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CARES considerations for Small Business Owners


3 CARES Act Actions for Small Business Owners

Paraphrasing Fred Rogers, in times like these, look for the helpers. To me, helpers are ‘doers’. You remember the people who helped lead through the Financial crisis of 2008 and the corresponding recovery as a result. This time will be no different. Actions will get us through this. Here are 3 possible action steps small business owners can take, now.

Good news for stressed-out clients who own small businesses. The CARES Act offers generous loans, which may even be forgiven, as well as two forms of payroll tax relief and more to help them through closures and slowdowns due to the pandemic.

 Now that the CARES Act and the Families First Coronavirus Response Act have been passed, it is time to assess the opportunities available to our clients, and to all small business owners (including financial advisors). In our companion article published yesterday, we discuss how this legislation impacts individuals. Here we are focusing on actions that savvy advisors should be considering right now on behalf of themselves and their clients who are small business owners.

1. Low-interest business loans and potential loan forgiveness available (this includes you)

The primary way the CARES Act will help small businesses is through the creation of the Paycheck Protection Program, which provides cash flow to small businesses through federal loans. The CARES Act expands the allowable uses of 7(a) loans to include “payroll support.” The Paycheck Protection Program provides $349B in 100% federally guaranteed loans and is designed to ensure continued employment of employees through business interruptions. You can view the sample Paycheck Protection Program application here.

The possible loan amount must be the lesser of 2.5 average monthly eligible payroll costs or $10M and will cover the period to June 30, 2020, and will make loans available for payroll costs, group health care benefits, paid sick or medical leave, salaries, and insurance premiums.

The loan period is from February 15 through June 30, 2020 and the program generally covers businesses with fewer than 500 employees. Borrowers may apply at participating banks and the loans will be forgiven if employment and wage levels are maintained during an eight-week period starting on the loan’s origination date. Loans are allowed up to $100,000 per annual salary of an employee (prorated for the covered period).

The SBA has no recourse against any borrower for nonpayment of the loan, unless the borrower has used the loan proceeds for a non-allowable purpose. In addition, the loan can’t duplicate payments already under the Families First Coronavirus Response Act.

Loans will be offered at an interest rate of 4% and there are no origination fees. No personal guarantee or collateral is required and payments for loans under the program will be deferred from six to twelve months including principal, interest and fees. “Good faith” certification is required and must meet the following elements: the loan is necessary, funds will be used to retain workers and maintain payroll, and there are no duplicative amounts in the relief sought.

Loan forgivevess

One of the most interesting aspects of this program is the way in which loan principal can be forgiven. Principal can be forgiven in an amount equal to the payroll costs, mortgage interest, rent, and utilities during the eight-week period beginning on the date of the origination of the loan. There are some tricky year-over-year comparisons, however, to ensure that the small business is retaining and paying the workers.

The amount of loan forgiveness calculated above is reduced if there is a reduction in the number of the employees or a reduction of greater than 25% in wages paid to employees. Any amounts forgiven will be reduced proportionally by any reduction in the number of employees retained compared to specified prior periods or by the reduction in pay of any employee beyond 25%. For a great and simple explanation of this mildly complicated but very important program (including the forgiveness formula), see this small business guide and checklist from the U.S. Chamber of Commerce.

Also, as a last resort, don’t forget the SBA Disaster Relief Loan Program, where low interest loans are available to businesses experiencing a business loss related to COVID-19. Special restrictions apply to these loans so do your research to see if this makes sense.

Obviously there is some fine print here that must be explored, but the point is that these monies are available to many of your clients and even you if you qualify. It makes sense to reach out to your banker to see if their bank is participating in the program and what the next steps would be.

Also note that indebtedness cancelled will not be included in the borrower’s taxable income. Another bonus.

  • Action items: Reach out to clients who are small business owners and make sure they are aware of these very generous loan provisions (that could be forgiven) and that many will likely qualify for. Reach out to local banks and help clients navigate through the process.

 2. Payroll-tax relief delivered 2 ways

The credit

The act creates a refundable payroll tax credit for 50% of wages paid by employers to employees. The credit is available to employers whose: (1) operations were fully or partially suspended due to a COVID-19 shutdown order or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year.

The credit is based on qualified wages paid to the employees. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit whether the employer is open for business or subject to a shut down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.

The deferral

With the exception of employers who have debt forgiven by the CARES Act for certain loans provided by the SBA (discussed above), employers are also eligible to defer payroll taxes (6.2% Social Security tax on employee wages) from the date of enactment through the end of the year, until the end of 2021 and 2022. More specifically, the 50% of the payroll taxes that would otherwise be due during this period may be deferred until December 31, 2021 and the remaining payroll taxes would be due on December 31, 2022.

And for all financial advisors out there that could qualify, the payroll tax relief is also available to you as small business owners.

  • Action items: Reach out to all small business owners to notify them of the payroll tax relief and offer assistance in navigating the paperwork and requirements. Also reach out to your banker and consider whether any of these programs make sense for you.

3. Self-employed get sick and family-leave tax credits (this also includes you)

While they don’t get the same sick and family leave benefits available to employees, the Families First Coronavirus Response Act provides self-employed people with two refundable credits tied to the amount of time they can’t work because of the coronavirus outbreak.

The sick-leave credit compensates self-employed people for up to 10 days away from their business for coronavirus-related reasons. And the family-leave credit covers up to 50 days away from work for any reason that would qualify an employee for coronavirus family leave. There are limits based on self-employment income, but it behooves any self-employed business owner to be aware of these options.

  • Action items: Review your list of self-employed clients and discuss with them some of these options and tax credits. Reach out to their tax professional if need be. Also reach out to your tax professional to consider whether this could benefit you.

Resources

Original article posted by Horsesmouth.com

For additional information on all the items we discussed above, see this handy summary issued by The U.S. Senate Committee on Small Businesses.

For something a little shorter that you could possibly share with clients, see this one-pager sent to me from our tax professional: CPA Small Business CARES Act Summary.