The ‘noise-to-signal’ ratio is really high right now when it comes to COVID-19 related relief that might be useful to your business. This article is an attempt to cut through the noise and to provide you with (1) concise summaries of changes in the law that may be important or useful to your business, and (2) actionable advice.
UPDATE: Small businesses and sole proprietorships can apply for a PPP loan beginning Friday, April 3rd. Here is the sample application.
SBA Financing Under the CARES Act
What is it?
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) includes significant financial relief benefits to qualifying small businesses with <500 employees.
The SBA currently has two major offerings for businesses facing COVID-19 related challenges: (1) Paycheck Protection Program under 7(a), and (2) Economic Injury Disaster Loans.
Important Note: If you are a VC-backed startup, you may be ineligible for SBA loans unless your investors are willing to waive certain control rights. (This is an issue in currently in flux so please check with your legal counsel.)
If you are eligible, you should strongly consider applying for the Paycheck Protection Program as the terms are highly favorable.
Paycheck Protection Program (PPP)
The PPP authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. The key terms are as follows:
- Borrow up to 2.5 times your business’s average monthly payroll costs .
- “Payroll costs” means the average monthly salary, wages, commissions, or tips (capped at $100k annually for each employee), plus employee benefits, plus State and local taxes assessed on compensation.
- 2 year term.
- 1% interest rate.
- All payments deferred for at least 6 months.
- No collateral or personal guarantee is required.
- PPP loan funds may be used for payroll costs, rent, utility costs, and certain interest on debt.
- This loan is forgivable in 8 weeks, IF (1) loan proceeds are used to cover payroll costs, rent, utility costs, and certain interest on debt, and (2) employee and compensation levels are maintained.
- Forgiveness will be reduced in proportion to how many of your employees you retain and at their current pay.
- Small businesses and sole proprietorships can apply for a PPP loan beginning Friday, April 3rd. Here is the sample application.
Economic Injury Disaster Loan (EIDL)
The key terms are as follows:
- Up to $2M in financing.
- 30 year term.
- 3.75% interest rate.
- Loans may be used to pay payroll costs, fixed debts, accounts payable and other bills that can’t be paid because of the disaster’s impact.
- Personal guarantee likely required.
- Disbursed to borrowers on a first come/first serve basis, so do not delay.
EIDL $10k Advance
If you apply for an EIDL, you can receive a $10k loan advance. Funds will be made available within three days of a successful application, and will not have to be repaid.
Important Note: You can apply for both an EIDL and a PPP loan, however, you’d need to use the loan funds to cover different expenses. For example, you could use the PPP loan funds to pay payroll expenses, and the EIDL for rent.
Considerations for VC-Backed Companies.
If you are a VC-backed startup, you may be ineligible for SBA loans if your investors (1) own more than 50% of the company, (2) control the board, or (3) have the ability to block “day-to-day” operational decisions (e.g. paying dividends, employee comp, changing equity incentive plans, etc.). Investment agreements may be amended to reduce investor control in order to be able to apply for and receive SBA loans. Please contact us if you need assistance in making this determination.
- Discuss SBA loans with your board of directors, if applicable.
- If you are a VC-backed startup, work with your legal counsel to confirm whether you are eligible for SBA loans, and if not, what changes must be made in order to become eligible
- Begin gathering information for the PPP loan application in preparation for submission on April 3rd.
- Contact your bank to confirm whether it is an SBA lender and to confirm the process for submitting your application.
- Consider applying directly to the SBA for a Disaster Loan. (The SBA website has been overloaded, so you may be required to do this one on paper.)
Deferring Tax Payments
Employers May Defer Some Payroll Tax Deposits Due on Monday. The employer’s share of the 6.2% Social Security tax is not required to be paid on its normal deposit schedule as part of payroll. Instead, amounts due between now and December 31, 2020 may be paid 50% on December 31, 2021 and 50% on December 31, 2022. More details to come.
Employee Retention Credit. Employers that fully or partially suspend operations or experiences >50% decline in gross receipts due to COVID-19, are eligible for a payroll tax credit equal to 50% of all wages paid to employees between March 12, 2020 and December 31, 2020 up to $5k credit per employee.
Tax Deadline Extended. The deadlines to file and pay federal income taxes have been extended to July 15, 2020.
- Contact your accountant and/or payroll provider to discuss deferring payment on payroll taxes.
Families First Corona Virus Response Act (FFCRA)
What is It?
If an employee is unable to work due to COVID-19 related reasons, employers are required to provide employees with paid leave. Requirements are summarized in the below chart.
|Reason Employee is Unable to Work||Amount of Paid Leave|
|Quarantine or shelter-in-place order, or seeking a diagnosis for COVID-19 symptoms||Up to 2 weeks of paid sick leave at the employee’s regular rate of pay (capped @ $511 daily and $5,110 total)|
|Caring for someone in quarantine||Up to 2 weeks of paid sick leave at ⅔ the employee’s regular rate of pay (capped @ $200 daily and $2,000 total)|
|Caring for child who’s school or childcare is closed due to COVID-19||Up to 12 weeks of paid sick leave at ⅔ the employee’s regular rate of pay (capped @ $200 daily and $12,000 total)|
Employers receive 100% reimbursement for providing paid leave. Employers may deduct amounts paid to employees on a dollar-for-dollar basis against payroll tax liabilities, and/or request a prompt refund from the IRS.
Employers with <50 employees may be exempt from the requirements to pay leave to care for a child whose school or childcare is closed if “the viability of the business is threatened”.
The FFCRA goes into effect on April 1st.
- As required by law, distribute the FFCRA notice poster to your employees.
- Check with your payroll provider to confirm whether their platform will support COVID-19 related paid leave, including the payroll tax deductions.
Small Business Emergency Relief Grant. Denver will make grants of up to $7,500 to small businesses most impacted by the COVID-19. The grants will be made monthly, with the first applications due March 31, 2020.