The United States Congress has passed several measures in response to the COVID-19 pandemic designed to help small businesses, including tax rebates, tax-filing extensions, business loans, emergency relief, and modified tax treatment. Perhaps the most significant benefit, the paycheck protection loan—also known as the coronavirus loan—can convert into a grant for small business owners that use it to cover payroll costs.
The SBA 7(a) Paycheck Protection Program Loan, as it’s known formally, offers small business owners funding up to $10 million. If the funds are used to cover payroll, taxes, mortgage interest, and lease payments, the entire loan amount can be forgiven on June 30, 2020. Completing an application is the best way to ensure your business can get funding soon and cover up to eight weeks of expenses.
Similar to the last round of funding, the $320 million allocated willl likely be depleted quickly. We recommend submitting an application through Lendio, a broker that has handled—and received funding for—thousands of Paycheck Protection Program loans in the last few weeks with no issues.
What’s Included in This Analysis
Our analysis of the Coronavirus Aid, Relief, and Economic Security (CARES) Act focuses on the impact on small business owners, rather than any relief available for individuals. We analyzed the programs available to small businesses, including the qualifications and constraints imposed on financing and grants.
Unless otherwise stated, the financial assistance to small businesses offered by this act is retroactive to March 1, 2020, and will remain in effect until the president deems the Coronavirus Disease 2019 (COVID-19) is no longer a threat to the economy.
The legislation offers owners financial relief through:
- SBA 7(a) Loan Programs (Paycheck Protection Program Loans)
- Relief of Paycheck Protection Program Loan
- Emergency Economic Injury Disaster Loans (EIDLs) & Grants
- Accelerated Tax Benefits from Net Operating Losses (NOLs)
What Is Excluded From This Analysis
- Unemployment Insurance
- One-time rebates to American citizens
- Provisions for major industries like airlines
- Relief aimed at the healthcare sector
Now that President Trump has signed the bill into law, various government bodies including the Small Business Administration (SBA), US Department of Treasury, and IRS may weigh in and make adjustments within their power. We will monitor developments and ensure this guide is the most up-to-date resource for small business owners.
The Office of Inspector General has issued a statement regarding best practices to avoid potential fraud with SBA loans. Remember that the SBA will not initiate contact on any loans and that any communication from the SBA will come from an account ending with .gov.
Changes in the April 2, 2020 Update
For Paycheck Protection Program Loans:
- The repayment term has been reduced from 10 to 2 years.
- All applicants will receive six months of payment deferral.
- A form is now available for review and top lenders are accepting applications.
- Lenders expect to process applications starting Friday, April 3, 2020.
- Forgiveness is available for eight weeks rather than 2.5 months as previously reported.
- We’ve created a checklist for the documents and information you must collect for an application.
- We’ve added a calculator for potential loan amounts that can be forgiven.
Paycheck Protection Program Loans
The CARES Act authorizes the SBA to offer loans to small businesses to cover payroll-related expenses. These loans are offered as a subset of the SBA 7(a) loan program. They have very few qualifications, mostly related to employee counts and business size, offer potential forgiveness, have much lower costs than traditional SBA 7(a) loans, and require no personal guarantees or collateral.
SBA 7(a) Paycheck Protection Loan Terms
- SBA 7(a) loan amount: Up to $10 million
- SBA Express loans: Up to $1 million
- Repayment term: Up to 2 years
- Repayment schedule: Monthly
- Deferral of payment: Six months
The maximum loan amount permitted by the act is $10 million. For business owners who want quicker funding, an SBA Express loan is a better option but offers less funding. The amount of forgivable funding can be calculated by estimating payroll and other operational costs.
Paycheck Protection Loan Calculator
What Costs Are Considered Payroll?
The CARES Act offers a broad definition of payroll including:
- Salary, wages, commission, or similar compensation
- Cash or tip equivalent
- Vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Provisions of group healthcare benefits, including insurance premiums
- Retirement benefits
- State or local tax that’s part of employee compensation
While this is very broad, the act also limits some considerations for payroll that small business owners must apply when completing their calculations. These limitations are imposed to avoid excessive compensation and double-dipping of funding across multiple relief efforts.
