How the CARES Act can help fund small business operations

Creates Small Business Administration (SBA) financing option to help you get working capital

Creates Paycheck Protection Program (PPP) to encourage employers to keep staff employed with forgiveness potential

Enhances the existing Economic Injury Disaster Loan (EIDL) and the 7(a) Express Loan

Allows you to take a loan from your retirement vehicles without penalty.

Pauses all current SBA loan repayment for 6 months.

SBA Economic Injury Disaster Loan (EIDL)Eligibility: Business, 501(c)3 and other eligible non-profits including (c) 6 organizations, or tribal business employing no more than 500 employees per location; sole proprietors, independent contractors, and eligible self-employed individuals. Must have been operating on January 31, 2020.

Loan Amount: up to $2 million based on size of business

Terms: Repayment up to 30 years. 3.75% rate for small businesses, 2.75% for non-profits.

Allowable Uses: pay fixed debts, payroll, accounts payable, mortgage or rent, overhead expenses and bills that can’t be paid because of the disaster’s impact. (Lost rents are factored into determining your loss)

Cash Advance: The first 1 million applicants can request up to a $10,000 grant within three days of applying. This does not need to be repaid and can be kept even if you are denied or decline the EIDL loan. It is advised that you apply online ASAP.

Application: Online at https://covid19relief.sba.gov/#/ The process takes about two hours.

SBA 7(a) Paycheck Protection Program Eligibility: Business, 501(c)3, veterans organizations (501(c)19 or tribal business employing no mare than 500 employees per location; sole proprietors, independent contractors, and eligible self-employed individuals. Must have been operating on February 15, 2020.

Loan Amount: 2.5 X the employer’s average monthly payroll cost for the last twelve months up to $10 million. Includes wages for W2 employee and independent contractors, tips, Family Medical Leave, health benefits, retirement, state and local taxes.

Terms: Repayment up to 10 years for anything left over after forgiveness. 4% rate. Personal guarantee and collateral not required.

Allowable Uses: Payroll costs, employee salaries, mortgage payments, rent, utilities, interest on debt incurred before February 15, 2020.

Application: At SBA lending institutions. Sole proprietors, self-employed, and contractors can start applying April 10. Two week turnaround. Sample application: https://www.sba.gov/sites/default/files/2020-03/Borrower%20Paycheck%20Protection%20Program%20Application_0.pdf

PPP Loan ForgivenessAny payment made during the 8 weeks after loan origination for the following: payroll (including paid sick, medical and family leave, and independent contractor pay), group health benefits, rent (including rent payments made to other companies you own), mortgage interest, utilities.

Cannot exceed the original loan amount.

The amount of the forgiveness can be reduced if the employer reduces the number of employees as compared to the prior year, or reduces the pay of any employee by more than 25% as of Q4 2019. If you have already laid people off but re-hire at the same ay by June 30, 2020 you will not be penalized.

Compensation amounts over $100,000 will not be forgiven.

Amount forgiven will be excluded from taxable 2020 income.

SBA 7(a) Express Loan

Eligibility: Made by the SBA lender

Loan Amount: up to $1 million

Terms: Up to 7 years repayment with extensions permitted. Rates negotiable and cannot exceed the SBA maximum

Allowable Uses: Long-term and short-term working capital, purchase of real estate, purchase of equipment, establishing or acquiring a business, and more.

Application: At any SBA lending institution. Turnaround is 36 hours.

Employee Retention Tax CreditIncluded in the CARES Act is a tax credit for employee retention. Entities such as 501(C)6 trade organizations, which do not qualify for the PPP, can benefit from this credit.

Eligibility: Business or tax-exempt organizations that (1) are fully or partially suspended due to a governmental order related to COVID-19, or (2) experiencing a significant decline in gross receipts (i.e., a reduction of 50 percent of gross receipts from the same quarter in 2019).

Credit: The credit is equal to 50% of the qualified wages paid by the employer with respect to each employee. The amount of qualified wages with respect to any employee for all calendar quarters in 2020 cannot exceed $10,000. In other words, there is a $5,000 total cap on the credit per employee for the 2020 tax year. The credit is available for qualified wages paid from March 13, 2020 through December 31, 2020

Application: The tax credit may be claimed against the employer portion of employment taxes, including Social Security and Railroad Retirement payroll taxes. To the extent the credit exceeds the employer portion of employment taxes due, the credit is treated as an overpayment and is refundable to the employer. The IRS is expected to provide guidance regarding the process for claiming the credit and receiving the refund.

More Info: https://www.irs.gov/coronavirus and your tax professional.

What Information Do I Need?Generally, be prepared to provide the following for any SBA Disaster Loan:General business information (name, location, SSN, contact info)

• Your annual income statement for 2019, plus 2020 monthly income statements up to the present date (your bookkeeper should be able to provide these)

• Complete copies, including schedules, of the most recent federal income tax returns for the principals of your business (general partners, or 20%+ shareholders in corporations). Be prepared to provide an explanation if you can’t provide these.

• A completed copy of the application (SBA Form 5)

• A schedule of liabilities listing all debts (SBA Form 2022)

• A request for a transcript of your tax return (SBA Form 4506-T)

• A personal history statement (SBA Form 912)

• A personal financial statement (SBA Form 413)

• Copies of relevant business certificates or licenses

• A copy of your business lease

• A history of previous loan applications

• Information on collateral property (real estate, equipment) if needed

RecommendationsDetermine which loan is right for you.

Pull together your payroll expenses and P/L statements for the last 12 months ASAP.

Apply now online for the EIDL loan and up to $10,000 advance grant. The grant is given to the first 1 million applicants. Even if you prefer a different loan, you can keep the grant.

If the PPP Loan is right for you, the banks have not begun taking applications as of this moment. BUT, you can apply for a standard 7(a) loan now and let them know you want to convert it to a PPP loan as soon as it is available. $350 billion has been appropriated for this loan and when it is gone, it’s gone.

If your entity does not quality for the PPP, consult your tax professional and the IRS about the Employee Retention Tax Credit.

7(a) Express Loans are not a new program and there are other SBA loans that allow you to purchase property. Talk to your SBA lending officer for best options if you want to use a loan for real estate purchases.

Kevin Coughlin Kevin@LexingtonCos.com