Understanding the COVID-19 CARES Act
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law on March 27, 2020. This is the third piece of legislation passed in the last few weeks intended to address some of the economic hardships brought on by the Coronavirus health emergency. If you are the owner of a closely held business, with or without employees, you are likely facing financial and work challenges that were unimaginable just a few months ago. Ultimately coming together in a bipartisan manner, Congress has crafted a historically large emergency relief package with significant provisions designed to help business owners and their employees.
Key Opportunities the CARES Act Provides Business Owners
There are dozens of provisions in this new law. We have selected just a few to highlight and to provide you with information so that you may explore these opportunities in detail with someone like your financial advisor. Four opportunities the CARES Act provides small business owners are:
- Employee Retention Credit
- Payroll Protection Loan
- Payroll Tax Deferral
- Short Time Compensation Program
Employee Retention Credit Under the CARES Act
Eligible employers may receive a payroll tax credit for 50% of wages paid to employees during the Coronavirus health emergency. This credit cannot be used in conjunction with the Paycheck Protection Loan (which is also part of the CARES Act). There are many qualifying rules and certain limitations including:
- You must be an eligible employer. You must have carried on a trade or business during 2020 and satisfy one of two tests.
- Your operations were fully or partially closed down or suspended, or
- Gross receipts decreased by more than 50% when compared to the same quarter in the prior year.
- Applies to payroll after 3/12/2020 and before 1/1/21.
- Limited to $10,000 per employee, per quarter (includes health benefits).
- The credit may be claimed by an employer with an average of more than 100 employees who are retained but are not providing services as a result of COVID-19, or
- An employer who has an average of fewer than 100 employees, all wages paid qualify.
Paycheck Protection Program (PPP) Loans
The loans available to businesses under the Act are SBA 7a loans. Loans provided under this provision will waive certain fees and personal collateral and guarantee requirements. In addition, the Act waives the rule that the borrower had to be unable to obtain credit elsewhere. The goal of the program is to help employers retain employees and to help the employer pay certain business expenses (such as mortgage, rent and utilities).
The loan amount available will be the lesser of 250% of an employer’s average monthly payroll or $10,000,000. Reasonable interest of up to 4% may be applied to the loan. Eligible payroll costs do not include compensation over $100,000.
Loan forgiveness is built into this program. The amount forgiven may be equal to the amount spent by the borrower during an 8 week period after the origination of the loan on amounts used for payroll, mortgage interest, rent and utilities.
Economic Injury Disaster Loans & Emergency Economic Injury Grants
These grants provide an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID-19 within three days of applying for an SBA Economic Injury Disaster Loan (EIDL). To access the advance, you first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments.
CARES Act Payroll Tax Deferral
You may defer payment of the 6.2% payroll tax (Social Security Tax) paid by both employers and self-employed individuals. You may pay ½ the amount by 12/31/2021 and the other ½ by 12/31/2022. This provision will not apply to employers with small business loan debt forgiveness.
CARES Act and Short-Time Compensation Program
Where an employer reduces employees’ hours rather than laying the employees off, the employees may receive prorated unemployment benefits. This provision provides 100% of the costs incurred by the state in providing the so-called short time compensation thru 12/31/20. Short time compensation programs must be approved by the state. Generally, the employer may reduce the number of hours worked by more than 10% and no more than 60%. It is important to check with your state to see if they have adopted these special unemployment compensation provisions and that you meet any requirements set by the state.
How these CARES Act Provisions Can Be Leveraged for Your Business
The goal for many of these provisions is to help create cash flow and some degree of financial certainty for the owners of closely held businesses and their employees. The direct impact of the Coronavirus epidemic puts many small businesses in danger. These loans, credits, deferrals and other provisions may help create cash flow relief.
Our Country has faced many challenges, which at the time, seemed insurmountable. None of us have experienced a world wide shutdown on this magnitude. If you are looking for some silver lining, you have come to the right place. Every significant catastrophe has provided fertile ground for those entrepreneurs and professionals who seized the opportunities presented to them. The Cares Act is one of the most generous aid packages ever developed for small businesses. The grim reality is that this is desperately needed.