When calculating payroll for relief, businesses may not:
- Pay any individual employee an annual salary greater than $100,000
- Pay any taxes imposed or withheld under Chapter 21, Chapter 22, or Chapter 24 of the Internal Revenue Code of 1986
- Pay any employee living outside the US
- Pay sick leave wages for employees for which the Families First Coronavirus Response Act (Section 7001) offers a tax credit
- Pay sick leave for self-employed individuals for which the Families First Coronavirus Response Act (Section 7003) offers a tax credit
While it’s helpful to do these calculations to build a more accurate budget, every lender that offers this loan will be equipped to navigate these calculations using the information you provide them.
Paycheck Protection Loan Qualifications
Businesses that qualify for funding must:
- Be small businesses, nonprofits, veterans organizations or tribal businesses
- Employ fewer than 500 employees
- Fit the definition of size standards set by the SBA; for example, a restaurant must have less than $8 million in annual revenue and convenience store chains must have fewer than 500 employees
- Be operating as of Feb. 15, 2020
- Pay payroll taxes
- Submit a Form 1099-MISC if they have paid contractors
In addition to these criteria, the act also allows financing for:
- Sole proprietors and self-employed individuals
- Businesses that fit under NAICS code 72, with 500 or fewer employees per location
- Businesses receiving financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.
While the SBA will presume that any applicant that applies has been adversely affected by the coronavirus, the act aims to aid in the recovery of specific types of damages. This includes business disruptions, lost earnings, closures, and even staffing issues. Borrowers must sign confirmation that their business is suffering from one of these causes.
This Paycheck Protection Loan Program is intended to aid against:
- Supply chain disruptions: This includes a decrease in quantity, lead time, quality, and technology, including payment networks
- Staffing challenges: Including any problems related to finding, interviewing, hiring, or retaining employees
- A decline in gross earnings or customers: Resulting from COVID-19, quarantine, or other mandates that have led to a decrease in traffic and sales
- Closure: Closure of the business, which is required by law or is deemed otherwise necessary for public safety
Self-employed Business Owners
The CARES Act enables small business owners, sole proprietors, and independent contractors to finance wages for self-employment with a paycheck protection loan. Independent contractors can include wages, commissions, income, net earnings from self-employment, or similar compensation of $100,000 or less over one year for the purposes of the loan.
To qualify for a coronavirus relief loan, self-employed individuals, independent contractors, or sole proprietorships must provide:
- Payroll tax filings reported to the IRS
- Forms 1099-MISC
- Income and expense verification from the sole proprietorship
Paycheck Protection Loan Costs
SBA 7(a) loans issued under the Paycheck Protection Program have much lower costs than traditional SBA 7(a) loans. There are no applicable fees, and the interest rate is capped at 4%. Besides these costs, small business owners will not be penalized for repaying the loan early, have to sign a personal guarantee, or provide collateral.
- Applicable fees: None, 7(a) fees are usually up to 5% of the loan amount
- Interest rate: Up to 1.0%, charged only on any remainder after forgiveness
- SBA Guarantee fee: Waived
- Prepayment penalties: None
- Personal guarantee: None
- Collateral: None
Loans issued under this program can qualify to be discharged. If your loan is more than enough to cover payroll, the portion that exceeds your payroll cost will not be forgiven.
Permitted Uses of Paycheck Protection Loans
Small business owners can use the loan to pay:
- Payroll costs, including taxes
- Insurance premiums and costs associated with healthcare benefits during periods of paid sick, medical, or family leaves
- Employee salaries, commissions, or similar compensations
- Mortgage interest
- Interest on debt incurred before the covered period
How to Apply for Paycheck Protection Loans
The documents required to apply for the Paycheck Protection Loan program include:
- IRS Form 940
- IRS Form 941
- Articles of incorporation
- Bylaws/operating agreement
- Color copy of all owners’ driver’s licenses
- Payroll summary report or employee pay stubs
- Most recent filing of IRS Form 1099-MISC
- Trailing 12-month profit and loss statement
- Most recent business mortgage or rent statements
- Most recent business utility bills
Getting a head start and collecting the necessary documents can improve your approval odds, as most lenders are approving applications on a first-come, first-served basis. Paycheck protection loans will be offered by banks, credit unions, and other financial institutions that offer SBA financing. Small business owners that want to save time by applying for funding online, can work with Lendio, an online lending marketplace.
