The Cares act, or short for the “Coronavirus Aid, Relief, 2 and Economic Security Act’’. Was just passed at the end of March 2020 and most Americans are expecting to receive a check of $1,200 from the government in the next few weeks. However, if you make more than $75,000 or $150,000 for a married couple you may receive a reduced amount or nothing at all.
Don’t panic, if you are a high earner or a small business owner you may have a chance to get far more than the rest of America buy using the TITLE I—KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT portion of the bill.
In essence, one must take out an SBA 7(a) loan from a bank, keep payroll similar to the level that you had in the past and then apply for loan forgiveness. Sounds easy right? Well let’s dig in. If you prefer watching, I have a video that is about 25 minutes that goes into the bill below. Or if you prefer reading the entire CARES bill can be found here.
Want the TLDR?
If you have a small business or receive a 1099-Misc, earn less than $100,000 per year, then you may be eligible for a SBA 7(a) loan which is forgivable AKA FREE MONEY, and much more than the $1,200 that the media keeps talking about.
CARES Act Small Business Loans VIDEO
The SBA 7(a) program and the CARES Act
The Cares act is going to force small business owners to jump through some hoops, but the rewards are going to be huge and hopefully, will help your business survive in the covid-19 era.
Let’s start with who is eligible. If you work for someone as an employee, there is no reason to keep reading, it will only make you jealous as you learn how much more the owner of your company will get. Now if you are the owner of a S-corp, or a C-corporation, and LLC, Partnership, sole proprietor, or an independent contractor keep reading.
Check your tax returns do you normally receive a 1099-misc? As a small business owner do you issue yourself a W-2 that is under $100,000? If so keep reading.
Here is the Title of the first section of the Cares bill:
DIVISION A—KEEPING WORKERS PAID AND EMPLOYED, HEALTH CARE SYSTEM ENHANCEMENTS, AND ECONOMIC STABILIZATION TITLE I—KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT
The very first words in the first section are KEEPING WORKERS PAID AND EMPLOYED.
The bill is clearly designed to keep the unemployment stats down by keeping people on the payroll during this corona virus crisis. The way to do this is to provide small loans (up to $10,000,000) to small businesses, which will be forgivable if the business owners maintain their payroll. Sounds easy right? Well let’s dig into some of the key provisions.
IN GENERAL.—Section 7(a) of the Small Business Act (15 U.S.C. 636(a)) is amended—
Again in the beginning, they are stating that the program that will be used for this stimulus package is the SBA Section 7(a) loan. If you walk into a bank and they offer you another solution it may not be FORGIVABLE, which is the key. You are searching for a solution that is also FREE MONEY, as long as you play by the rules.
The first thing that a small business owner needs to do is look at their payroll for the last 12 months, here is the language around that:
the term ‘payroll costs’ ‘‘(I) means— ‘‘(aa) the sum of payments of any compensation with respect to employees that is a— ‘‘(AA) salary, wage, commission, or similar compensation; ‘‘(BB) payment of cash tip or equivalent; ‘‘(CC) payment for vacation, parental, family, medical, or sick leave;
†HR 748 EAS
‘‘(DD) allowance for dismissal or separation; ‘‘(EE) payment required for the provisions of group health care benefits, including insurance premiums; ‘‘(FF) payment of any retirement benefit; or ‘‘(GG) payment of State or local tax assessed on the compensation of employees; and ‘‘(bb) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period;
Notice section (bb) above which allows for independent contractors (think UBER drivers) and sole proprietors (think a one person tax firm, or a small restaurant). This was a provision that they put in the the last minute as they realized that the backbone of our economy would not be able to survive off of the $1,200 as they probably wouldn’t also be covered by unemployment insurance. As a side note, I’m not sure if I could “fire” myself from my one person S-Corporation, and then claim unemployment insurance. Maybe I could but the way that unemployment insurance can scale back your check if your business gets some income in the door, I don’t think I would be eligible to receive anything from that program.
So the government was looking out for those of us who run small businesses, in fact, I argue that they are doing everything possible to keep small businesses alive with these provisions.
Who isn’t elibible:
shall not include—
†HR 748 EAS
‘‘(aa) the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;
any compensation of an employee whose principal place of residence is outside of the United States;
Seems pretty straight forward, wages need to be under $100,000 and you need to live in the US to be eligible.
business concern employs not more than the greater of— ‘‘(I) 500 employees;
I know that a larger small business with say 400 employees could use this rather than laying off their work force, but I’m not sure it actually pencils out to keep people on the payroll if the stay at home type of shut downs extend into the summer.
