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Understanding the CARES Act Paycheck Protection Program
What is the CARES Act?
On March 25, 2020, the United States Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This legislation is designed to provide relief, benefits and economic stimulants for American individuals, businesses, local and state governments, and nonprofits.
The new law is a $2 trillion economic stimulus package designed to repair the economic damage caused by COVID-19 and provide additional protection to individuals and businesses who may lose income due to the pandemic.
$350 billion of the package has been allocated for the Small Business Administration (SBA) to provide loans to help small businesses through this difficult time, also known as the Paycheck Protection Program (PPP). Busineses may start applying for PPP loans today, April 3, 2020. In this blog, we are going to provide an overview of the CARES Act as it relates to PPP loans.
What Types of Employers Are Eligible For the CARES Act?
- Self-employed individual
- Small business that meets SBA size standards (any businesses that have 500 or fewer employees, including tribe-owned businesses)
- Franchise or small business with multiple locations
- Mid-sized business or nonprofit (generally 500-10,000 employees)
- Large business or corporation with more than 500 employees
- 501(c)(3, 4, 6, 7, or 19) nonprofits
- Political subdivision, state or municipality
Forgivable Loans for Businesses
Paycheck Protection Program (PPP) Loans
This program provides loans to organizations with less than 500 employees or less per location, 501(c)(3) nonprofits, veterans’ organizations, and tribal small business concerns to help them through the time period between February 15, 2020, to June 30, 2020. Sole-proprietors, independent contractors, and other self-employed individuals may also participate. The program would provide cash-flow assistance through 100 percent federally guaranteed loans to employers who keep their staff employed during this emergency.
What Is the Loan Amount Available Per Business?
The loan size is dependent on various business factors. The maximum loan size available is $10 million. Here are the different ways to calculate your loan size:
- If you were in business February 15, 2019 – June 30, 2019: Your max loan is equal to 250 percent of your average monthly payroll costs during that time period. If your business employs seasonal workers, you can opt to choose March 1, 2019, as your time period start date.
- If you were not in business between February 15, 2019 – June 30, 2019: Your max loan is equal to 250 percent of your average monthly payroll costs between January 1, 2020, and February 29, 2020.
- If you took out an Economic Injury Disaster Loan (EIDL) between February 15, 2020, and June 30, 2020, and you want to refinance that loan into a PPP loan, you would add the outstanding loan amount to the payroll sum.
What Expenses Will the Loan Cover?
The expected forgiveness amount can be expended on payroll costs, payments of interest on a mortgage obligation, rent obligations, and utility payments. The following are what the loan will cover:
- Group health insurance benefits, including insurance premiums,
- Mortgage or rent payments
- Interest on any other debt obligations that were incurred before February 15, 2020
- Salary, wages, commissions, or similar compensation, cash tips or equivalent
- Vacation, parental, family, medical, and sick leave
- Allowances for dismissal or separation
- Health benefits
- Retirement benefits
- State and local taxes
- Limited up to $100K annual salary/wage for each employee
PPP Loan Forgiveness
If employers maintain their staff through the end of June, any portion of the loan could be forgiven. This will help workers remain employed, as well as help small businesses and our economy recover more quickly after the crisis. PPP has a host of attractive features, like forgiveness of up to eight weeks of payroll based on employee retention and salary levels, no SBA fees, and at least six months of deferral with maximum deferrals of up to a year.
This program would be retroactive to February 15, 2020, to help bring workers who may have already been laid off back onto payrolls. Loans are available through June 30, 2020.
The full amount of the loan could be forgiven, as long as the number of employees employed from February 2019 is equal to or greater than the number of employees from February 2020 to June 2020. If you have fewer employees in 2020, then you will need to complete a calculation to determine what loan percentage is forgivable.
To Calculate Loan Forgiveness Click Here
How to Apply for a PPP Loan
Employers may apply for a loan through any existing SBA 7(a) lender or through any financially insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. The SBA recommends businesses consult with their local lenders as to whether it is participating in the program or search for local assistance. Lenders may begin processing loan applications as soon as April 3, 2020.
Employers will need to use SBA Form 2483 to apply for a PPP loan. For more information on the PPP loan, eligibility requirements, and loan forgiveness, we recommend consulting with an SBA certified financial institution. For a complete list of SBA certified businesses, click here.
Subscribe to the APS blog to receive our next CARES Act article about additional small business loans, as well as the latest Coronavirus updates and news to help your business navigate this uncertain time.
Employer Tax Credits
Employee Retention Credit
This section of the CARES Act establishes a fully refundable tax credit for businesses of all sizes that are closed or distressed to help them keep workers on the payroll. The goal is to get those employees hired back or put on paid furlough to make sure they can return to their jobs. The credit covers up to 50 percent of payroll on the first $10,000 of compensation, including health benefits, for each employee.
For employers with more than 100 full-time employees, the credit is for wages paid to employees when they are not providing services because of the coronavirus. Eligible employers with 100 or fewer full-time employees could use the deduction even if they aren’t closed.
Deferred Employer Social Security
This section of the CARES Act allows taxpayers to defer paying the employer portion of the Social Security payroll tax (6.2 percent) through the end of 2020. The deferred payments will eventually have to be paid to the U.S. Treasury in two installments. Half of the deferred amount from 2020 will be due December 31, 2021 and the remaining half will be due December 31, 2022.
How the CARES Act Affects Your Industry
We have compiled a list of resources below that provide information about how the CARES Act impacts different industries.
Nonprofits, Churches, and 501c3 Christian Schools
Hospitals and Public Health Entities
We are unable to advise on these topics as they are outside the scope of our expertise. We encourage you to follow the IRS Coronavirus Tax Relief page and the SBA Coronavirus Loan Resources page, as well as consult with your tax professional or financial advisor. Detailed guidance on how to access these financial resources will be released as it becomes available.
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