CARES Act FAQ

Courtesy of the West Bank Business Association:
You probably heard that the federal government has done its job and passed the third big coronavirus bill: the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This law is the one we have been waiting for that will provide much needed relief to small businesses and the self-employed.
 There are also relief provisions for small business in the federal Families First Act and in Minnesota law and executive orders (including the MN Small Business Emergency Loan), but I am not addressing those here.
 
1.       Paycheck Protection Program
 
Am I eligible?
Any business concern and 501c(3) nonprofit, veterans orgs and tribal business orgs with less than 500 employees are eligible to apply.

Self-employed, independent contractors, and sole proprietors are also eligible and will need to show payroll filings, 1099s, or other income and expense records to be determined.

Your business must have been in operation on February 15, 2020, had employees for whom you paid salaries or wages and payroll taxes, or paid independent contractors. There is no requirement for a personal guarantee or collateral.

How much am I eligible for?

The lesser of either
a)       the average monthly payments for payroll costs incurred during the 12 months prior to the date the loan was made TIMES 2.5.
[So, if your loan is made on April 1, you will need to add up all payroll costs made from 4/1/2019 through 3/31/20; divide that number by 12; then multiply by 2.5.] Seasonal employers have a different standard for calculating the amount they are eligible for.
OR

b)      10 million dollars

Payroll costs include salary, wage, tip, sick leave, vacation, and family leave (but not sick or family leave payments covered by the Family First Act tax credits) health insurance payments, severance, retirement contributions, state or local taxes on payroll, as well as self-employment wages, commission, income or net earnings from self-employment. Eligible base salary payments are capped at $100,000.

You can’t double-dip with other SBA loans for the same disaster.
 
What can I use the money for?
These loans must be used for
1)      Payroll costs (defined above)
2)      Interest on mortgage
3)      Rent
4)      Interest on other debt
5)      Utility payments
 
These payments must be made during the 8 weeks following receiving the loan and not after June 30, 2020.
 
Are the loans really forgivable?

Yes! The amount of payments made during the 8 week period after you get the loan will be forgiven so long as those payments were used for payroll costs, mortgage interest, rent payments, and utility payments. You will need documentation of where the payments went to get forgiveness.

However, if you let employees go during the 8 week period, your amount of loan eligible to be forgiven will be reduced. You will not be penalized if you re-hire employees you let post-coronavirus but prior to getting this loan.
 
Is there interest on these loans?

Yes, it is capped at 4% However, if your loan is forgiven, the interest is also forgiven. The loan term is a maximum of 10 years.
 
When do I need to start making payments?

All payments are deferred for at least 6 months (and may be deferred for up to one year). After 8 weeks, you will apply for forgiveness for the part of the loan used for forgivable purposes.
 
How do I apply?

Good news! You do not have to apply through the dysfunctional SBA Disaster loan website. You can work with your regular bankers so long as they are an SBA lender offering 7(a) loans.
 
What if I don’t have records to prove my payroll payments or income?

Now is the time for you to take advantage of the free technical assistance provided by the West Bank Business Association and paid for by the City of Minneapolis business technical assistance program. Email me and we can talk.
 
2.       Economic Injury Disaster Loans (EIDL) at SBA

You can still apply for economic injury disaster loans through the SBA, although you cannot use the economic injury disaster loan for the same purpose as the paycheck protection program if you also get the paycheck protection loan.

To be eligible for an EIDL, you need to be a cooperative or business with less than 500 employees. You can also be a sole proprietor, independent contractor or self-employed.
 
Apply at https://www.sba.gov/disaster/apply-for-disaster-loan/index.html

Sole proprietors, self-employed, freelancers and artists will use Form 5C

Businesses organized as a legal businesses entity, including  single-member LLC will use Form 5

All applicants will need to provide information about business and personal assets and debts as well as tax return information.
 
The CARES Act does a number of helpful things for EIDL applicants:

• waives the personal guarantee requirement for EIDLs under $200,000
  
• eliminates the one year being in business requirements and replaces it with the requirement the business be in operation on January 31, 2020
  
• waives the requirement that applicants cannot obtain credit elsewhere
  
• businesses can self-certify eligibility for the loan
  
• Emergency advance grants of up to $10,000 can be received within 3 days of loan application. The SBA may approve an emergency grant solely based on the applicant’s credit score and waives need to examine the tax return.

However, the business receives a paycheck protection loan after the advance, the forgivable amount of the paycheck protection loan will be reduced by the amount of the advance. The amount of the emergency advance does not need to be repaid. It can be used for: payroll including sick leave, meeting increased costs due to supply chain disruption, or other business obligations including business debt that cannot be paid due to revenue losses, mortgage or rent.

Wait, does that mean that I can get $10,000 in free money from the SBA through EIDL?

Yes. That is what that means. You can get up to $10,000 in advance money as part of your loan application for an EIDL. You will be eligible for the grant based on your credit report.  However, if you need more than 10,000 to meet make payroll, pay rent, pay mortgage interest, or pay utilities you should apply for the paycheck protection money rather than this grant. This is because the paycheck protection loan will be automatically reduced by the amount of the EIDL emergency grant.