Paycheck Protection Program Loan Forgiveness Eligibility
The sum of the following costs, up to $10 million, will make a business eligible for forgiveness:
- Payroll costs
- Interest payments on mortgage obligations, excluding prepayment and principal
- Rent payments
- Utility payments
The documents required to verify loan forgiveness include:
- Payroll tax filings reported to the IRS
- State income, payroll, and unemployment insurance filings
- Canceled checks, payment receipts, account statements to verify mortgage, lease, and utility obligations.
How the Forgiveness Program Works
Small business owners that receive funding and use it to cover eligible expenses through June 30, 2020, can submit the necessary documents to receive forgiveness for the loan. Once the lender processes and accounts for the portion of the loan used for eligible expenses, the qualified portion of the loan will be considered canceled debt, which would make it essentially a grant for the business.
There are certain reductions that apply to small business owners that reduce staff, salaries, or wages with an outstanding covered loan. In these cases, small business owners must recalculate the average number of employees and account for the reduction in payroll obligations. For most business owners who retain all of their employees for the given period, there are no reductions to the forgiveness amount.
In some cases, small business owners may need to increase wages or compensate employees for lost tips. Forgiveness amounts can be increased to compensate for these differences. For example, if an employee earned 50% of their wages from tips in the past, and the employer now compensates them directly for that difference, that is eligible for forgiveness.
Tax Treatment of Forgiven Debt
In most circumstances, debt forgiveness is treated as income by the IRS. In the case of the CARES Act, the forgiven amount does not need to be reported as income and is not taxable.
Calculating How Much to Borrow for Forgiveness
Small business owners wanting to estimate how much they can borrow while fitting within the parameters of forgiveness have a few options.
- Most small businesses: Multiply average total monthly payroll costs for a one-year period before the date of the loan by 2.5
- Seasonal small businesses: Calculate average total monthly payroll for a 12-week period from Feb. 15, 2019, to June 30, 2019, and multiply by 2.5
- Businesses formed after Feb. 15, 2019: Calculate monthly payments from Jan. 1, 2020, to Feb. 29, 2020, and multiply by 2.5
- Businesses refinancing loans: Small business owners can also refinance an outstanding loan made between Jan. 31, 2020, and the date upon which they receive a Paycheck Protection Program Loan if the previous loan’s proceeds were used to cover a qualified expense
What Happens If You Borrow More Than the Forgiveness Amount
You can choose to borrow more than the amount that will be forgiven, leaving you with a low-interest SBA loan with a long repayment term. In some cases, this may be necessary to increase the amount of available capital for expenses not covered under the program like inventory.
The terms for the remainder of the loan are:
- Guarantee: The SBA will continue to guarantee the loans
- Repayment term: Up to 2 years from the forgiveness date
- Interest rate: Up to 1.0%, which is up to 10% lower than traditional 7(a) loans
In this case, the loan would continue with the forgiven portion discharged from the amount. The financial institution that handled the initial application will continue to service the loan until it is repaid.
Below you’ll find information about SBA Disaster Loans, grants, and tax changes introduced by the CARES Act. This is a separate loan from the Payroll Protection Program. If you would like to start an application with an experienced SBA lender, consider Lendio. The entire Paycheck Protection Program Loan application is available online immediately.
Emergency EIDLs & Grants
The Coronavirus Preparedness and Response Supplemental Appropriations Act declared COVID-19 to be an eligible disaster for the purpose of SBA EIDL. These loans are available to small businesses nationwide in amounts up to $2 million, with standard interest rates of 3.75% for small businesses and 2.75% for nonprofit businesses and repayment terms of up to 30 years are available.
When applying for an SBA EIDL, you may request an emergency advance for up to $10,000 to be paid within three days of application submission for ongoing operations.
