This article was updated to reflect changes from the Paycheck Protection Program Flexibility Act which President Trump signed into law on June 5, 2020. This act amends some provisions of the PPP program.
This article is only for educational purposes and does not constitute legal, financial or tax advice. Make sure you consult a professional regarding your unique business needs.
The federal government passed a $2.2 trillion relief package known as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This package affects individuals, big corporations, hospitals and public health organizations, the federal safety net, state and local governments, and small businesses.
This is what small businesses should know about the CARES Act.
Paycheck Protection Program (PPP)
This program allocates funds to provide loans to cover the cost of retaining their employees and/or lost income (for certain business types). Generally, if you spend at minimum, 60% of your PPP loan on payroll within a 24 week period after you receive PPP funds, or through a maximum date of December 31, 2020, the loan will be eligible for forgiveness. This loan can be used on:
- Income replacement
- Payroll costs including compensation up to $100,000 per employee
- Continuation of group healthcare benefits or insurance premiums
- Payments on state and local taxes assessed on employee compensation
- Mortgage interest
These expenses can take place during a 24 week period, starting the day you receive your loan up to a maximum date of December 31, 2020.
Sole-proprietors, independent contractors, and self-employed individuals can apply for and receive loans to cover lost income and other expenses.
Who is eligible for the Paycheck Protection Program?
- Business concerns with fewer than 500 employees
- Tribal business concerns
- 501(c)(19) veteran organizations
- 501(c)(3) nonprofits
- Independently owned franchises with fewer than 500 employees
- Sole proprietors (subject to additional requirements)
- Independent contractors
- Gig economy workers
- Self-employed individuals
- Businesses that fall under the North American Industry Classification System as “Accommodation and Food Services” and have fewer than 500 employees per location
All businesses that are eligible must have been operational by February 15, 2020 and as of that date were paying employees or contractors. Borrowers must also certify that current economic conditions necessitate the loan to support ongoing operations.
Details of the loan
Under the Paycheck Protection Program the amount businesses will receive is calculated using your average payroll. If your business was operational from February 15, 2019 - June 30, 2019 the maximum amount of the loan will be equal to 250% of your average monthly payroll cost during that period. If your business wasn’t operational between February 15, 2019 - June 30, 2019 then the maximum amount of the loan will be equal to 250% of your average payroll monthly costs between January 1, 2020 and February 29, 2020. The maximum amount a business can receive is $10 million, with an interest rate of 1% (for amounts not forgiven) and five years to pay it back. Lenders will defer fees, principal, and interest from six months to the date on which the amount of forgiveness is determined by the SBA or 10 months after the last day of the covered period if the borrower fails to apply for forgiveness within 10 months. If you apply and meet the requirements for loan forgiveness, then the loan will be converted to a nontaxable grant.
How to apply
- Starting April 3, 2020, small businesses can apply for and receive loans to cover their payroll and other expenses.
- Starting April 10, 2020, sole proprietors, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other expenses.
You can apply through any existing SBA lender, federally insured credit union, or Farm Credit System institution that is participating. Other lenders are being approved and enrolled in the program, so be sure to check with your local lender to see if they are participating. You’ll need to fill out the application for the Paycheck Protection Program to apply.
Square is rolling out PPP loan applications. Take a look at this application guide to help you prepare and gather information and documents you’ll need to apply. If you’ve already applied elsewhere but have not received funding, you can still apply through Square Capital if you receive an invite.
Be on the lookout for an email or update in your Square Dashboard for an invitation to apply. If you don’t use Square currently, sign up for a Square account to begin the application process. Remember, demand for PPP loans remains high and funding may run out quickly. To improve your chances, submit your application as soon as you possibly can.
Economic Injury Disaster Loans (EIDLs) from the SBA
Typically, EIDLs are for businesses that need financial help because of a natural disaster. As of early March, eligibility for these loans has been extended to businesses that are affected by COVID-19. The CARES Act expands this program and makes it easier to apply.
Who is eligible for EIDLs
- Businesses with fewer than 500 employees
- Sole proprietorships, with or without employees
- Independent contractors
- Cooperatives with fewer than 500 employees
- Tribal businesses with fewer than 500 employees
- Certain types of businesses with more than 500 employees that meet the SBA size standards
- Nonprofit organizations
Details of the loan
These loans are processed through the SBA. Other lenders aren’t approved to give these loans yet, but they might be in the future. The maximum amount a business can receive with an EIDL is $2 million, with a 3.75% interest rate and a maximum term of 30 years. Loans under $200,000 can be approved without a personal guarantee. Additionally, borrowers can receive an advance of up to$10,000 . This $10,000 can be forgiven if it’s spent on the following:
- Paid leave
- Maintaining payroll
- Increased costs due to supply chain disruptions
- Mortgage or lease payments
- Other payment obligations that can’t be met due to revenue loss
How to apply
You can apply for EIDLs online. Visit the SBA COVID-19 Economic Injury Disaster Loan application.
Business tax changes
In addition to the Paycheck Protection Program and expanded EIDL, the CARES Act implements changes to some business taxes to help ease the financial burden on small businesses.
Here are some of the tax changes:
- Employee Retention Credit: This is a refundable tax credit available to eligible employees equal to 50% of wages for certain employees of up to $10,000 per employee, meaning the maximum credit per employee is $5,000. This credit applies to wages paid after March 12, 2020, and before January 1, 2021. Your business is eligible for this credit if your business operations were fully or partially suspended due to COVID-19 or if your business experiences a more than 50% decline in quarterly gross receipts. You can apply for this credit using the Form 7200, Advance Payment of Employer Credits Due to COVID-19.
- Deferred payroll taxes: Usually employers would pay 6.2% of Social Security tax on their employees’ wages. For payments owed in 2020, businesses and self-employed individuals can now defer these payments over the next two years. You must pay 50% by the end of 2021 and the remaining 50% by the end of 2022. Note that you can’t defer these payments if you’ve had a Paycheck Protection loan forgiven.
- Modifications for net operating losses: Usually if your business experiences a net operating loss, you can only carry it forward to future years to offset your taxable income. This is now being relaxed. If you had a net operating loss in tax years 2018, 2019, or 2020, that loss can now be carried back five years. This allows you to amend previous years’ tax returns to claim the loss now and receive a refund when you might need cash flow. Pass-through businesses or sole proprietorships can also take advantage of this. Typically, these kinds of businesses can’t claim losses of more than $250,000 for a single taxpayer, but this limit is suspended for tax years 2018 and later.
- Accelerated credit for minimum tax liability: If your business is due to claim alternative minimum tax (AMT) credits by the end of 2021, you can now accelerate those credits to claim a refund immediately.
- Adjusted business interest deduction: For 2019 and 2020, business can increase the amount of interest expenses they deduct from their tax returns from 30% to 50%.
- Claim a write-off for property improvements: You can amend tax returns from 2018 and 2019 and write off any improvements you’ve made to your facilities.
- Waived excise tax for making hand sanitizer: For 2020, the federal excise tax is waived on distilled spirits if your business is using them to make hand sanitizer.
Families First Coronavirus Response Act (FFRCA)
The CARES Act was signed into law after the FFRCA. Consequently, the CARES act made some changes in regards to paid sick leave as well as paid family and medical leave. Learn more about what employers should know about the FFRCA (inclusive of those changes).
Additionally, stay up to date with our regulatory updates, and be sure to check with official sources in your location for the latest local information. To get more guidance and tools for your business during this time, check our resource hub.