IN GENERAL.—During the covered period, individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals shall be eligible to receive a covered loan.
This section further notes that independent contractors or GIG economy employees are covered.
WOW that’s a lot of hard to understand legalese isn’t it? I’m pretty sure that it says that you can take your average monthly salary (as long as that yearly salary is less than $100,000) and multiply that by 2.5 and ask for a SBA 7(a) loan in that amount to cover payroll.
Can I use my SBA 7(a) loan for personal expenses?
What do you have to pledge to get a Cares SBA loan?
How Much does a Cares Act Loan Cost?
Don’t sleep on this section, it is saying that you are agreeing to the terms that they are laying out and pledging to play by their rules by basically keeping your payroll up and not spending the money on a new RV.
They also require no collateral and no personal guarantee (WHICH IS HUGE!!!):
‘‘(J) WAIVER OF PERSONAL GUARANTEE REQUIREMENT.—During the covered period, with respect to a covered loan—
†HR 748 EAS
‘‘(i) no personal guarantee shall be required for the covered loan; and ‘‘(ii) no collateral shall be required for the covered loan.
What are the Terms of a SBA 7(a) CARES Loan?
You Must Demonstrate Hardship from Covid-19 to be Eligible
Do I Have To Pay Back My SBA 7(a) CARES loan?
Are there Limits to the Forgiveness?
Can you get the $1,200 and get an SBA loan?
If you are in the gig economy, say a lyft or uber driver, I think you are going to be qualified to essentially double dip. The Cares bill allows independent contractors to get the SBA loans, which means that you can get 2.5 times your monthly earnings. If those earnings are less than $100,000 per year it seems likely that you would also qualify for the $1,200 check.
Should I get a CARES SBA Loan for my Small Business?
If you hate FREE MONEY, then no. Otherwise, run to your bank and ask for one, just make sure that you stand 6 feet behind what should be a HUGE LINE!
Do the math on this. Let’s say that you pay a W-2 wage to yourself of $5,000 per month for your small tax preparation business. You can apply to get $12,500 loan at a 4% interest rate that you don’t have to start paying back for at least 6 months, and then if you don’t cut your own wages, you get the entire $12,500 loan forgiven, yes FREE MONEY!!! Way more than you would get with the Trump signed $1,200 checks that the media is so focused on.
Personally, I’m going to go to the bank this morning 3/30/2020 and will update this post with my experience there.
Update 3/30/2020 My First Trip to the Bank
Went to the opening of the nearest bank that I use for my business. They had a line of about 10 of us, spaced out appropriately. Manager comes out and says only 4 people inside at a time. As the gatekeeper she directs people to their destination, first 4 people say teller so she lets them in. I say sba 7 loan. She says oh for the stimulus?
I say yes, she says: “we don’t have that here, you have to apply online.”
So I come home hop on their website, and just like this morning there is no option for a paycheck/Cares loan.
I then search on the web and find the national SBA site, which currently has three sections.
- What is it
- Who is eligible
- Other resources
The other leads you down a rabbit hole to nowhere. AS IN YOU CAN’T CURRENTLY GET A LOAN FOR THIS!!!
Imagine all of the paperwork that needs to be pushed to document and give out these loans. There is no way that our banking infrastructure is set up to do this for awhile. My guess is that links to applications will start showing up by Friday the 3rd of April, but they won’t be able to process it for weeks if you can even get that far.
I received my PPP Loan on May 1
My journey with the Payroll Protection Program is mostly complete. I received my loan on May 1 after the second round of funding. As I’m sure you know the first round was gobbled up by large businesses. After a social backlash for all of the large companies, like the Lakers, Shake shack, etc. the banks started to push out smaller loans.
My understanding is that banks get 1% for huge loans and 5% for micro loans. So if they loan out $10 million they get $100,000 in fees. On a $10,000 loan they are looking at $500.
Assuming it takes say an hour worth of administrative time to deal with the SBA paperwork. Would you rather get paid $500/hour or $100,000?
This is a clear failure in the design of the law that ensured that the big companies got money way before the small companies.
The larger question that taxpayers should ask is: “why are the banks getting paid for this? Why didn’t the SBA just do it all directly?”
I would think that our technology has evolved to the point where paperwork could be filled out online and that the government should know enough about all of the companies from their tax records, 1120’s, schedule c, 940-941 that they should have been able to do the legwork rather than giving away all of that money to banks.
Not investment advice, but I’m thinking that giving all of this highly profitable business to banks can only be a positive to their share prices.
This post is for discussion purposes only, it is not legal or tax advice. Please consult your legal or tax adviser for full details on how the CARES act will apply to your situation.