Quick note: As of right now – this is still evolving. I will update this post as necessary. The last update was 1:18 PM EST 3/30/2020.
Last week, the United States Senate passed what looks to be an extraordinarily impressive stimulus bill, with provisions for almost every part of the economy. On Friday, the House of Representatives took up the bill, and with its approval, it arrived on the President’s desk that night. The text of the law was made available shortly thereafter. I wanted to highlight some of the areas which can be of best help to our clients and their employees. By no means is this guide comprehensive to every feature of the law, and by no means am I a lawyer or anyone who can interpret every line of this 800+ page document. However, I have been carefully looking through what resources are available in crafting this guide. Updated on Monday the 30th: The SBA has started populating their site with details.
Before we get started, I want to clarify the three stimulus motions under consideration or already in place:
- Phase I: This included $8.3B in emergency appropriations and became law on March 6th, and also included SBA disaster loan provisions.
- Phase II: Also known as FFCRA, this was $800B, which included paid employee leave and various IRS credits. This became law on March 18th.
- Phase III: Also known as the CARES Act or HR748, this is the document which we are discussing in this post. This is currently in the process of being voted on and includes in the area of $2T in spending.
I want to also clarify for anyone reading: I am going to cover the items of most use to my particular industry, clients, etc. As such, areas that address covering seasonal wages or tips, other scenarios similar to that, will not be heavily covered in this post.
For Companies < 500 Employees: Forgivable Loans
In my opinion, this is the most important part of this bill for small to medium businesses. First, who qualifies. Right now, the bill is written to include organizations under 500 employees, including businesses, non-profits, veterans organizations, and tribal businesses. Also included are individuals who operate as a sole proprietorship, independent contractors or are self-employed. Of course, there are many nuances involved, but these are the general guidelines as of right now.
The program is for quick loans and utilizes the SBA’s existing 7(a) loan program as the methodology for facilitating the transactions. Now, for the covered items… The loan can be structured to include the following:
- Your previous year’s monthly average total payments for payroll multiplied by 2.5, to a max of $10M. (There was some debate about if this figure was 4X or 2.5X. The latest text stipulates 2.5X average payroll only).
This means you can take the average expenses for those items in the previous year and use that as a basis for calculating your maximum loan amount. The loans are 100% covered by the SBA and, therefore, the federal government. Unlike other loans, there is no personal guarantee required by the borrower. Likewise, there is no collateral required. There are no application fees and no requirement that you prove the inability to get funding elsewhere. And if you go by the word of the Secretary of the Treasury, Steven Mnuchin, there will be fast approvals and same-day fund transfers. Yes – it almost sounds too good to be true – but there’s more…
The most interesting part is that the loans feature a forgiveness clause. If you can meet this requirement, you can apply for 100% forgiveness, expect perhaps the interest accrued: during the eight weeks following your receipt of the loan, you must maintain the same amount of full-time employees that you employed in the same period the previous year (in the case of seasonal employment) OR from 1/1/2020 to 2/29/2020. This means, if you do not lower your workforce, you are eligible to have up to 100% of the loan written off and forgiven. If you were to reduce the salary of your employees, the amount you lower will be owed and not forgiven.
So, it seems that the federal government has, in effect, created a grant program aimed at making sure employers maintain employment levels. And provided you do, your loans will be 100% forgiven.
Update: Marco Rubio's office put a great synopsis out today. Read it!
For Employers: Deferred Payroll Taxes
Many employees don’t even know this – but when you have a full-time employment agreement, your employer is paying an additional payroll tax of 6.2% for the first $137,700 of salary. The stimulus allows your employer to defer all remaining 2020 payroll taxes, with the stipulation that they must be paid in full by the end of 2022. The payment would be 50% due in 2021 and the remainder the following year.
This is an instant 6.2% deferment of every dollar spent on payroll, which employers remit twice per month to the federal government. Every penny helps, and this helps too. Remember, the feds already extended the filing deadline from April 15th to June 15th, and also removed all interest and penalties from companies who owe a balance. As such, they have improved short-term liquidity. Though, again, keep in mind that these payments will be due in the future.
For Employees: Cash Payments & Stronger Unemployment
Employees may qualify for an immediate cash payment from the federal government. But, it does limit out based on income. Individuals qualify for a $1,200 payment, and couples $2,400. Also, there is a $500 per child allowance. Your qualification is based on your 2019 tax return, and if not filed, 2018. The benefit phases out at $75,000 for individuals and $150,000 for couples. By the time you reach $99,000 and $198,000, respectively, you are completely phased out of the benefit. I’m unsure right now how these payments go out – either via check or some have rumored debit cards.
Also, if you have been laid off as a result of this crisis, the federal government is supplementing unemployment insurance that you may already receive in your state, up to $600 per week for four months. Also, it expands this to cover self-employed and independent contractors – also known as the gig economy participants.
I think it's important that we see this as a "step" in what will be a long process. I read an interesting article on Axios this afternoon that puts it in perspective. "The idea is to freeze time for a month or six weeks and let people emerge with not a huge amount of debt — not starving, not being evicted." The point here is, this step stops the bleeding, keeps people in their homes and away from total economic destruction, but it is not a long-term fix. Therefore, we should expect further steps down the line. I would recommend that all business owners keep a careful eye on the programs being offered by the government, because not taking advantage of them would be an unnecessary risk.
This is all evolving very quickly – we will update this post as the news updates with any additional information that may be made available. Thus far, however, this seems to be a good bill for business owners. Hopefully, some of the tools provided will help businesses in turmoil weather this storm.