What is the CARES law?
CARES is the abbreviation for Coronavirus Aid, Relief, and Economic Security Act. President Trump signed the bill on March 27, 2020. The stimulus package provides $ 2.1 trillion in assistance to individuals and businesses. Part of this money is reserved for small businesses.
Employee retention credit
Although not limited to small businesses, the bill offers a refundable payroll tax credit of up to $ 10,000 in wages paid to an eligible employee during the crisis. Credit is available to for-profit and not-for-profit businesses whose operations have been disrupted by government restrictions that have resulted in total or partial suspension of their business activities. The credit is also available to businesses whose quarterly revenues have declined 50% or more from year to year.
Salaries of employees who have been on leave or whose hours have been reduced are eligible for the credit. For employers with 100 or fewer employees, all salaries of full-time employees are eligible regardless of whether the employee has been put on leave or not.
The credit is equal to 50% of a maximum of $ 10,000 of eligible salary paid to an employee after March 12, 2020 and before January 1, 2021. The eligible salary includes not only the employee’s cash remuneration, but also eligible health costs paid by the employer. The employer will receive credits and any reimbursement if eligible, through their quarterly payroll tax returns.
Paycheque Protection Program
the The CARES law allocated $ 350 billion to small businesses as part of the paycheck protection program. The program provides 100% federally guaranteed loans to small businesses to help them keep their employees busy during the COVID-19 pandemic and any economic downturn that results. The program is administered by the Small Business Administration (SBA) and applications can be filed with banks from April 3, 2020.
A key feature of this program is that all or part of the loan can be canceled if the company is able to maintain its payroll during the crisis and / or if it restores employees to the payroll afterwards.
Some of the eligibility conditions include:
· A small business, a 501 (c) (3) or a small business that meets the SBA criteria with 500 or fewer employees.
· People who operate as sole proprietors, independent contractors or who are self-employed and regularly carry on a business in progress.
· Eligible tribal businesses and 501 (c) (3) veterans organizations that meet the SBA size criteria are also eligible.
· Certain companies operating as a franchisee and benefiting from SBA assistance may be eligible, as are certain companies in the accommodation sector (hotels, etc.) and the catering sector. In the last two cases, the limit of 500 employees can be applied per location.
· The limit of 500 employees includes employees of all statuses, full-time, part-time and others.
Work with lenders
The SBA will direct participating lenders to ensure that the business was in operation before February 15, 2020 and that they had employees to whom they paid wages and payroll taxes. Payments to independent contractors will also be considered.
Lenders do not:
· Consider whether the borrower has requested and been denied credit elsewhere.
· Require personal security for the loan.
· Require collateral for the loan.
Lenders will ask prospective borrowers to certify in good faith that the loan is due to economic hardship due to the pandemic, that the loan proceeds will be used to retain employees and that the borrower has no duplicate requests for a similar loan in progress elsewhere. Independent contractors and those who are sole proprietors or otherwise independent will be required to provide documents such as payroll statements or 1099 forms as part of the application process.
How much can we borrow?
Loans can amount to 2.5 times the average salary cost of the employer, but not more than $ 10 million.
Items that can be included in the calculation of average salary costs include:
· Salaries, other wages, commissions or other types of remuneration
· Tips or equivalent payments
· Vacation pay and parental, family, medical or sick leave
· Severance pay
· Payments for group health care benefits, including insurance premiums
· Payment of any retirement benefit
· Payment of national or local taxes assessed on the payment of employee remuneration
Items that would be excluded from average salary costs include:
· The prorated compensation of each employee for the period from February 15 to June 30, 2020 which would exceed $ 100,000 on an annualized basis.
· Payroll taxes, railway retirement taxes and income taxes
· Any compensation associated with an employee whose principal residence is outside the United States
· Sick leave or qualifying family leave that is already eligible for credit under existing rules.
How does the loan cancellation function work?
Borrowers may be eligible to forgive some or all of the loan amount. The amount is based on the amount spent on the following items during the eight week period from the date of loan creation:
· Salary costs as discussed above
· Interest on a mortgage linked to the business
· Rental payments on a commercial lease
· Utility payments made
· Additional salary in addition to tips earned and paid to the employees concerned
The amount of the loan forgiveness can be reduced in the event of a decrease in the number of employees or by more than 25% of the amount of salaries paid to employees of the company. Any reduction in the amount of the loan forgiveness can be reduced or eliminated if the company reinstates the reduced salary or brings back dismissed employees by June 30, 2020.
Overall, this is potentially a great program for many small businesses. As of this writing, there are still a lot of questions about some of the details of the program, consult your banker, business adviser or the SBA for details.
Tips and suggestions
Mike Kutchin, business consultant and president of See Change Management offers survival advice to business owners during this period.
He urges business owners to take advantage of all government programs in place to cope with this unprecedented period. Beyond that, Kutchin suggests:
· Contact your bank and request immediate suspension of principal payments on term debt and / or leases. Almost all banks have implemented these demand programs. ASK TODAY!
· Contact any equipment rental company and request negotiated relief on rental payments.
· Contact your landlord (if you are not the owner of the building) and start discussions about suspending the rent.
· Look at all the business expenses and your suppliers. Contact them by asking them for extended payment terms as soon as possible.
· Anticipate that the collection of your accounts receivable balance will not go as planned. You will need to make arrangements for late / deferred payments.