The CARES (Coronavirus, Aid, Relief, and Economic Security) Act is only one week old, yet legislators have already made some changes. The amendments to the historic $2.2T stimulus package follow news from top medical officials that COVID-19 may drag on for longer than previously thought. According to the White House task force led by Dr. Anthony Fauci, an estimated 100,000 to 240,000 Americans will likely perish due to the outbreak. Last week, Dr. Fauci expressed concern that COVID-19 may return in the fall when the weather gets colder.
According to research conducted by economists of the Saint Louis district of the Federal Reserve, 67 millions work in “high-risk” jobs, those at most at risk of being lost due to the pandemic. The researchers have revised their previous estimate of a 30% unemployment rate to 32.1% – or 47 million jobs lost. However, the economists did not factor in that some Americans may drop out of the labor force, a move that would bring the unemployment rate down, and they have not yet factored in the positive impact of the CARES Act.
What Is the CARES Act?
For the second time in the last dozen years, the federal government has approved a bailout to aid the battered economy. As the U.S. economy continues its freeze for the prolonged future, there is much debate to how much is needed to stave off a Great Depression and who should get what. Here’s just some of what the act entails.
Health-Care: $153 billion for the beleaguered health care-system as well as $50 billion for hospital equipment, protective masks and clothing, medical training, research, and patient housing.
Direct Payments: An estimated $390 billion will go directly to Americans that earn less than $150,000 per year. Single Americans who earn less than $75,000 will receive a one-time payment of $1,200. Married couples would each receive a check and $500 per child.
Unemployment: $260 billion will be injected directly into unemployment payments. The act will pay $600 per week on top of what state unemployment pays. For instance, a worker who receives $300 per week in state unemployment will also collect $600 from the federal government per week for a total of $900 per week. This federal payment will last for up to four months. The act now also extends UI benefits through December 31st. Under the act, freelance and gig workers are covered as well.
Freelance and Gig Workers: A 2016 study conducted by the consulting firm McKinsey found that the number of freelance workers has grown exponentially. To combat the massive loss of freelance layoffs during the outbreak, the CARES Act will create a temporary Pandemic Unemployment Assistance that will last through 2020.
State and Local Governments: State and local governments will receive $339.8 billion, most of which will go to directly combatting COVID-19. The rest will go toward education.
Tax Day: The federal government has extended the deadline to file 2019 tax returns to July 15th.
Insurance: The CARES Act mandates that private insurance must cover COVID-19 treatments and vaccines. Testing is also free.
Emergency Grants: $10 billion will be provided as emergency grants for small businesses. Grants of up to $10,000 will go to small businesses in order to cover operating costs.
Forgivable Loans: The Small Business Administration will provide $377 billion in loans, up to $10 million per business, to cover payroll, mortgages, and rent. The bill aims to ensure that workers stay employed by their respective companies. Existing debt will be forgiven provided workers stay employed through June. There is another $17 billion for small businesses already enrolled the SBA program to make payments.
Retirement Funds: Americans can now withdraw up to $100,000 of their retirement funds without incurring a 10% penalty. Withdrawals are still taxed but the tax penalty can be spread over three years. The deal lasts through January 1st.
401k Loans: The loan limit on 401k loans is increased from $50,000 to $100,000.
Agriculture: The federal government can now spend $50B on agriculture stimulus, an increase of $20B from its $30B max.
A Detailed Look At Small Business Provisions
On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act in the Senate (the “CARES Act”). The act increases the maximum Small Business Administration’s 7(a) loan amount to $10 million and expands allowable uses of 7(a) loans to include payroll support (including paid sick or medical leave), employee salaries, mortgage payments, insurance premiums and any other debt obligations.
Under the current draft of the CARES Act, the SBA is authorized to guarantee up to $349 billion in SBA 7(a) loans to businesses with no more than 500 employees or the applicable size standard established by the SBA for the industry in which the business operates, if greater. The loan period for this program would begin on February 15, 2020, and end on December 31, 2020.
