COVID-19 Stimulus Funds Now Available to Individuals and Small Business Owners Under CARES Act

Small business owners just got a care package from the government with the recently-enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). This new law provides much-needed emergency funds for individuals and small business owners dealing with the virus-induced shutdown. It’s been labeled the best stimulus package ever for small businesses as some of the loan proceeds doled out under this bill will ultimately be forgiven and represent “free money” while the remainder of the loaned proceeds will be repaid under terms favorable to the borrower. Once you review the extremely favorable terms for these programs as outlined below, you will better understand why so many are calling this the best government stimulus offering of all time. There is a downside, however, as the rollout of these programs has been disappointing so far to say the least (many would characterize the implementation phase as a disaster so far) and the terms for these loan programs seem to be changing daily, if not hourly.

The CARES Act is the largest economic relief bill in history and provides relief to all types of American businesses, from sole proprietorships and single-member LLCs to international Fortune 100 companies. However, this blog will focus solely on four programs that are designed to put emergency funds in the hands of individuals and small businesses on a near-immediate basis. These four benefits/programs are (i) immediate one-time cash payments to individuals earning less than $75,000, (ii) unsecured, low-interest (1%) loans available to small businesses (from zero to 500 employees) under the Paycheck Protection Program (PPP), the repayment of which will likely be forgiven for most recipients if the loan proceeds are spent on certain approved uses, (iii) a quick (two weeks or so) advance/grant ($1K per employee capped at $10K) to small businesses that will not be subject to repayment and (iv) a more-conventional Economic Injury Disaster Loan (EIDL) of up to $2 million that will have to be repaid, but on borrower-friendly terms.

Cash Payments to Americans

The government will soon be distributing $1,200 to each individual with an adjusted gross income (AGI) less than $75,000 ($150,000 for couples filing joint returns), plus $500 for each qualifying child (under 17). If you had AGI between $75,000 and $99,000, you will receive a lesser payment (payment reduction of $5 for every $100 over the applicable AGI threshold). Taxpayers with AGI exceeding $99,000 ($198,000 for joint filers) are not eligible for this payment. Qualification for these one-time payments will be based on your 2018 Form 1040 unless you have already filed your 2019 return. If you were required to file but failed to file a tax return for either 2018 or 2019, you should do so immediately since without one of these filed returns (if required to file) you are not eligible for this payment.

You do not have to take any action to receive this payment – if you qualify the funds will be direct-deposited into the same bank account into which your tax refunds and/or social security benefits have been previously deposited. If the government does not have your bank account info on file your check will be mailed to you, probably during the first week of May. However, the Treasury Department plans to develop a web-based portal soon on which individuals can provide their banking information to IRS so as to avoid the delays associated with mailing their stimulus checks.

While these payments are presently considered tax-free and you will never have to pay this money back to the government, any payment you receive under this program will be offset against any tax refund to which you are entitled for your 2020 Form 1040. Therefore, if you receive one of these payments and typically receive tax refunds on your Form 1040, you may want to decrease your federal income tax withholding for 2020 to avoid a refund for 2020 because you will likely not receive all or a portion of it if you have received a stimulus payment under this program.

Paycheck Protection Program (PPP)

This PPP program is available to businesses (including sole proprietorships, single-member LLCs, independent contractors and non-profits) that were in operation on February 15, 2020 and have 500 or fewer employees. It provides for a low-interest (1%) loan equal to 2.5 times your average monthly payroll amount (up to $10 million). You will need to apply for this loan through your local bank where you have your personal and business bank accounts. The “average monthly payroll” figure that is used to calculate the amount you can borrow under the PPP is calculated on a gross basis (without regard to federal taxes withheld and FICA paid by the employer) and includes wages, salaries (up to $100K per employee), severance pay, employee health insurance costs (including insurance premiums), cost of employee retirement benefits (i.e., matching 401(k) contributions) and state and local payroll taxes. Payroll costs do not include payments to independent contractors. Although financial statements will not be required for this loan, you will have to verify your payroll costs and, if you seek loan forgiveness, your post-receipt uses of the loan proceeds. No collateral or personal guarantee is required and the deadline for applying for this loan is currently June 30, 2020.

