As the nation and the world grapple with the spread of COVID-19 and global economies shut down in an effort to keep people safe at home, business owners are facing a crisis of their own: the financial fallout of mass social distancing.
In recognition of the economic risks posed by the pandemic, the federal government is unveiling new measures to help. In early April, the Federal Reserve announced it would provide as much as $2.3 trillion to aid small- and mid-sized businesses as well as state and local governments. That announcement followed President Donald Trump signing the Coronavirus Aid Relief and Economic Security (CARES) Act into law in late March to provide help for individuals, nonprofits and businesses.
“Every small business, including those that are still operating and those that want to reopen, may be able to benefit from the provisions of the CARES Act," says Angie O'Leary, head of wealth planning at RBC Wealth Management-U.S. “The act also provides relief for nonprofit organizations and for sole proprietors, independent contractors and self-employed individuals."
There are more than 30 million small businesses in the U.S. — categorized as those with fewer than 500 employees — and nearly half (49.2 percent) of the nation's workforce is employed by a small business, according to recent statistics from the U.S. Chamber of Commerce.
There are numerous provisions in the CARES Act that could benefit small businesses, but one of the most compelling is the Payroll Protection Program (PPP), says Daniel Sullivan, a wealth strategist with RBC Wealth Management-U.S.
“The PPP provides a loan that will be forgiven to the extent that it's used to pay employees, the rent or mortgage interest, and utilities during the eight-week period from the loan date," says Sullivan.
Loans can be as large as 2.5 times the monthly payroll, mortgage, rent and debt payment expenses, up to $10 million. The funds from these loans can be used for multiple business expenses, including paid sick leave and payments on existing debts. There are no fees or prepayment penalties on the loans, which are fully guaranteed by the government through 2020 and guaranteed up to 75 to 85 percent of the original loan in 2021 and beyond.
First steps for business owners
The Small Business Administration (SBA) opened the loan application process on April 3, 2020 and provides guidance through its site.
“The PPP program is most important for companies that are trying to stay open or want to rehire their employees and reopen," says O'Leary. “Business owners who are not able to stay open can reach out to their furloughed and laid-off employees to communicate with them about extra unemployment benefits available through the act and encourage them to rejoin the company when things improve."
Business owners should immediately reach out to their financial advisor and tax specialist, Sullivan recommends.
“What makes the PPP special is that it's a potentially forgivable loan that doesn't require collateral or a personal guarantee," Sullivan says. “Usually there's an income tax consequence when a debt is forgiven, but in this case, there won't be a tax liability if the PPP criteria are satisfied."
Your banker must be an SBA loan provider to participate in the program.
Gwen Miller, executive vice president for RBC Banking Solutions at City National Bank, says the bank has processed thousands of loan applications for clients who own small businesses and seen more than $3 billion in emergency relief approved by the SBA in just the first week of the Payroll Protection Program.
“We are moving full steam ahead with all the bank's resources aimed at getting these funds to our clients so they can keep their businesses open and save jobs," Miller says. Businesses need to continue to act quickly, she explains, connecting with their current bank to assist with the application process as these funds are limited.
“You'll need a copy of your payroll tax report and other documents when you apply for the loan," adds Sullivan. “It's also extremely important to document all your payments during the eight-week loan period because you'll need that for the loan to be forgiven."
While the PPP may provide the most immediate relief for employers and employees, the CARES Act also has several other elements that can be helpful. However, most of these cannot be combined, so it's best to discuss the following options with your accountant and financial advisor:
- Employers are eligible to defer 50 percent of payroll taxes until Dec. 31, 2021, with the remaining 50 percent due Dec. 31, 2022.
- Employers who have partially or completely suspended their business, or who have seen a more than 50 percent reduction in gross receipts compared to 2019, may be eligible for an employee retention credit, which is a payroll tax credit for employment taxes equal to 50 percent of wages (up to $10,000 per employee) paid to employees who are not working due to the COVID-19 crisis.
- An expansion of the SBA Disaster Loan Program, which is a low-interest loan for up to $2 million with a maturity of up to 30 years. A $10,000 emergency advance will be paid within three days of the loan application while the full loan approval is pending.
- An SBA Express loan, which can be processed within 36 hours, is available for up to $1 million through Dec. 31, 2020.
- Businesses with a net operating loss (NOL) may be able to claim a refund for NOLs from 2018, 2019 and 2020 or choose to carry those forward to offset taxable income in future years.
- The amount of business interest expenses that can be deducted has been increased for 2019 and 2020.
“While it's smart to apply as soon as possible for government assistance, business owners should talk to their banker, CPA and attorney to make sure they understand the ins-and-outs of these evolving programs and any tax and legal implications," says Sullivan.
Many business owners are also active with nonprofit organizations that can apply for SBA assistance.
“These loans are a lifeline that make a difference between a nonprofit being viable or not," O'Leary says. "For example, I'm on the board of an organization applying for help now that supports women recovering from drug and alcohol abuse, work that is possibly even more essential to keep going now."
For companies that have pivoted to provide their communities with assistance during the crisis, or have the means to continue their philanthropic efforts, the CARES Act also raises the limit on tax deductible donations from 10 to 25 percent of a corporation's taxable profits. Food donations are also tax deductible up to 25 percent.
Other sources of help for businesses
In addition to the resources provided by the federal government, numerous local, regional and state programs are available for business owners, says Sullivan. He recommends the CASE Center at Duke University's regularly updated and searchable dashboard of small business relief programs.
While no company could be prepared for the global magnitude of COVID-19, contingency planning for all businesses should include establishing both cash reserves and access to a line of credit to increase resiliency, Sullivan adds.