/2021, the other 50% are due 12/31/2022.
This applies to self employed people too, for the “employer” half of the taxes: 6.2% for Social Security and 1.45% for Medicare. This will provide some relief and financial flexibility to many, especially given the timelines.
Logistically, you may be wondering how to defer your payroll taxes since most payroll providers automatically tack them to your payroll cycles. I use Gusto at Three Oaks Capital, and they’d already built in an option to defer when I ran payroll last Thursday.
This provision will also be helpful – especially to businesses unsure whether they’ll be eligible for the Employee Retention Credit. If you think you might be eligible, the deferral gives you enough flexibility to wait and find out. Just stop paying payroll taxes for now, and wait and see. If it turns out you’re not eligible for the credit, you have a couple years to get back on track. No harm no foul.
Relaxation of Net Operating Loss (NOL) Restrictions
Prior to the Tax Cut & Jobs Act of 2018, companies with net operating losses could carry those losses back for up to two years, and forward up to 20. This can be helpful from a tax standpoint. Let’s say you run a successful manufacturing business, but your factory burns down and causes an operating loss in a given year. The ability to carry the losses forward and backward can help offset prior taxes you’ve already paid, and future taxes you will pay.
The TCJA of 2018 restricted net operating losses, only allowing them to carried forward indefinitely. It also limited the amount of NOLs that could be used to offset taxable income to 80%.
The CARES Act relaxes these restrictions. NOLs from 2018, 2019, or 2020 may now be carried backward up to five years, and 100% of them may be used against taxable income. This will undoubtedly help thousands of small businesses across the country that wind up posting substantial losses this year.
That’s it for now.
Look out for a subsequent post covering the CARES Act provisions covering individuals and unemployment insurance.