After a quick turnaround in the House and the Senate, the CARES Act was successfully passed on March 27, 2020—providing some much needed economic relief to a declining American economy. A second influx of funding was allocated in June of 2020, and a new stimulus bill was signed by President Trump on December 27, 2020. While many citizens will benefit from the financial aid package, small businesses in particular can access funding in the form of forgivable loans, cash grants, and other tax benefits.
What is the CARES Act?
The Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act was signed into law by President Trump on Friday, March 27, 2020. The CARES Act is intended to provide relief to the economy as a result of the unprecedented financial and social effects of COVID-19.
As much of American life has been put on hold in all sectors—most particularly the entertainment, travel, and hospitality industries—the legislation was seen as a bipartisan effort for necessary emergency relief. Senate Majority Leader Mitch McConnell said of the CARES Act, “This isn’t even a stimulus package. It is emergency relief. Emergency relief. That’s what this is.”
The $2 trillion dollar relief package aims to have a positive impact on every corner of the economy, but in particular, NPR describes how the CARES Act impacts seven groups:
- Individuals: One-time cash payments and expanded unemployment benefits
- Big corporations: Tax credits (particularly to airlines)
- Small businesses: Emergency grants and forgivable loans
- State and local governments: Supplementing COVID-19 response programs
- Public health: Additional funding to CDC, hospitals, medicine, and supplies
- Education: Relief for college students and graduates
- Federal safety programs: Continued food stamps and child nutrition
How does the CARES Act benefit small businesses?
Inclusive in the $2 trillion dollar relief packages, $375 billion or more of the funds will go towards small businesses. Two programs were expanded or introduced as part of the CARES Act: first, the Paycheck Protection Program (PPP), and second, an expansion of the Economic Injury Disaster Loan program (EIDL).
This funding introduces greater opportunities for small business owners to receive emergency grants and forgivable loans. Companies with 500 or fewer employees are eligible to apply to both programs and additional contingencies for tax credits, counseling, and debt relief were also provided for.
These benefits and updates are intended to make it easier for small businesses to keep employees on the payroll and to stay open in the interim.
What has changed since the Coronavirus Relief Bill passed?
The Coronavirus Relief Bill provides additional funding, relaxed requirements, and extended deadlines for the relief programs created by the CARES Act. This relief bill provides additional funding for unemployment benefits, $284 billion to the popular Paycheck Protection Program, simplified loan forgiveness, assistance for schools and health care providers, and individual stimulus checks.
Key changes to the PPP include:
- $284 billion in Paycheck Protection Program funding
- Applications will likely open up the second week of January, but some lenders are preparing early by gathering documentation
- Eligibility focuses on smaller businesses: 300 or fewer employees and a reduction in income greater than 25% in at least one quarter of 2020
- Businesses who have already received a PPP loan are still eligible for this round
- The loan cap has dropped from $10 million to $2 million for repeat borrowers
- The provisions and extensions of this new stimulus bill will affect all existing PPP loans except those which have already been forgiven
- The bill offers expanded and extended unemployment benefits
- Payroll tax repayment has been delayed until the end of 2021
The Biden administration 2021 updates include easier access for the smallest businesses, as demonstrated by a prioritized two week window for SBA applications and a more favorable formula for calculating PPP loan eligibility.
Paycheck Protection Loans
The Coronavirus Relief Bill adjusted PPP requirements to businesses of 300 or fewer employees with a 25% reduction of revenue over one quarter of 2020 compared to the same quarter in 2019. Second time borrowers are limited to $2 million.
Round two of the Paycheck Protection ProgramEligible businesses
- Small businesses, tribal businesses, veterans organizations, and nonprofits with fewer than 300 employees
- Sole proprietors
- Independent contractors
- Self-employed individuals
Max borrowing amount
First time applicants may borrow the lesser of:
- $10 million OR
- 2.5x average monthly payroll costs
Second time applicants may borrow the lesser of:
- $2 million OR
- 2.5x average monthly payroll costs
Term lengths2 yearsInterest rates1%ForgivenessUp to 100%*Deferred payments6 months (though interest still accrues)AvailabilityLikely opening early-mid January 2021Use
- Payroll and compensation
- Insurance premiums and healthcare benefits
- Mortgage interest costs
- Rent and utilities
- Interest on other debt obligations
*Forgiveness may be reduced dependent on reduction of number of employees or reduction in salaries.