Eligibility evaluations are to be limited to whether a business or certain non-profits was:
- Operational on February 15, 2020, and
- had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors, and
- is substantially impacted by public health restrictions related to COVID-19. (Eligible borrowers would be required to make good faith certification that they have been affected by COVID-19 and will use funds to retain workers and maintain payroll and other debt obligations.) There is no requirement to evaluate the borrowers’ ability to repay the covered loan or that the borrower not be able to find credit elsewhere, unlike the normal 7(a) requirements.
Loan Amount and Purpose.
- Maximum Amount of Loan
- The maximum loan amount is thelesser of $10 million or the product obtained by multiplying average total monthly payments for payroll costs during the 1-year period before the loan is made by 2.5. (2.5 x Average monthly payroll [covers employees making up to $100k/year]
- So if the loan was made on April 1, 2020, and average monthly payroll costs for the period April 1, 2019, to April 1, 2020, were $1,500,000, the maximum loan amount would be $3,750,000
- Payroll costs include salaries, wages, tips, payments for sick leave, insurance premiums and state and local taxes assessed on the compensation of employees, but does not include compensation of individual employees in excess of annual salary of $100,000,as prorated for the relevant period
- Allowable uses expanded to include:
- Payroll support (including paid sick or medical leave);
- Employee salaries;
- Mortgage, rent and utility payments;
- Insurance premiums; and
- Other debt obligations.
- Allowable uses expanded to include:
- Loan Forgiveness. Certain borrowers would be eligible for loan forgiveness equal to the amount spent during an eight-week period after the origination date of the loan on:
- Payroll costs;
- Interest payment on any mortgage incurred before Feb. 15, 2020;
- Rent on any lease in force before Feb. 15, 2020; and
- Utilities for which service began before Feb. 15, 2020.
Disaster Business Loan Application:
You can apply for an SBA loan through its site. Be prepared to provide the following information:
Note that a 2020 CARES Act loan requires the information listed below. Note that it requires tax returns and personal financial statements.
Finally, the CARES Act includes $349 million for the U.S. Small Business Administration (SBA) to guarantee loans through its 7(a) loan program. The SBA is also offering Economic Injury Disaster Loans for qualifying small businesses. These are low-interest loans with terms potentially as long as 30 years for small businesses and nonprofits. You can apply for an SBA loan through its site. Be prepared to provide the following information:
- SBA Loan Application SBA Form 1919)
- Statement of Personal History (SBA Form 912)
- Business Financial Statements
- Tax Information Authorization (IRS Form 4506T), completed and signed by each principal or owner
- Recent federal income tax returns
- Personal Financial Statement (SBA Form 413)
- Schedule of Liabilities listing all fixed debts (SBA Form 2202)
- You may also need to provide profit and loss statements, recent tax returns, and balance sheets.
Paycheck Protection Program (PPP) Loans
The program would provide cash-flow assistance through 100 percent federally guaranteed loans to employers who maintain their payroll during this emergency. If employers maintain their payroll, the loans would be forgiven, which would help workers remain employed, as well as help affected small businesses and our economy snap-back quicker after the crisis.
PPP has a host of attractive features, such as forgiveness of up to 8 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. Small businesses and other eligible entities will be able to apply if they were harmed by COVID-19 between February 15, 2020 and June 30, 2020. This program would be retroactive to February 15, 2020, in order to help bring workers who may have already been laid off back onto payrolls. Loans are available through June 30, 2020.
Small Business Debt Relief Program
This program will provide immediate relief to small businesses with non-disaster SBA loans, in particular 7(a), 504, and microloans. Under it, SBA will cover all loan payments on these SBA loans, including principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out loans within six months of the President signing the bill into law.
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
Counseling & Training
If you, like many small business owners, need a business counselor to help guide you through this uncertain time, you can turn to your local Small Business Development Center (SBDC), Women’s Business Center (WBC), or SCORE mentorship chapter. These resource partners, and the associations that represent them, will receive additional funds to expand their reach and better support small business owners with counseling and up-to-date information regarding COVID-19.
