The COVID-19 pandemic has taken a massive toll on the economy and the way that we conduct business. As many are reeling from the shock of the disease’s immediate impact on small businesses — both owners and their employees — the U.S. Government has put together legislation to attempt to alleviate some of the economic strain. As is the case with most legislation, there is a lot to unpack in the Senate CARES act. I’ve taken the time to comb through some of the language and provisions included in the bill and have identified some of the key points that may impact you, the business owner. Join me as I explain the bill in Financially Simple terms.
Let me begin by reminding you that I am a financial advisor and business coach, not an attorney or a tax advisor. At no point in this article am I offering legal, financial, or tax advice. Instead, I am writing this article as a means to educate you about what is included in the bill that is going before the House. With that said, the new Senate CARES Bill offers some key points that many business owners might find helpful. Some of the highlights include “paycheck protection” and debt-relief options. Furthermore, the Small Business Administration is required to enact these programs with regulations within fifteen days of the Act being signed into law. So what does it all mean to you, as a business owner?
This is the primary program that the government uses to provide financial assistance to small businesses – those with fewer than 500 employees. Senator Marco Rubio has stated that there are over 30 million small businesses in the United States and the only way I can think that he has come to this number is by including both employer firms — those who have employees — and nonemployer firms which include the sole proprietors and independent contractors. This is important to note because of changes made to Section D of SBA 7(a).
Section D of the SBA 7(a) loan program makes an inclusion for sole proprietors and independent contractors. This is important because previously, a business owner had to have employees to qualify for this program. The change benefits the artisan sole proprietors and independent contractors who would have otherwise been left out in the cold. However, you must be able to show that you had income via Form 1099 to be able to take advantage of the program.
Previously, Section E only allowed for a maximum loan of $5 MM for business owners through the SBA 7(a) program. With the new verbiage, the maximum increases to $10 MM. The thing to really pay attention to within Section E is how the SBA will quantify the amount that each business is eligible to receive. The total amount of eligibility will be based on the average total monthly payments for payroll costs made by the applicant over the course of the year prior to the date of the loan.
Section F has a lot of information in it. However, one of the most intriguing parts is found in Section F – i. This is where the new payroll protection program is found. Essentially, the payroll protection program provides eight weeks of cash-flow assistance through 100% federally guaranteed loans to small employers who maintain their payroll throughout the COVID-19 crisis. If the employer maintains payroll, the portion of the loans used to cover payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven. This helps workers to remain employed while small businesses and our economy recover from this emergency.
They are calling the loans received through the payroll protection program, “groans.” It is a combination of a grant and a loan since a portion of the loan can be forgiven. This is huge in that it can really help the economy to recover quickly. Moving further into the section, there are some provisions for debt-relief.
The SBA is required to pay all principal, interest, and fees on all existing SBA loan products for six months. This includes 7(a), Community Advantage, 504, and Microloan programs. That’s where we see the debt-relief coming into play. In addition, the loans can be used to cover group healthcare, medical leave, family medical leave, and even interest on debts incurred before the covered period.
These sections deal with the intricacies surrounding the revisions to the SBA 7(a) loan program and I have never seen anything like it. For starters, you can now refinance your loans and there is no personal guarantee. One of the reasons I have never been a fan of taking loans through the SBA is that they require you to offer up so much collateral. That is not the case with this revision. There’s no collateral required. The loans do come with a ten-year maximum term and a maximum of 4%. On top of it all, if the borrower is impacted they can defer payments for up to six months.
Stimulus checks aren’t necessarily new to the United States; we’ve received them in 2001, 2008, and 2009. However, this one is like the grandpappy of them all! The checks will provide $1,200 for each adult and an additional $500 per qualifying child. So, that’s $2,400 dollars for each couple filing jointly plus $500 per child claimed in the household under the age of seventeen. One thing to note is that the benefit begins to phase out at a rate of $5 for each additional $100 in annual household income.
What this means is that a single person earning $75,000 per year begins to phase out. If you’re the head of household, you will begin to phase out with an adjusted gross income of $112,500. Married couples filing jointly begin to phase out at a combined $150,000 adjusted gross income. Complete phase-out begins at $99,000 for singles and $198,000 for married couples filing jointly with no children.
The Department of Treasury will be using the IRS records to send checks out to families, hopefully, as soon as possible. They will base the amount on your 2018 tax filings unless you have already filed for 2019, in which case, they will use the information from that filing. Likewise, if you received your tax refund via a direct deposit, that’s how you will receive your stimulus check. If you must receive a paper check, this typically adds 2-3 weeks to the wait time.
