Financial Resources to Survive the COVID-19 Crisis: The CARES Act Explained
Updated: Apr 10, 2020
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, or the “CARES Act”. The CARES Act was a bipartisan effort to alleviate the financial and operational struggles of both American taxpayers and small businesses during the Coronavirus (COVID-19) crisis. The CARES Act has many important provisions that Americans can take advantage of to keep their homes and businesses afloat.
There are three major programs discussed here because I think these three parts are where most Americans and American small businesses will benefit from with the CARES Act and other existing programs.
1. Recovery Rebates for Individuals
The Recovery Rebates for Individuals payment is a new stimulus tax credit that most Americans will be eligible for. This was created for the 2020 tax year, and then advanced by the CARES Act so that Americans can use it now rather than waiting until they file their 2020 tax returns. This will be given to taxpayers who earned up to $99,000 for single tax filers.
Up to $75,000 income - $1,200 stimulus rebate
Over $75,000, but under $99,000 - Start at $1,200, then for each $100, deduct $5
$99,000 or over - No rebate
If you’re married, or file jointly with your spouse or domestic partner, then double the previous amount. For joint filers, you must have earned under $198,000 to get a rebate.
Up to $150,000 income - $2,400 stimulus rebate
Over $150,000, but under $198,000 - Start at $2,400, then for each $100, deduct $5
$150,000 or over - No rebate
Additionally, your children ages 16 and under will also bring a $500 rebate per child. The CARES Act does not have a maximum number of children that can be claimed.
If you’ve filed your 2019 tax returns already, then the IRS will use your 2019 income level. If you haven’t filed your 2019 taxes yet, as is the case with many people, you’ll get the rebate based on your 2018 taxes. The money you get from this rebate is not taxable because it’s a rebate from the government and not income.
To get this rebate, it’s quite simple. The IRS announced earlier this week that the recovery rebate will be automatically processed and distributed to the bank account linked to your previous tax return. If you don’t have a bank account linked, then the IRS plans to develop an online system or web portal for you to opt into an electronic payment system. This system is not yet public, but is being developed by the IRS.
2. The Paycheck Protection Program Loan
The Paycheck Protection Program Loan (or PPP Loan) may be a great lifeline for your small business if you’re struggling with cash flow and want to retain your staff, keep your payroll going and keep the employment levels consistent. This is without doubt the biggest challenge that small businesses are having right now. PPP Loans are available to businesses with less than 500 employees and they have a pretty broad range of business types that are eligible. Your business can be a corporation, LLC, sole proprietorship, partnership, or even you working as an independent contractor. Also, non-profit entities can get these loans.
The maximum PPP Loan amount is $10,000,000, with a maximum interest rate of 4% for borrowed funds. While the maximum interest rate is 4%, the current interest rate being reported between is 0.5% and 1.0%. The actual loan amount will be based on your average monthly payroll expenses and costs over the past 12 months. Currently, the PPP Loan allows for your business to get 2.5 times that monthly amount. So if your monthly payroll and employee costs are $10,000, then you should be able to get $25,000. If your company is larger and has a monthly payroll and employee costs of $200,000, then you should be able to get a PPP Loan for $500,000.
The money should be generally used for payroll or employee compensations:
Salary, wages, commission (not to exceed $100,000/year per employee)
Cash tips or equivalent
Vacation, parental, family, medical or sick leave
Severance or separation pay and any retirement benefit
Group health care benefit pay including insurance premiums
State and local tax on the compensation of employees
You can use the PPP loan funds for non-payroll expenses, but at least 75% of the borrowed funds must be used for the payroll expenses to qualify for the loan forgiveness. The term of the loan is 2 years and the first 6 months of payments are deferred. You can prepay the PPP Loan prior to the two years without penalty and can also see loan forgiveness as soon as 8 weeks after you get the loan.
To get the loan forgiven, you must use the loan proceeds for your payroll costs and employment expenses. After an 8 week compliance and look back period, you can apply for loan forgiveness. You’ll need to show appropriate documentation that you spent the loan funds on the appropriate categories, and those funds spent for loan purposes will be forgiven.
The PPP Loans are granted by the Small Business Administration (SBA), but they are serviced by SBA-approved, FDIC-insured banks. It’s best to go to the bank that you have your business account at and ask to speak with a business banker for this. Expect a huge backlog of applications and delays and and expect the banks to prioritize the application process. You should really have a good relationship with your bank for this process because your bank is going to review your application, process your loan, and eventually forgive your PPP loan.
3. Economic Injury Disaster Loan (or EIDL)
The third and final program that I’ll discuss here is the Economic Injury Disaster Loan (or EIDL). The EIDL model is not a new program, but has been put at the forefront of the discussion these past couple of weeks because of some of the lucrative provisions recently added due to the Coronavirus (COVID-19) pandemic. Similar to the PPP Loan, the EIDL is a small business loan. But unlike the PPP Loans, the EIDLs can be used for both payroll and non-payroll expenses, such as rent, supplies, and other obligations. The EIDL includes the provision for that infamous $10,000 payment emergency advance.
Just like the PPP Loan, you’re applying for a loan with the EIDL. But unlike the PPP Loan, the EIDL is directly with the SBA and not through the bank. Most applications are online. I’ve worked on these applications with my clients and they are pretty straightforward. Part of the EIDL application process allows you to request an advance of up to $10,000. This is permitted under Section 1110 of the CARES Act. Currently, the SBA is expecting the $10,000 advance to be disbursed within three (3) days following the EIDL application.
After you apply for the EIDL, your loan application will still be processed and if your EIDL is approved, then the $10,000 will be removed from the remaining loan disbursement because you already got the $10,000. For example, if you get the $10,000 advance and are later approved for a $100,000 loan, then your loan disbursement will only be for $90,000.
If you apply for the EIDL, then you are given the $10,000 advance, and your EIDL application is denied, you do not have to repay the $10,000 advance. Section 1110e(5) of the CARES Act discusses the repayment of the “Emergency EIDL Grants” and it states “(a)n applicant shall not be required to repay any amounts of an advance provided under this subsection, even if subsequently denied a loan under section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)).”
So again, if you want the $10,000 advance, you have to apply for a Economic Injury Disaster Loan. You may be approved or you may be denied, but you have to apply for the loan first. During the loan review process, you can get an advance of up to $10,000 to use for emergency expenses. This $10,000 advance does not need to be repaid, but the remainder of the loan MUST be repaid. It won’t be forgiven.
The SBA can issue your business an EIDL of up to $2,000,000. The interest rates are 3.75% for business and 2.75% for non-profits. For EIDLs under $25,000, there is generally no collateral. But for anything over $25,000, the SBA will request collateral and detailed financial records.
These government programs are not mutually exclusive, meaning that you can take part in more than one at the same time. If you are a business owner, you can get the Recovery Rebates for Individuals credit for your personal expenses, and also get the Paycheck Protection Program Loan or Economic Injury Disaster Loan for your business expenses. Feel free to reach out if you have any questions or inquiries for yourself or your business.
Tawfiq Morrar is an attorney in Elk Grove, California who handles all aspects of business and transactional law, in addition to estate planning services. Mr. Morrar can be reached at (916) 968-7973 or via email at firstname.lastname@example.org.