What is the new Paycheck Protection Program?
The CARES Act provided nearly $350 billion and the Coronavirus Bill adds $284 billion towards the Paycheck Protection Program (PPP), a lending solution intended to keep as many employees on the payroll as possible.
Employers who take advantage of PPP loans and apply them towards allowable costs—such as compensation, benefits, and other business obligations—can qualify for up to 100% loan forgiveness.
Forgiveness amounts may be reduced if your average number of employees changes or you cut compensation for employees who make under $100K by more than 25%. However, you won’t be penalized for reduction in employment or wages if you rehire employees or restore any decreases by July 31, 2021.
PPP loans are separate from existing federal loan programs, including Economic Injury Disaster Loans (EIDLs). You can apply to both PPP loans and EIDLs if your loan amounts cover different expenses—in other words, no double-dipping.
How to apply for a PPP loan
It is expected that applications will open up the second week of January, but many lenders have already opened pre-applications. You can apply through any of the 1800+ approved SBA 7(a) lenders—though this list is rapidly expanding as local lenders are approved and enrolled in the program.
If your bank is not an SBA-approved lender, you can reach out to your local SBA office for direction.
To speed up your application, we recommend that you gather the necessary documentation:
- Payroll records: Tax Forms 940 and/or 941 from January 1, 2019 to the most current filing. Note: You will need to be able to filter out any employees paid over $100K.
- Tax returns: Gather your tax returns and financial statements for the last two years. If you haven’t been in business that long, gather all the tax returns you have.
- Copies of driver licenses: You’ll need to provide copies of driver licenses for business owners with ownership stakes of 20% or more.
- Voided check: Provide a voided check from the account where the loan will be deposited.
- Six months of bank statements: Provide bank statements from your business accounts for the most recent six months of business.
- 1099-Misc (if applicable): If you have filed form 1099-Misc and are counting contractor compensation as part of your average payroll, you will need to provide this form.
- Other useful documents:
- Proof of being operational by 2/15/2020 (like a payroll summary)
- Articles of organization
- W9 documents
- Tidy books: To apply for loan forgiveness in the future, you’ll need documentation of the expenses you will pay during the eight week period after you receive an SBA PPP loan. Make sure you’re prepared to document expenses, including mortgage interest and/or rent and utilities.
Alternative lending platforms are ready to help small businesses access funds from PPP loans.
SBA Economic Injury Disaster Loans
The Coronavirus Relief Bill provides $20 billion in Economic Injury Disaster Grants to businesses that are serving low-income areas and have seen a 30% reduction in revenue compared to the same quarter in 2019. Additionally, EIDL cash advances will not be subtracted from your loan forgiveness eligibility.
SBA Economic Injury Disaster LoansEligible BusinessesSmall businesses with 500 or fewer employees and private nonprofitsMax Borrowing Amount$2,000,000Term LengthsUp to 30 yearsInterest Rates3.75% (2.75% for nonprofits)Use• Fixed debts
• Payroll
• Utilities and other bills
• Business adaptations and obligations
What are Economic Injury Disaster Loans?
Economic Injury Disaster Loans (EIDLs) are provided by the US Small Business Administration (SBA) in order to cover economic losses as a result of regional or national disasters. In the case of COVID-19, the SBA is providing low-interest funding to small businesses in the form of EIDLs.
SBA disaster loan or EIDL offerings were expanded as a result of the CARES Act, primarily in the form of cash grants (more in the next section). However, businesses may qualify for an EIDL, emergency economic injury grant and a PPP loan, so it’s worth applying to all of them.
