As the coronavirus has made its way around the world and has rapidly infected hundreds of thousands of people, we have been asked to stay at home and practice social distancing in an effort to “flatten the curve”. A tragic unintended consequence of social distancing, staying home, and shutting down many businesses is that millions of people have been laid off, gig economy workers aren’t able to find work, effectively becoming unemployed, and the economy is headed towards a recession.
In an attempt to lessen the blow to these individuals, and to the economy as a whole, Congress approved the massive $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act last Friday, March 27th, as a means to relieve the economic crisis caused by the coronavirus pandemic. The bill was then swiftly signed into law by President Trump on Friday afternoon.
Two trillion is a giant number. It’s really unfathomable once you begin trying to understand the scale. For example, one million seconds is equal to 12 days, one billion seconds is equal to 31 years, and one trillion seconds is 31,688 years. The market cap of Microsoft is $1.159T, Apple’s market cap is $1.098T, and Amazon’s is $954.287B. So, $1 trillion could buy every single share of Amazon’s stock and still have money leftover! For another sense of scale, check out this visualization for what $1 trillion of $100 bills would look like.
This article does not include every detail and provision of the bill, but it does provide information on those aspects that we believe will be the most relevant to self-employed individuals and small business owners and their employees. Please find our other CARES Act blog post here that dives into those provisions within the bill which are specifically meant to help individuals.
Unemployment Benefits & Pandemic Unemployment Insurance
Unemployment benefits for self-employed individuals have seen many enhancements thanks to the CARES Act. Chief among these are:
- Benefits are extended to self-employed 1099 income earners (who are usually not eligible for unemployment benefits) through Pandemic Unemployment Insurance
- The length of benefits is extended by 13 weeks (to a total of 39 weeks in Indiana)
- An additional $600 per week for up to 4 months is provided for eligible workers on top of state unemployment benefits
- Waiting periods (typically a week) are eliminated under the CARES ACT and the Federal government will cover the first week of benefits
(If you need more information about Indiana unemployment benefits, then you can check out the Indiana Department of Workforce Development Unemployment Insurance Claimant Handbook and the Indiana Department of Workforce Development Unemployment Insurance FAQ page.)
These enhanced benefits are available to those who were newly eligible for unemployment benefits beginning January 27, 2020 through December 31, 2020.
Paycheck Protection Program & (Forgivable) Small Business Loans
Included within the CARES Act is $349 billion to guarantee partially forgivable loans to small businesses issued by December 31, 2020, known as the Paycheck Protection Program. This provision within the bill has been setup so that business owners with less than 500 employees (or a different size standard based on the business’ NAICS code with exceptions, of course) can go to their normal SBA lender to apply for a loan by June 30, 2020. Those who qualify include gig workers who work as independent contractors such as artists, musicians, and ride share drivers.
The bill has temporarily raised the maximum amount of 7(a) small business loans from $5 million to $10 million (based on payroll costs excluding annual compensation over $100,000 per person and relaxed underwriting) with a maximum interest rate of 4% over a term up to 10 years and deferred payments for 6-12 months.
These funds may be used for:
- Payroll costs
- Group health insurance benefits and other costs
- Employee compensations
- Mortgage interest
- Other business interest incurred prior to February 15, 2020
The greatest potential benefit to this provision of the CARES Act is that it includes loan forgiveness for funds used during the first 8 weeks beginning on the origination date of the loan for certain expenses including:
- Group health insurance premiums
- Rent payments & mortgage interest
Those businesses that maintain the same number of employees from February 15, 2020 through June 30, 2020 as they did during either the same period in 2019, or from January 1, 2020 through February 29, 2020 will be eligible for forgiveness of proceeds that went towards paying these expenses. If this requirement is not met, then the amount of the loan eligible to be forgiven will ratably be reduced by the number of full-time employee equivalents not retained. The amount of debt given under this provision will not be included in taxable income.
The SBA is making these loans available through traditional lenders such as banks and credit unions so that business owners may use their current banker to secure a loan and so that the bankers may use their own paperwork, although the ultimate approval will come from the SBA.
The Treasury Department has released the Paycheck Protection Program Information Sheet for Borrowers which provides guidance on the program and answers many Frequently Asked Questions.
Employee Retention Credit
The Employee Retention Credit within the CARES Act is another provision meant to help and encourage employers to retain employees which provides a credit against employment taxes. To be eligible for an Employee Retention Credit, a business must have had its operations suspended due to "…orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19." (SEC 2301). An additional eligibility requirement for the credit is that gross revenue (not profit) must be less than 50% of gross revenue in the same quarter last year.
Once a business qualifies for the credit, it will remain in effect until gross revenue exceeds 80% of revenue for the same quarter in the prior year, a quarter without a government-required suspension of operations, or the end of 2020, whichever comes first.
The Employee Retention Credit is applicable for 50% of wages paid to employees, up to a maximum of $10,000 of wages per employee, and not to exceed the applicable amount of employment taxes. Of course, there are other factors that go into this as always.
Small businesses (100 or less employees) may include the wages of all employees up to the $10,000 maximum limit per employee towards the credit while larger businesses with over 100 employees may only count wages paid to individuals who are not working due to a government-mandated shutdown or due to declines in business revenues. Qualified health care expenses allocable to wages in both instances are included within these amounts.
Deferral of Employer Payroll Taxes
Businesses and self-employed individuals that don’t qualify for the Employee Retention Credit are still eligible for another form of help in the form of deferred employment taxes. Employment taxes (Social Security & Medicare taxes), may be deferred beginning on the date of enactment through the end of 2020. Half of the deferred tax payments will be due 12/31/2021 while the other half will be due 12/31/2022.
Net Operating Loss Carryback
Net operating losses from 2018-2020 may be carried back up to five years and may fully offset income. This could result in tax refunds from prior years that can be received in the current year with amended returns.
Small Business Administration Disaster Loan Program
Although the SBA’s Disaster Loan program is not a part of the CARES Act, the bill does provide for $562 million to be made available for the program. The Disaster Loan program is another source that could prove to be very helpful to business owners and their employees while revenues are dropping. Last Monday, the SBA announced that it is deferring disaster loan payments until December 31, 2020 as a part of its Economic Injury Disaster Loan program.
Additionally, the SBA is working to help small businesses by making it easier for them to apply for Economic Injury Disaster Loans and allowing them to defer payments for 1 year. These loans may be more appropriate for owners of smaller businesses who need less funds to help them get through this time as these loans are limited to $2 million.
Please contact your Financial Planner if you have any questions about the provisions within the CARES Act or if you would like help exploring how they may be applicable to you.
Analyzing The CARES Act: From Rebate Checks To Small Business Relief For The Coronavirus Pandemic. Levine, Jeffrey. https://www.kitces.com/blog/analyzing-the-cares-act-from-rebate-checks-to-small-business-relief-for-the-coronavirus-pandemic
H.R. 748 – 116th Congress (2019-2020): CARES Act. Courtney, Joe. https://www.congress.gov/bill/116th-congress/house-bill/748/text
S.3548 – 116th Congress (2019-2020): CARES Act. McConnell, Mitch. https://www.congress.gov/bill/116th-congress/senate-bill/3548/text
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