What Small-Business Owners Need to Know About the CARES Act

In an effort to minimize the spread of COVID-19, government-mandated stay-at-home orders have turned our world upside down. Nearly every aspect of our daily lives has changed and, unfortunately, much of the U.S. economy has come to a screeching, grinding halt. And small businesses are hurting. Many are getting pummeled by this unprecedented global pandemic. If you’re a small-business owner, here’s what you need to know about the brand-new economic stimulus package known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

What Is the CARES Act?

On March 27, 2020, President Trump signed the CARES Act, a $2 trillion coronavirus economic stimulus bill, into law. This is the largest stimulus bill in modern history (more than double the stimulus act passed during the 2009 financial crisis) and is intended to reduce the economic impact of the coronavirus on both individuals and businesses. 

What Help Is Available for Small Businesses?

 Of the total funds available under the CARES Act, 19% ($377 billion) is designated for small businesses across the country.¹ This money will be available primarily through:

• The Paycheck Protection Program (PPP)
• The expansion of the Small Business Administration’s (SBA) Economic Injury Disaster Loan (EIDL) Program

Let’s get one thing straight: Both of these programs require small-business owners to take loans. Yes, a L-O-A-N. That means you’re borrowing money. This is not a handout. You are not getting “free” money from the government. You are taking a loan. And at Ramsey Solutions, we never recommend taking on debt. Ever. Period. Full stop.

Here’s the thing: All debt is created equal, no matter who the lender is—and even when there is talk about some of these loans being forgiven down the line. You know that saying, “If it seems too good to be true, then it probably is?” Well, that’s pretty solid advice in this case. Listen to it! Remember, there is absolutely, 100% no guarantee that any of these loans will be forgiven.

We’re advising small-business owners to take a hard pass on the loans offered through both the Paycheck Protection Program and the Economic Injury Disaster Loan Program. That said, we know there are a lot of questions and confusion right now about these programs, so we wanted to present the facts as plainly as possible.

Want some good news? If you need to boost your cash flow right now, definitely take advantage of the changes the CARES Act has made to existing tax policies that affect small businesses, specifically:

• Employee Retention Credit
• Deferred payment of employer payroll taxes

Both of these tax credits put cash in your pocket—without borrowing a dime. That’s what we call a smart business decision.

Dave Ramsey breaks down why the PPP loan is actually a bad idea for business owners.

What Is the Paycheck Protection Program?

Funded by $350 billion in government-backed loans, the Paycheck Protection Program (PPP) is intended to help companies maintain their payrolls through June 2020.

Who’s eligible?

• • Companies and nonprofit organizations—in operation on February 15, 2020—with fewer than 500 employees
  • Self-employed individuals
  • Sole proprietors
  • Freelancers
  • Contract or gig workers (like Uber or Lyft drivers)
  • Select businesses with up to 1,500 employees (for more information, contact the U.S. Chamber of Commerce)

How much can I borrow?

You can borrow 250% of your average monthly payroll, up to $10 million. This includes wages for full- and part-time employees, as well as contractors. Any individual salaries over $100,000 are excluded, but you don’t leave out that payroll expense altogether. You simply cap that salary at $100,000 when calculating your average monthly payroll figure.

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Let’s run some simple numbers to break this down: If you’ve paid $120,000 in payroll over the past 12 months, divide that number by 12. Your average monthly payroll is $10,000. Multiply that figure by 2.5 and you get $25,000, which is the maximum loan amount you can apply for through the PPP.

Can I use a Paycheck Protection loan for things other than payroll?

Yes. You can use those funds to pay for:

• • Paid medical or sick leave for your employees
  • Mortgage, rent and utility payments
  • Insurance premiums
  • Other debt obligations

Do I have to repay this loan?

Here’s where things get tricky. And when it comes to money, we don’t do tricky. Borrowers must submit an application for forgiveness to their lender, and that decision (due within 60 days of application) is at the discretion of the lender. Translation: Your fate is completely in the hands of the lender. And p.s., the lender can say no to your request.