Begin with taking care of necessities. If you need groceries or household supplies such as the increasingly valuable toilet paper, buy them! Next, see if you can pay off any outstanding debts. This is a great opportunity to remove the oppressive weight of debt with cash that you didn’t expect to have. Another option is to save for the future. Place the money into a savings account or your retirement fund to prepare for your future needs. Finally, if you don’t need the money then donate it.
If you plan to donate it, do a little research. According to 501(c)(3), there are some charitable organizations that are eligible for the SBA lending program. However, religious organizations are not. So if you have a particular church or religious organization that you love, this is an excellent way to show them that you love them.
Section 2202 has been drafted to include hardship distributions. Under the proposed legislation, the 10% penalty early withdrawal fee will be waived for withdrawals up to $100,000 from a retirement plan or an IRA. There are some standards that must be met to be eligible for the waiver though. These include being diagnosed with COVID-19, having a spouse or dependent diagnosed with COVID-19, experiencing financial hardship as a direct result of COVID-19 (quarantined, laid off, lack of child care because of the disease, etc,…), and various other factors determined by the Treasury Secretary.
In addition, Section 2202 doubles the current retirement plan loan from the lesser of $50,000 or 50% of the current balance to the lesser of $100,000 or 100% of the current balance. Not only that but if you have an outstanding loan from your plan with a repayment due date between the enactment of the Senate CARES Bill and December 31, 2020, you can delay your repayment for up to one year.
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Section 2203 waives the requirement for individuals above the age of 72 to withdraw money from their qualified accounts. The reason for this — also why I would caution anyone from reaching into their retirement accounts right now — is that the market is down right now. The loosening of this previous mandate could be a big help in the long-term health of your retirement accounts.
There is a lot of language in the Senate CARES Bill that deals with retirement. Section 3608 targets the single-employer defined benefit funding rules. It provides some relief by extending the window for companies to meet their funding obligations. Under the amendments in Section 3608, business owners will have until January 1, 2021, to make contributions that would otherwise have been due in 2020.
The stimulus bill has proposed tax credits for businesses, allowing them to defer their payroll taxes so that they can continue paying employees. The payroll taxes can be delayed for two years with half of it being paid on December 31, 2021, and the other half on December 31, 2022. This is where you definitely want to speak to your tax advisor. I’m not sure that I would want to do this in my own business but the bill does allow it. The idea behind this portion of the bill is that it could benefit larger companies that pay enormous taxes on their payrolls.
In order to help cover operating costs, the bill has proposed $10 billion for grants to businesses. Each business could receive up to $10,000 to help with the operating expenses. Basically, this is the government’s way of saying, “Thank you for keeping the nation employed and for taking the risk involved in owning a business” to business owners.
The IRS has extended the deadline for tax filings to July 15, 2020. Likewise, the deadline for IRA and HSA contributions has also been extended. Once again, this is not tax advice and you should speak to your tax advisor to determine what the best plan for your individual situation is. However, something to think about is that Net Operating Losses (NOL) from 2018-2020 can be carried back five years. The changes also remove the taxable income limitation, allowing NOL to fully offset income.
Furthermore, interest expenses have been increased from 30% to 50% of the taxable income — with some adjustments — for 2019 and 2020. Again, speak with your tax advisor about this because it may impact the decision on when you should file your corporate taxes.
Student debt has been a hot-button issue for a while now and the Senate CARES Bill includes some provision to aid people who are still paying off their student loans. We can pause the payment of federal student loans until September 30, 2020, without interest. That’s not really new. But where this gets interesting is where the bill offers the ability to count these six months of no payments for purposes of any student loan forgiveness program, including public student loan forgiveness. Now, I don’t know exactly what those purposes are at this point but it will be interesting to watch as they unpack this section of the bill.
In addition, it also gives your employer the ability to pay up to $5,250 of your student loans tax-free. This is a great benefit for businesses that hire students right out of college and agree to pay their student loans – a common practice in hospitals. Now they can make payments on some of the debt without paying taxes on it.
Hopefully, the Senate CARES Bill is signed by the President in the next few days. In the meantime, I wanted to help you to make sense of some of the information included in the bill. Over the next few weeks, we will be speaking with some of the experts who can shed even more light on the how’s and why’s of this bill. I hope you’ll take the information you find here and speak to your tax advisors to see which of these changes is the most beneficial to you.
If you have questions about this Bill and its effect on your business, reach out. Our trusted advisors are here to help you through this challenging season.