There will soon be a joint platform that consolidates information and resources related to COVID-19 in order to provide consistent, timely information to small businesses. To find a local resource partner, visit https://www.sba.gov/local-assistance/find/.
In addition, the Minority Business Development Agency’s Business Centers (MBDCs), which cater to minority business enterprises of all sizes, will also receive funding to hire staff and provide programming to help their clients respond to COVID-19. Not every state has a MBDC. To find out if there is one that services your area, visit this site.
If you are a government contractor, there are a number of ways that Congress has provided relief and protection for your business. Agencies will be able to modify terms and conditions of a contract and to reimburse contractors at a billing rate of up to 40 hours per week of any paid leave, including sick leave. The contractors eligible are those whose employees or subcontractors cannot perform work on site and cannot telework due to federal facilities closing because of COVID-19.
If you need additional assistance, please reach out to your local Small Business Development Center, Women’s Business Center, SCORE chapter, or SBA District Office. You should also work with your agency’s contracting officer, as well as the agency’s Office of Small and Disadvantaged Business Utilization (OSDBU).
Small Business Tax Provisions
Employee Retention Credit for Employers Subject to Closure or Experiencing Economic Hardship
This provision would provide a refundable payroll tax credit for 50 percent of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers who have experienced a greater than 50 percent reduction in quarterly receipts, measured on a year-over-year basis.
Wages of employees who are furloughed or face reduced hours as a result of their employer’s closure or economic hardship are eligible for the credit. For employers with 100 or fewer full- time employees, all employee wages are eligible, regardless of whether an employee is furloughed.
The credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in wages and compensation paid by the employer to an eligible employee. Wages do not include those taken into account for purposes of the payroll credits for required paid sick leave or required paid family leave, nor for wages taken into account for the employer credit for paid family and medical leave (IRC sec. 45S).
• The credit is not available to employers receiving assistance through the Paycheck Protection Program. The credit is provided through December 31, 2020.
Delay of Payment of Employer Payroll Taxes
This provision would allow taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Payroll taxes that can be deferred include the employer portion of FICA taxes, the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer FICA rate), and half of SECA tax liability.
• Deferral is not provided to employers receiving assistance through the Paycheck Protection Program.
Here’s who qualifies for relief checks from the government and how much they will receive:
Courtesy of the Tax Foundation
The CARES Act Is Far More Strict
Although the TARP Act included stipulations against executive compensation, dividends, and stock buybacks, executives were still able to receive large bonuses. Architects of the bailout argued that, in order for all banks to participate in the program, they could not add too many punitive measures. Recipients of funding from the CARES Act are barred from laying off more than 10% of employees, outsourcing, paying dividends, or buying back stock. There are also stipulations against executive compensation as well.
How Can Americans Take Advantage of the CARES Act?
There are several ways that Americans can take advantage of the CARES Act.
Collecting Unemployment Benefits:
To apply for unemployment benefits, visit your state’s unemployment website. You will need to provide your Social Security number, your driver’s license or state ID. You will also need to provide the Social Security number of any dependents as well.
Receiving A Small Business Loan From The Government:
The SBA offers assistance through Economic Injury Disaster Loans. These low-interest loans can last as long as 30 years for small businesses and nonprofits. The American Banking Association also provides a list of programs that are available across the country. Furthermore, the National Governors Association lists where small businesses can find loan information in various counties, states, and cities.
What About Student Loans?
Due to the COVID-19 epidemic, the Department of Education is allowing a 60-day grace period for those with federal student loans. Debtors do not have to make a payment during the 60-day period and will not accrue interest.
Ultimately, Will the CARES Act Succeed?
Only time will tell if the CARES Act will succeed. The world is faced with an unprecedented situation that it never adequately accounted for. Ultimately, the efficacy of any relief plan relies on the impact of COVID-19. Will the virus slow down its deadly spread? Can the world develop a vaccine in time? Will the virus continue to return as some experts warn? At least for the moment, the CARES Act provides much needed stimulus to a frozen, American economy.