The opportunity is that when faced with extreme stress and uncertainty, many humans completely fold or allow the stress and uncertainty to heavily impact their decision making. This is a time in history where we need steady leaders. If you can continue to put one foot in front of the other, continue to play the hand you have been dealt to the best of your ability, continue to look for areas of innovation and refinement, you will likely be one of the survivors. When we eventually work our way through this, if you stop to look around, you will notice something. You will notice that many other business owners were not able to weather this storm. Your competition will be less and your opportunity will be greater. In addition to surviving, if you can maintain your key employees, and take advantage of this imposed quiet time, you should have the time to work ON your business instead of IN your business. I understand that when it feels like the house is burning down, such an approach is easier said than done. But remember, you will be one of the survivors and that is what survivors do.
I personally have a team surrounding me that has taken years to grow. True talent and loyal employees are hard to come by. Don’t try to do battle by yourself. Set up a meeting (most likely virtual) with a Financial Advisor who is also an entrepreneur. There is still a lot of unknowns and misinformation regarding the Cares Act, but with competent professional advice and self education, you will likely find a provision that can provide a lasting difference for you, your business and your family. We are here to help!
Are Government Bailouts All Bad? A Modern Example of a Bailout Success Story
Many reading this post will remember hearing about the massive AIG bailout in September of 2008. AIG had become a major seller of credit default swaps in an attempt to boost its profit margin. These swaps insured the assets that supported corporate debt and mortgages. If AIG went bankrupt, it would trigger the bankruptcy of many of the financial institutions that had bought these swaps. AIG was so large that its demise would impact the entire global economy.
AIG's swaps on subprime mortgages pushed the otherwise profitable company to the brink of bankruptcy. As the mortgages tied to the swaps defaulted, AIG was forced to raise millions in capital. As stockholders got wind of the situation, they sold their shares, making it even more difficult for AIG to cover the swaps.
Even though AIG had more than enough assets to cover the swaps, it couldn't sell them before the swaps came due. It left it without the cash to pay the swap insurance.
The Federal Reserve Ultimately provided AIG with a 182 Billion Dollar Bailout. At one point, the government estimated that it would never recover all of the bailout money, but as AIG restructured and returned to viability, it was able to repay the entire rescue fund plus generate a profit for U.S. taxpayers. In December 2012, the Treasury Department sold off the last of its remaining shares of AIG. In total, the government and taxpayers made a $22.7 billion profit from the AIG bailout.
Many have viewed the Cares Act as a necessary evil. What if we changed our perspective? What if we viewed this as one of the greatest investments in the history of American small businesses. As a small business owner myself, I know the sacrifices, I understand the fear, I can quantify the risk, but I also know the spirit and ingenuity of the American small business owner. For those of us eligible, let’s graciously accept this bailout, use it as it was intended, and pay multiples back to the collective tax payers and Country that made it possible. Many of these loans will be forgiven, but the economic activity, growth and future taxes that will be possible as a result should be many multiples of what was given. Be sure to work in collaboration with your financial, tax, legal and accounting advisors to get the most out of this financial opportunity.
One of my favorite sayings is “you are not being buried but rather you are being planted”. It is all a matter of perspective. We are here to help.
Don’t Know What Type of CARES Act Provision You Need?
The following questions might help point you in the right direction. Do you need:
- Capital to cover the cost of retaining employees? Then the Paycheck Protection Program might be right for you.
- A quick infusion of a smaller amount of cash to cover you right now? You might want to look into an Emergency Economic Injury Grant.
- To ease your fears about keeping up with payments on your current or potential SBA loan? The Small Business Debt Relief Program could help.
- Just some quality, free counseling to help you navigate this uncertain economic time? Contact a Thoroughbred Advisor today. We are available through traditional phone appointments or virtual meetings!