How to apply for an Economic Injury Disaster Loan
The fastest way to apply for an SBA disaster loan is through their online portal. You can consult your local SBA district office or call for over-the-phone assistance: 1-800-659-2955 (Non-peak hours are 7:00pm to 7:00am EDT).
Be prepared with the necessary documentation:
- SBA Form 5 (Business Loan Application)
- IRS Form 4506-T (IRS Release)
- Most recent Federal income tax returns
- SBA Form 413 (Personal Financial Statement)
- Schedule of Liabilities (may use SBA Form 2202)
- Additional documentation may be requested, such as income statements, deed/lease information, Employee Identification Number (EIN), monthly sales, etc.)
SBA Emergency Cash Grants
EIDL Advances were popular and quickly exhausted. The 2021 updates have provided additional funding, but the SBA will target specific businesses in need for these grants. The Targeted EIDL Advances will be provided by assignment, specifically for businesses who were unable to get their desired funds from the initial round of EIDL cash grants.
SBA Emergency Economic Injury GrantsEligible BusinessesSmall businesses and private nonprofits who have been in operation since Jan 31, 2020Max Borrowing Amount$10,000Deferred PaymentsDoes not need to be repaidUse• Payroll
• Sick leave
• Increased production costs
• Business obligations (debts, rent, or mortgage)
What are Emergency Economic Injury Grants?
The CARES Act provided $10 billion to fund cash grants for small businesses and nonprofits. The Coronavirus Relief Bill provides an additional $20 billion in grants for those in especially disadvantaged areas. Eligible businesses can receive up to $10,000 in financial aid to cover immediate operating costs.
Unlike PPP and EIDL loans, these emergency grants do not require repayment. In addition, the CARES Act waives the requirement that you are unable to obtain credit elsewhere. Even if you already have a credit line or do not qualify for SBA loans, you may still be eligible for an emergency grant.
Eligibility for emergency economic injury grants is determined by self-certification and the applicant’s credit score. So, even though the review process should go fairly quickly, there will likely be high demand for this kind of funding.
How to apply for an Emergency Economic Injury Grants
The application process for emergency grants is the same as the process for EIDLs. Apply for your Economic Injury Disaster Loan through their online portal and request an emergency grant of $10,000.
If approved, the SBA will provide the grant within 3 days of receiving your application.
As with the EIDL, you should be prepared with the necessary documentation:
- SBA Form 5 (Business Loan Application)
- IRS Form 4506-T (IRS Release)
- Most recent Federal income tax returns
- SBA Form 413 (Personal Financial Statement)
- Schedule of Liabilities (may use SBA Form 2202)
- Additional documentation may be requested, such as income statements, deed/lease information, Employee Identification Number (EIN), monthly sales, etc.)
If you don’t qualify for the EIDL Emergency grant, consider applying to other small business grants like these.
Small Business Debt Relief Program
The Coronavirus Relief Bill simplifies the debt forgiveness program with a one-page application for loans under $150,000.
SBA Debt ReliefEligible Businesses• Small business with existing SBA 7(a), 504, and microloans
• New borrowers who take out SBA loans within six months of CARES actTerm Lengths6 monthsTermsSBA will automatically make payments within 30 days of the date on which the first payment is due.UseSBA will cover all loan payments for six months (including principal, interest, and fees).
What is the Small Business Debt Relief Program?
The CARES Act allotted $17 billion to cover payments for companies already using SBA loans. This debt relief program covers 7(a), 504 and microloans funded through the SBA. However, it does not cover existing disaster loans or new PPP loan payments.
Under the small business debt relief program, the SBA will cover all loan payments for six months from the date the CARES Act was signed (including principal, interest, and fees). Relief is also available to new borrowers who take out qualifying, non-disaster SBA loans within six months of the act.
7(a), 504, and microloans offered by the SBA provide up to $5 million in funding for businesses who lack credit elsewhere.
How to apply for Small Business Debt Relief
If you already have an SBA loan, debt relief should be automatic. The SBA will automatically make payments on your behalf within 30 days of the date on which the payment is due.
