After some short deliberation in Congress, the Coronavirus Aid, Relief, and Economic Security Act (CARES) was signed into law on March 27. At TaxAct, we have spent countless hours reading the law, viewing informative webinars, digging through analysis, and making direct contact with the IRS. While there will be continued clarification around the law, including IRS news releases and notices, I’m here to try to help break down how this law impacts small businesses.
Paycheck Protection Program
Let’s start with business loans.
If you have a small business – meaning you have 500 employees or less – it may qualify for a Paycheck Protection Program Loan. Sole proprietorships, independent contractors, and other self-employed individuals all qualify as a small business. Your business must have paid salaries and payroll taxes for employees or contractors. Additional qualifications for this loan include:
The loan is necessary for your business because of the economic uncertainty caused by COVID-19. The loan will be used for allowable purposes (described below) for your business. You are not receiving duplicate funds for the same uses from another Small Business Administration program.
What are the allowable purposes you ask? That means eligible payroll (such as employee salaries, paid sick or medical leave, etc.), mortgage interest, rent, pre-existing debt, and utility payments.
This is intended to be a low-interest loan, and the best part is that some of the loan is forgivable. If you use the loan proceeds for any of the allowable purposes (with at least 75% used for payroll) within the first eight weeks, the loan balance will reduce, and you won’t be taxed on the forgiven amount. The maximum amount of this loan is $10 million, subject to other limitations.
Congress has authorized up to $349 billion dollars for this loan program, and it’s scheduled to run through June 30, 2020. For more information, please refer to the Department of Treasury’s fact sheet, which includes more details on how to apply.
SBA Economic Injury Disaster Loans
Another type of loan that may benefit small businesses is a Small Business Association (SBA) Economic Injury Disaster Loans. The SBA works with states to provide low-interest federal disaster loans for businesses that are experiencing a substantial economic injury from the COVID-19 outbreak.
The maximum amount of the loan is $2 million and can be used to pay off debt, payroll, and other bills that cannot be paid due to COVID-19. Some borrowers can get an advance on the loan, with up to $10,000 of the loan considered a grant that does not have to be paid back. See the U.S. Small Business Administration Disaster Assistance website for more information.
Unemployment and Small Businesses
Traditionally, if you are self-employed or consider yourself an independent contractor, you can’t claim unemployment compensation. The CARES Act now allows you to claim federal unemployment compensation for up to 39 weeks, which takes you through the end of 2020.
There are a few stipulations. For example, if you can telework, you are ineligible. But if you are forced to close your business, you likely will qualify for this benefit. The three benefit components are:
$600 of supplemental state-paid unemployment compensation for those who already qualify $600 plus the regular state unemployment rate provided by a pandemic unemployment program for those who are not normally eligible forContinue reading