If you choose to get the advance, the funds can be used to pay for:
- Employee paid sick leave
- Employee retention and payroll
- Increased costs due to supply chain issues
- Rent or mortgage payments
- Repaying an obligation that cannot be met due to lost revenue
In the event that an advance is disbursed, and the application is denied, the advance does not need to be repaid.
EIDLs have fixed interest rates and repayment terms that can extend up to 30 years based on your ability to repay the loan. The interest rates for COVID-19 disaster loans have been set at 3.75% for for-profit businesses and 2.75% for nonprofit businesses.
The loan terms you can expect with EIDL funding include:
- Repayment terms: May extend up to 30 years
- Interest rate: 3.75% for for-profit businesses, 2.75% for nonprofit businesses
- Time in business: No requirement
- Personal guarantee: Not required on loans less than $200,000
While there are no requirements as to how long your business needs to have been operational prior to the disaster declaration, there are some qualifying factors the SBA will consider when reviewing your application.
All states have applied and been granted eligibility for EIDLs under the COVID-19 disaster declaration. For your business to qualify for one of these loans, it will need to employ less than 500 employees and have been directly impacted by the disaster.
The qualification factors for an EIDL include:
- Economic injury: Business has faced economic injury as a direct result of the disaster and is unable to pay ordinary operating expenses
- Business size: No more than 500 employees (sole proprietors or independent contractors are eligible)
- Credit: These loans may be approved based solely on credit score
- Business revenue: There are no revenue requirements and qualification does not require tax return or tax return transcript for approval
If your business meets these basic qualification requirements, you can apply for EIDL funding directly through the SBA’s Disaster Loan Portal.
Can You Get Both SBA Disaster and Relief Loans?
Yes, in fact the act states that nothing should prevent a borrower from getting both SBA disaster and relief loans. If you got an SBA Disaster Loan for anything other than payroll between Jan. 31, 2020 and when relief loans became available, you can still qualify for a relief loan. If you receive an advance and later qualify for a 7(a) loan, the advance will reduce the amount of forgiveness that you can receive.
Accelerated Tax Benefits From NOLs
Under prior law, taxpayers―both corporations and individuals―had to carry forward their NOLs to future years. That’s not a great treatment because you don’t get the tax savings of deducting the NOL until you file the future tax return. The new law allows you to carry-back any NOLs generated in 2018, 2019, or 2020 to the five years prior to the year of loss.
For instance, if your company has a loss in 2020, that loss can be applied to reduce or eliminate your taxable income reported in 2016 to 2019. Once you file your 2020 tax return showing a loss, you will be able to receive a refund of income taxes paid in prior years by amending the prior-year tax returns. Similarly, you can carry back any losses reported on tax returns for 2018 and 2019.
Delay of Payroll Tax Payments
Employer federal payroll tax payments normally due in 2020 are now deferred. Half of the 2020 payments will be due Dec. 31, 2021, and the other half will be due Dec. 31, 2022. This should provide employers with immediate cash that would have otherwise gone toward payroll tax deposits.
Some of these deferred payroll tax payments may ultimately be offset by the Employee Retention Credit (discussed next) and/or the Credit for Sick Leave enacted with the Family First Act. However, once we get through this uncertain period, you need to start making plans on how you’re going to pay the tax on Dec. 31, 2021, and Dec. 31, 2022. Deferring a year’s worth of payroll tax is a big liability.
Employee Retention Credit
Employers may receive a credit against their payroll taxes for 50% of any wages paid to employees during a period where their business activity was fully or partially suspended by a government authority, or a period where gross receipts declined by 50% or more compared to the same quarter in 2019. The credit applies to a maximum of $10,000 in wages per employee. If the credit exceeds your payroll tax liability for the quarter, the excess will be treated as an overpayment and refunded.
The SBA 7(a) Paycheck Protection Program Loan is a modified SBA 7(a) loan created to provide relief from the impact of the coronavirus for small businesses. Small business owners can access up to $10 million in funding and if it’s used to pay for payroll the sum could be forgiven. There is also economic relief from SBA disaster loans, payroll tax payments, employee retention credits, and accelerated tax benefits from the government.