However, it’d be wise to check in with your lender to see if SBA payments are coming through or if there is anything additional they need from you to speed the process.
Small Business Tax Provisions
Included in the CARES Act were several tax provisions that positively affect small businesses.
Employee Retention Credit
Employee Retention CreditEligible BusinessesSmall business employers (and some nonprofits) who have been forced to suspend or close operations*Max Credit Amount50% of qualified wages (up to $5,000 per employee)AvailabilityThrough July 31, 2021Terms Employers that receive PPP loans are ineligible*The ERC benefit is dependent on the size of the employer (Companies with 100 or fewer employees have greater benefit opportunities).
What is the Employee Retention Credit?
Small businesses who were subject to a full or partial closure related to COVID-19 may be eligible for a tax credit. The employment tax credit for each calendar quarter is equal to 50% of the qualified wages for each employee.
“Qualified” wages vary based on the size of the company. Wages from businesses with more than 100 full-time employees are any wages paid when the employee was not performing services due to current circumstances. For companies with 100 or fewer employees, any wages paid during this time are counted as “qualified.”
The tax credit caps at 50% of up to $10,000 per employee for all calendar quarters. In other words, the max credit is $5,000 per person.
Deferred Payroll Tax Payments
Deferred Payroll Tax PaymentsEligible BusinessesSmall business and nonprofits*TermsDeferred 2020 payroll taxes to be paid in two equal installments:
• First payment before Dec 31, 2021
• Second payment before Dec 31, 2022UsePayment deferrals include:
• Employer portion of FICA taxes
• Employer and employee portions of Railroad Retirement taxes
• Half of SECA tax liability
*Employers that receive PPP loans are ineligible.
What are Deferred Payroll Tax Payments?
Under the CARES Act, most employers are permitted to delay payment of the employer-portion of Social Security Taxes (6.2%). Once deferred, payments are due in two equal installments: 50% to be paid at the end of 2021 and 50% to be paid at the end of 2022.
Employers that receive loan forgiveness through PPP loans are not eligible to defer payroll tax payments.
In addition to deferred payments, businesses can receive payroll tax credits for providing leave benefits to workers affected by the coronavirus.
Other tax provisions in the CARES Act
The CARES Act included several provisions affecting taxes for both individuals and corporations. In addition to the Employee Retention Credit and deferred payroll tax payments, some of the following tax provisions may be relevant to your small business:
- Modified limitations on Charitable Contributions during 2020: The CARES Act modifies the carryover limitation for charitable contributions from 10% to 25%. If a corporation’s contributions exceed 25%, the excess contributions may be carried over for the next five years.
- Modified Net Operating Losses: The CARES Act modifies the 80% rule passed in the Tax Cuts and Jobs Act (TCJA). Instead, corporations are allowed to carry back losses up to five years.
- Modified Loss Limitations: The CARES Act suspends the ability of a pass-through entity to deduct “excess business losses” (introduced in the TCJA) until after Dec 31, 2020.
Additional tax provisions can be viewed here.
Other benefits to small businesses
In addition to financial credits and assistance, the CARES Act includes provisions for the training and assistance of small businesses.
Small Business Counseling
Many small business owners have found themselves unprepared for an economic hit of this severity and could benefit from the guidance of a business counselor. The CARES Act expanded funding to SBA partners including:
- Small Business Development Centers (SBDC)
- Women’s Business Centers (WBC)
- SCORE mentorship chapters
- Minority Business Development Centers (MBDC)
Due to the additional funds provided by the CARES Act, counseling is free through each of these partners and training is low-cost. SCORE mentorship is always free.
Small Business Contracting
Under the CARES act, government contracting agencies are able to modify terms and conditions of a contract. Contractors can be reimbursed at a billing rate of up to 40 hours per week of any paid leave. Eligible contractors are those whose federal facilities have been closed due to COVID-19.
For additional assistance, contractors should reach out to their local SBA district office or business development center.