Example 1:

You are closed for 2.5 months due to coronavirus. You receive a paycheck protection loan for $20,000 and an EIDL Emergency grant for $10,000. You pay $20,000 for payroll, utilities, mortgage interest and lease in the 8 week period after getting the grant. You also pay other debt obligations of the business using the $10,000 emergency grant. You lose. Your paycheck protection loan forgiveness is reduced by the $10,000 emergency grant so only $10,000 of the $20,000 you paid for payroll, utilities, mortgage interest and rent is now forgivable. The $10,000 is now no longer “free.”

Example 2:

You are closed for 2.5 months. You pay the rent, your utilities and your other debt obligations in the amount of $10,000. You win! You receive the money for free.

The lesson: You don’t want to apply for the “free” $10,000 if you are also applying for the paycheck protection loan unless you really need the money absolutely immediately and are willing to have to pay back up to $10,000 of the paycheck protection loan money, with interest (capped at 4%).
 
How can I get an EIDL and a Paycheck Protection Loan?

You may still get EIDL money in additional to paycheck protection loan. You just don’t want to get the emergency $10,000 grant money unless you are not getting the paycheck protection loan or absolutely need the money very quickly.

You want to get EIDL loan (3.75% interest) and the paycheck protection loan if you have obligations you need to pay for beyond what is forgivable under the paycheck protection loan.
 
Some Strategies

• If $10,000 will get you through this crisis completely and you have good credit, go for the $10,000 in free money. It is not clear to me whether you can apply for a $10,000 loan and get all of it advanced as free money. You need to request the advance within 3 days of making the loan application.
  
• Use paychecks protection loan to pay for rent, payroll, utilities, and mortgage interest for 8 weeks up to 2.5 times your average payroll for the last year. Its possible that your cap (2.5 times the last 12 months’ payroll) for paycheck protection loan will not cover all your needs, in which case you need the EIDL.
  
•  Use EIDL regular loan (not the emergency grant) at 3.75% interest to pay other obligations not covered by payroll protection loan.

 
3.       Pandemic Unemployment Assistance Program

This new program of the federal-state unemployment insurance program extends unemployment benefits to people not normally covered by unemployment including freelancers, self-employed, sole-proprietors. Self-employment income may be calculated based on the net income as reported on person’s tax return. CARES Act also increases the amount and duration of unemployment insurance payments for everyone, including the self-employed.

I am self-employed as an artist, freelancer, independent contractor, or own my own LLC. Should I apply for unemployment, paycheck protection loan, or EIDL?

You are right that as a self-employed person you are now eligible for EIDL emergency grant, EIDL, paycheck protection loan or can go on unemployment benefits. You will need to evaluate how long you are anticipating to be out of work or with diminished income as well as how much you are losing. The West Bank Business Association can help you figure this out for FREE through the City of Minneapolis technical assistance grants. We do not yet know how MN DEED and the Federal Department of Labor is going to administer the unemployment insurance program for this new population.

You can also choose to use the paycheck protection loan for 8 weeks or the emergency EIDL grant and if you still need assistance after that, you can use the UI program at that point. It is unclear at this point how your UI claim would affect your experience rating in Minnesota or if you will need to pay for unemployment insurance as a business after the disaster if you take advantage of this in Minnesota. I will send out more on this as the expanded unemployment program is developed here.
One note, unemployment insurance is only going to replace your net income from your business. So, you may need other sources like payroll protection loan or EIDL to cover things like rent you will still need to pay while your business is closed.
 
4.       Payroll Tax Credit

Employers may be eligible for a credit of 50% of the wages paid to employees against the amounts owed for federal employment taxes which are paid every quarter. The credit is capped at $10,000 per employee. If 50% of the wages you paid is more than the amount you owe for federal employment taxes in the quarter, the amount of the credit is refundable. Eligible employers must be of businesses which were either partially or fully shut down due to coronavirus or which have lost 50% of their revenues due to the crisis. The credit only applies to the same amount of pay employees received in the 30 days preceding the crisis (you can’t give your employees a big pay raise then claim the credit for half of that). Businesses with under 100 employees can cover all employee wages with this credit. However, there are limitations for businesses with over 100 employees.
Employers cannot take the Families First Act payroll tax credit for the same wages as this credit covers. This credit is not available to employers who receive a paycheck protection loan.
If you use a payroll company, I am sure they will help you sort this out. 
 
5.       Deferral of Employer Portion of Payroll Taxes Owed
All employers and self-employed individuals may delay paying the employer share of payroll taxes which normally you would pay in monthly deposits or with your quarterly 941. This deferral is valid until December 31, 2020. Half of the amounts deferred will be due by December 31, 2021 and half will be due by December 31, 2022. However, if you receive the paycheck protection loan you are not eligible for this deferral. Again, if you use a payroll company, they will give you more information on this.