The beauty of this program is that to the extent you spend your PPP loan proceeds for payroll (at least 75% of the proceeds and not including payments to independent contractors), rent, utilities and mortgage interest during the 8 weeks following receipt of the PPP loan proceeds, you do not have to repay the PPP loan proceeds you received. In other words, the government will pay your payroll, rent and utilities for the next 8 weeks. The worst-case scenario is that you cannot spend all of the PPP loan proceeds on the approved uses during the 8-week period and you end up having to pay back some of the PPP loan proceeds over 2 years at a 1% interest rate, beginning 6 months after you receive the loan proceeds. It gets even better – forgiven PPP loan proceeds are not considered “cancellation of indebtedness income" and, thus, the PPP loan proceeds that are ultimately forgiven are not subject to federal income tax. Of course, all of this good news is subject to one big caveat – that the government does not change these favorable terms at some point in the future (as they have done multiple times during the last two weeks) before you actually close on your loan.

Economic Injury Disaster Loan (EIDL)

This loan is available to businesses (including sole proprietorships, single-member LLCs, independent contractors and non-profits) that have been in operation since January 31, 2020 and have 500 or fewer employees. The loan available under this program is a more-conventional loan in the sense that (i) you do have to pay this loan back (except for the emergency advance of up to $10K discussed below), (ii) personal guarantees and collateral may be required for loans over $200,000 and (iii) there are some minimal underwriting standards (probably need a FICO score of 640 or better and may get denied if you have a federal tax lien filed against you) as the lender does assess the borrower’s ability to repay the loan. Here, you apply directly to the SBA (as opposed to your local banker with the PPP) and you can borrow up to $2 million. There is no collateral required if the borrowed amount is $200,000 or less but financial documentation (P&L statements, balance sheets, etc.) will be required for this loan. Amounts borrowed under the EIDL will have to be repaid (after a one-year deferment period) at 3.75% (2.75% for non-profits) over an amortization period of up to 30 years (most likely 7-15 years). The deadline for applying for this loan is currently December 16, 2020.

Under the EIDL, the borrower can request an emergency advance of up to $10,000 which will be funded much sooner (probably within a week or so) than the EIDL loan proceeds. Although this advance was initially a “one size fits all” payment of $10,000 to each applicant regardless of employee headcount, the government recently modified this feature to limit the advance to $1,000 per employee of the applicant. While the EIDL loan proceeds will have to be repaid, this advance does not have to be repaid, even if the EIDL request is ultimately denied. As such, this advance essentially constitutes and is commonly referred to as, a “grant”. However, while the rules are not exactly clear at this time, there are some that believe the advance/grant may have to be repaid if the recipient does not actually apply for a disaster loan under the EIDL program. So, to be safe you should apply for at least a minimal disaster loan under the EIDL to ensure that any advance you get will not have to be repaid. Hopefully, this issue will be clarified soon.

Scarcity of Funds and Urgency of Action

Funds will be distributed to qualified borrowers under the PPP and EIDL loan programs on a “first-come, first-served” basis and it is widely believed that the PPP loan program is underfunded at the current appropriation level of $349 billion. While government leaders have promised additional funding for these small business loan programs, there is no guarantee that will happen. Therefore, time is of the essence in applying for assistance under these programs.

It is also important that you accurately calculate your “average monthly payroll” and otherwise complete a flawless PPP loan application since you only get one shot at these loan proceeds, the bulk of which will likely be forgiven. If you understate your payroll costs in your PPP loan application (resulting in reduced loan proceeds) you cannot go back and ask for additional funds. As such, you will have left “money on the table” so to speak.

If you are interested in applying for one of these new small business loans and need assistance navigating the rules and qualifying criteria for these programs, please give me a call for a free consultation to discuss your options and eligibility.