In general, your entire loan may be eligible for forgiveness if:

• • You don’t lay off any employees within eight weeks of receiving the loan.
  • You don’t reduce anyone’s pay who makes less than $100,000 by more than 25% within eight weeks of receiving the loan.
  • All borrowed funds are used for payroll expenses, mortgage interest, rent, or utility payments during the eight-week loan period.

Think about this, though. Let’s say you have to lay off someone or lower someone’s salary during those eight weeks. No, that doesn’t automatically mean you’re on the hook for the entire loan amount. But it does mean that the portion of the loan amount you would have used for those wages will not be forgiven. You’ll have to repay those funds—with interest. You may be able to make up some of that cost if you’re able to rehire that employee or bump up that salary by June 30, 2020. But again, there are no guarantees. Are you sensing a theme here?

Bottom line? The devil is in the details. You have to read every last bit of fine print. For real.

Here’s what we know for sure:

• • Your specific payback terms on your loan will be determined during the application process.
  • The interest rate cannot be more than 4% for up to a 10-year term.
  • Loans are available through June 30, 2020.

How Has the SBA’s Economic Injury Disaster Loan Program Been Expanded?

Through the Economic Injury Disaster Loan (EIDL) Program, the SBA has long offered financial assistance to businesses that have suffered losses due to federally declared disasters. The additional funds made available under the CARES Act simply expands their ability to do so across all 50 states.

Who’s eligible?

• • Businesses in existence on January 31, 2020, with fewer than 500 employees
  • Sole proprietors
  • Independent contractors
  • Most private nonprofits

How much can I borrow?

The maximum EIDL is $2 million at an interest rate of 3.75% for businesses and 2.75% for nonprofits with up to a 30-year team.

How can I access a $10,000 emergency grant?

Under the CARES Act, eligible applicants can receive a $10,000 emergency grant within three days of applying for an EIDL, through December 31, 2020. You only need an approved application—not an approved loan—to receive the $10,000 emergency grant. The grant does not need to be repaid, even if you’re ultimately denied for an EIDL.

If I get an EIDL, can I still get a PPP loan?

Yes, but if you receive funds through the PPP, the $10,000 emergency grant will be subtracted from the potential forgiveness amount on that loan. Ouch. You’ll have the option to consolidate the two loans by refinancing the EIDL into the Paycheck Protection loan—but that $10,000 grant will, sadly, still remain in the unforgiven funds category. And don’t forget, unforgiven funds come with interest attached to them.

It’s also important to note that the PPP doesn’t let borrowers take out two loans for the same purpose. In other words, you can’t use your EIDL to cover your April payroll if that’s what you’re using your Paycheck Protection loan for.

What Is the Employee Retention Credit?

The Employee Retention Credit is a tax break available under the CARES Act. If you’re eligible, this one’s a no-risk no-brainer.

Who’s eligible?

• • Any businesses, including nonprofits, that had to suspend operations—either fully or partially—due to a government-mandated COVID-19 shutdown order.
  • Any business with gross receipts down by more than 50% for the quarter compared to the same quarter in 2019.

How much of a credit will I receive?

That depends on how many employees you have. If you have 100 or fewer full-time employees, you’ll receive a 50% payroll tax credit for each of your employees up to $10,000—whether or not they’re furloughed due to the COVID-19 crisis. If you employ more than 100 people, only the wages of employees who are furloughed or working reduced hours due to the health crisis are eligible for the 50% payroll tax credit.

Regardless of the size of your company, the tax credit applies to wages paid March 13 to December 31, 2020, up to $10,000. One more thing: This credit is not available to employers who are receiving assistance through the PPP.

How Long Can I Defer Payment on My Payroll Taxes?

The CARES Act also allows small-business owners to defer paying their portion of certain payroll taxes through the end of 2020. All deferred amounts will be split into two equal installments, with the first due at the end of 2021 and the other due at the end of 2022.

The payroll taxes that can be deferred are:

• The employer portion of FICA taxes
• The employer and employee portion of railroad retirement taxes that are attributable to the employer FICA rate
• Half of the SECA tax liability

But again, this deferment is not available if you’re participating in the PPP. Yet another reason to avoid PPP, right?

Want to Know More About the CARES Act?

We’ve highlighted only a few parts of this comprehensive bill, but you can check out the CARES Act in its entirety here.