How Small Businesses can Obtain Loan Monies and Employment Tax Relief under the $2 Trillion COVID-19 Federal Relief Act

By Andrew Neiman

Americans have taken action with hopes to curb the spread of the novel coronavirus through social distancing, self-quarantine, and other efforts to “flatten the curve.” Twenty one states have issued stay-at-home orders—mandatory restrictions that require people to stay home except for certain “essential activities.” While these actions are crucial to lessen strain on health care system and prevent deaths, they have greatly restricted economic activity.

On March 27, 2020, the United States House responded by passing the CARES Act —the Coronavirus Aid, Relief, and Economic Security Act—a $2 trillion, comprehensive relief package that includes a variety of measures, including access to federal loan monies and tax credits, which may help small businesses to weather the COVID-19 storm. The Act received unanimous support when it passed the Senate two days prior on March 25, 2020.

Eligible businesses may apply for Economic Injury Disaster Loans

Small businesses will receive more than $350 billion in aid, but they must agree to retain workers to be eligible. The CARES Act empowers eligible entities to obtain emergency loans until December 31, 2020. Businesses with fewer than 500 employees are considered eligible. Independent contractors, private nonprofit organizations, and gig workers may also apply for these loans.

Loans will be made in accordance with the Section 7(a) program administered by the Small Business Administration (“SBA”), under the Small Business Act. However, the CARES Act will loosen the requirements to better facilitate borrowing. The main underwriting standards for eligibility will be proof of payroll costs and applicants may be approved solely by credit score. Prior to the CARES Act, Section 7(a) would have required that an entity be in business for one year prior to the pandemic and unable to obtain credit elsewhere. The SBA is expected to issue more detailed guidelines in coming days on underwriting and application criteria.

The CARES Act also authorizes advances of up to $10,000 for loan applicants for certain emergency situations, such as meeting rent obligations or maintaining payroll to retain employees. These advances are essentially free money; applicants are not required to repay them even if the loan application is subsequently denied. If the application is approved, the $10,000 is subtracted from the outstanding principal.

The SBA guarantees the loans which are administered through approximately 1,800 private banks. However, Secretary of the Treasury Steven Mnunchin indicated that the Department of the Treasury plans to allow all FDIC insured banks to issue the Section 7(a) loans in order to make assistance more widely available.

Businesses may receive tax credits and other relief

The CARES act includes provisions allowing for various employment tax credits for employers. These tax incentives are intended to promote continued employment of existing employees.

Many employers qualify for a tax credit per quarter against certain employment taxes, equal to 50 percent of the qualified wages up to $10,000 with respect to each. The credit only applies to wages paid after March 12 2020 and before January 1, 2021. Employer must see a partial or full suspension of operations because of COVID-19 or a significant decline in income to qualify. Additionally, this credit will not be available to Employers receiving Section 7(a) loans, as described in Section 1110 of the CARES Act.

Most employers may defer payment of employment taxes due from the date the CARES Act was enacted until January 1, 2021. The first 50 percent of the outstanding tax balance is due on December 31, 2021; the second 50 percent is due on December 31, 2022.

The CARES Act is a helping hand to individuals, businesses, and industries struggling with the effects of the economic shutdown caused by the COVID-19 pandemic. As time goes on, businesses will have to be savvy to retain their workforces, continue operations, and maintain cash flows.

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