The past few weeks have been anything but normal. Federal and state mandates have impacted how most small businesses and nonprofits operate. According to JP Morgan, the median business holds cash reserves to cover just 27 days of expenses.[1] Even if your organization operates with a bigger cushion, anxiety about the future is forcing many business owners and organizational leaders to face difficult decisions.
The good news is that health and government officials have worked together to craft the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to help small businesses and nonprofits through these tough times.
We have summarized a few key provisions below. These programs can provide a significant boost to struggling businesses. If you believe that you may be eligible or have any questions, please reach out to your team at SJS. We are here to help and can direct you to the correct resources.
Economic Injury Disaster Loans (EIDLs)
The Small Business Administration’s (SBA) EIDLs are the first line of support. While not new, these loans are available in the event of disaster.[2]
The SBA offers many favorable terms in their EIDLs:
Loans up to $2 million with terms up to 30 years. Interest rates are 3.75% for small businesses and 2.75% for nonprofits.
Borrowers can receive an emergency grant cash advance of $10,000, which can be forgiven if spent on paid leave, maintaining payroll, supply chain disruption costs, mortgage / lease payments, or repaying obligations that cannot be met due to revenue loss.
You apply for these loans directly through the SBA.
Paycheck Protection Program Loan Guarantee
This program can provide a business with a loan up to $10 million for payroll and other expenses including:[3]
Payroll costs, excluding prorated amounts for individuals with compensation greater than $100,000.
Rent pursuant to a lease in force before February 15, 2020.
Electricity, gas, water, transportation, telephone, or internet access expenses for services which began before February 15, 2020; and
Group health insurance premiums and other healthcare costs.
The amount spent on the above expenses during the first eight weeks after the loan origination date is potentially eligible for loan forgiveness. To qualify for loan forgiveness, you must maintain the same average number of employees for the first eight-week period beginning on the loan origination date. If you don’t meet this requirement, the loan amount forgiven is reduced.[4]
Employee Retention Credit for Employers Subject to Closure Due to COVID-19
If you are not receiving a loan, you may be eligible for a new payroll tax credit. To be eligible, your organization must continue to pay employees while not working, as well as satisfy one of the following criteria:
Organization operations were fully or partially suspended during Q1 2020 due to governmental authority.
Organization has less than 50% revenue in the quarter compared to the same quarter in 2019.
In simplest terms, the credit is equal to 50% of wages paid to each employee, up to a maximum of $10,000 of wages per employee.[5]
Deferral of Payment of Payroll Taxes
If not receiving a loan, you may be eligible to defer payroll taxes from the date of the CARES Act enactment through the end of 2020, ultimately paying these payroll taxes in 2021 and 2022. More specifically, 50% of the payroll taxes that would otherwise be due during this period may be deferred until December 31, 2021. The remaining 50% is due by December 31, 2022.[4]
Net Operating Loss Rules Are Loosened
The CARES Act adjusts Net Operating Losses (NOL) rules to allow NOL from 2018, 2019, or 2020 to be carried back up to five years. In theory, this should allow companies to reduce tax bills from prior years, allowing them to claim refunds of amounts previously paid.[4]
Please know that your SJS team is here to help guide you and your organization through these difficult times.
Important Disclosure Information and Sources:
[1] “Cash is King: Flows, Balances, and Buffer Days.” Diana Farrell & Chris Wheat, jpmorgan.com.
[2] “Small Business & Nonprofit SBA Programs Available with the Impacts of COVID-19.” Jim Ashley & Corey Stone, bkd.com.
[3] “Paycheck Protection Program.” U.S. Small Business Administration, sba.gov.
[4] “Analyzing The CARES Act: From Rebate Checks To Small Business Relief For The Coronavirus Pandemic.” Jeffrey Levine, kitces.com.
[5] “CARES Act Includes Employee Retention Credit.” Amy Barnes, Michael Goller, & Karla Nettleton, reinhartlaw.com.
SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professional for specific advice. This material has been prepared for informational purposes only.
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