There has been a lot of confusion surrounding the SBA loans available through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. I admit that I don’t know how it will all work, yet, but I thought I would share what the law actually says and some of my thoughts on it.
SBA Loan Program
The main topic has been the loan program. These loans differ from the disaster loans previously available through the SBA because these loans are potentially 100% forgivable (the principle, that is).
Any business with fewer than 500 employees is eligible. The loans are capped at the average monthly payroll costs per month times 2.5. The average monthly cost is considered over the last year, but it is capped at $100,000 per employee.
The loan is forgivable if it’s used to pay payroll, mortgage interest payments, rent, and utilities. Only the original principle is forgivable, and I have seen differing numbers on the amount of interest. The Act says interest not to exceed 4%, but I have been quoted less. The term for repayment of anything not forgiven is not to exceed 10 years.
Forgiveness is not guaranteed, however. Between February 15, 2020, and June 30, 2020, if a business reduces the number of employees or decreases their pay by more than 25%, the loan may not be forgiven. If layoffs have already occurred, businesses are allowed to rehire before June 30, 2020.
All of this is different from the SBA Economic Injury Disaster Loans that were previously offered, but my understanding is that those loans can be refinanced or included in a forgivable loan.
I am not a tax professional so I will not try to pretend to be one. Here is my understanding of what is offered:
Businesses can defer their payroll taxes between March 27, 2020, and December 31, 2020. Those deferred payments are due in two installment payments: 50% on December 31, 2021, and 50% on December 31, 2022.
The treatment of Net Operating Losses, business interest, and Alternative Minimum Tax Credits has changed. I am not going to try to explain these things. Talk to your CPA.
Relief for Individuals
Unemployment benefits have received a boost from the federal government. If an individual has used all of their state-based unemployment benefits, they can receive the same, continuing benefits for an additional 13 weeks. In addition, employees are eligible for an additional $600 per week for up to four months.
Rebates are being offered, as well. The government is sending $1200 per person with an adjusted gross income of less than $75,000. The AGI will be taken from your 2019 taxes, or if they haven’t been filed, from your 2018 taxes. Individuals will also receive $500 per child. These are being called an ‘advance refundable tax credit.’ My understanding is that they will not need to be repaid.
All payments for federal student loans are suspended. Any missed payments will not be reported to credit agencies. I saw nothing about whether interest is being forgiven. My guess is that interest will continue to accrue, much like what we are seeing with rent and evictions.
Borrowers facing financial hardship can request forbearance for any federally backed mortgages. The forbearances can be granted for a period of up to 180 days with another extension of 180 days. No fees or interest will be charged during that time. There is also a stay on foreclosure actions for 60 days beginning March 18, 2020.
Individuals may also remove up to $100,000 from their qualified retirement plans without penalty. Those funds will be subject to income tax, but the tax can be spread over three years beginning with 2020.
There are other benefits available, but I only wanted to hit the big issues.
What does it all mean?
The SBA loans seem like an obvious choice for most small businesses, but I have some concerns. For example, if, like many businesses, you have already laid off workforce due to the slowdown, you may be in a strange situation where you will need to rehire those employees before June 30, 2020, with or without an economic improvement.
I’m also not clear on the interest rates being offered, nor is it clear when these funds will actually make it to businesses in need. I have been in contact with some commercial lenders and they all seem a bit uncertain about the process.
I’m not clear on the benefits of the tax provisions. The deferred payroll tax seems favorable, but the taxes will still be due. I will need to discuss with a CPA to get a better idea of how these provisions work together.
For individuals, there will more funds available for unemployment benefits and checks will be sent directly to people in need. Those benefits are great, but no word on when money will be available. I have no idea how the unemployment applications are being handled, especially given a reduced workforce. The number of applicants is unprecedented. No word on the timing of those payments. The rebates should be directly deposited by April 15, but the paper checks will be delayed through the summer. All great measures, but will they get to people in time?
Bottom line is that there are a lot of unknowns in all of this. I will do my best to update this as things progress. If you are a business considering an SBA loan, please feel free to contact us. We are currently helping businesses navigate the application process, and we’d love to help.