The Cares Act and the Paycheck Protection Program: What is Important Going Forward?

January 11, 2021

During the initial phases of the COVID-19 pandemic, it became apparent that government intervention was needed to save a crashing American economy. To address the economic crises, the Trump administration signed the CARES Act into law, including the Paycheck Protection Program. However, with a program plagued with fraud and undercapitalized, a new program has been established.  Below is a reminder of the original program and what has changed in the new.


The Background

The CARES Act: This $2 trillion program divides relief in the following ways:

  • Individuals: ~$560 billion in the form of stimulus checks.
  • Big corporations: ~$500 billion in the form of bailouts.
  • Small businesses: ~$377 billion
  • Other (mostly government programs): ~563 billion


The Paycheck Protection Program (PPP) is a loan program designed to incentivize small businesses to continue to pay their employees as part of the CARES Act.


What was Essential to Small Businesses?

For small businesses, the most notable features of the Cares Act are as follows:

  • The government defines small businesses as companies with 500 or fewer employees.
  • $10 billion of grants are outlined in the bill.
  • Individual companies are entitled to up to $10,000 in emergency grants to cover "intermediate operating costs."
  • The bill outlined $350 billion for the Small Business Administration's Paycheck Protection Program.
  • Individual companies are entitled to up to $10 million in loans.
  • $17 billion was allocated to "cover six months of payments for small businesses already using SBA loans."


Overall, the CARES act and the Paycheck Protection Program's incentive seems to be for the aid of small business employees. The legislation accomplishes this through forgivable loan payments to small businesses with continued employment as a condition.


The CARES Act and Paycheck Protection Program also spell out specific changes in expenses and deduction rules to allow small businesses to have an easier time keeping workers on their payroll and staying open during the pandemic (NPR). According to the Small Business Administration (SBA), PPP loans have a 1% interest rate. Loans issued before June 5 have a maturity of 2 years, loans issued after June 5 have a maturity of 5 years, no collateral or personal guarantees required.


CONGRESS APPROVES ANOTHER ROUND OF PPP

On December 27, the US Federal Government approved a new $900 billion stimulus bill. About a third of the stimulus ($284 billion) will be allocated to small businesses in the form of forgivable loans - part of a revamping of the Paycheck Protection Program (PPP). The government on Monday was set to reopen its signature small business pandemic aid program with $284 billion in new funds and revamped rules that aim to get cash to the most needy businesses while stamping out fraud and abuse.


Changes to the PPP

PPP loan applications will officially be reopening after being closed since August. The funding in this round is significantly smaller than the CARES Act - a difference of over 300 billion.


Key changes:

  • A maximum loan amount of $2 million
  • Businesses that received a PPP loan the first time can apply for a second loan under the new PPP, with certain restrictions.
  • Employee maximum reduced from 500 to 300.
  • Loans can now be used for software and COVID-19 protective equipment.
  • Expansion of loan forgiveness up to $150,000, given 60% of the loan being used for payroll.
  • Simplified application.
  • 501(c)(6) non-profits now qualify for financing.


Other Guidelines:

Businesses that were initially unable to secure financing will be granted access to the application and select businesses that already received PPP financing through the CARES Act.


An SMB's maximum loan amount can be calculated by multiplying your past year's average monthly payroll by 2.5. The total maximum is set at $2 million (compared to $10 million before).

Borrowers can choose their covered period within the range of 8-24 weeks.

PPP financing can be used for payroll, operations, supplies, rental and mortgage costs, and damages. Expenses paid with PPP loans are tax-deductible.


Eligibility:

To be eligible for the program, you must be a small business with fewer than 300 employees that experienced revenue losses of at least 25% from the first to the third quarter of 2020 compared to the same quarter of 2019. You must also continue to have workers on your payroll.


In the Future: A Biden Presidency

President-Elect, Joe Biden has noted essential changes in small business relief. The Biden administration plans to implement the following small-business-related measures under the "Make It Work" checklist:


  • Implementation of a national work-sharing program for employers to utilize instead of laying off workers.
  • Ensure equitable and speedy access to relief for all small businesses.
  • Focusing substitute for small companies rather than large corporations and financial institutions.
  • Establishing strong accountability and transparency policies.
  • Establishing a CARES Act Implementation Office to ensure ease of access to knowledge about the government program.
  • Begin work on a fourth stimulus package.


See above, on the Joe Biden campaign website at https://joebiden.com/the-biden-make-it-work-checklist/.


Overall, it seems that the Biden administration intends to expand government relief, explicitly focusing on small businesses and other areas the previous package seemed to leave out. To date, the PPP has distributed $525 billion through more than 5 million loans.

What Documents Do You Need for a Business Loan Application?

By Alex Hunter • December 18, 2020
A business loan could be just what you need to jumpstart your company. Getting your documents ready in advance can expedite the loan approval process. Read this list so you can take the next step in getting financed as soon as you’re ready. Loan Letter Oftentimes banks want business loan applicants to provide a formal letter stating what they intend to use the loan for. Try to be as specific as possible with this. Example questions your loan letter should answer might include: How large of a loan are you seeking? Why is the loan needed? What do you need to purchase? How much will it specifically cost? How do you anticipate the business loan helping your business in the long run? How fast do you anticipate being able to pay off the loan? Bank Statements Most lenders require your business’s bank statements, and this will likely be one of the first things requested. Loan officers do this to ensure your business can actually afford to take out a loan as well as make the corresponding payments. Bank statements can also show how well you manage your company’s cash. On average, lenders ask for four months of bank statements, but it depends on the loan and the business. Tax Returns Next, you’ll need both personal and business tax returns. If you’re going to have a cosigner, he or she will need to provide returns as well. Generally speaking, you need to provide at least two years of tax returns (for both you and your business). As with bank statements, tax returns are used to gauge your financial health as well as your ability to repay a loan. If you’ve been running your business for two years, you’ll have a much easier time getting a loan. If not, you still have options, but many lenders like to see two years of business tax returns before they approve a loan. Business Permit or License Before a lender gives you a loan for your business, they need to verify that you are legally allowed to be running your business. Requirements vary state by state, so just make sure you are compliant with all local and state laws. It’s highly likely you’ve already done all of this. Collateral You may need to provide proof of collateral to your lender, especially if you are applying for an SBA loan. Depending on the loan amount, you may be able to use your house, car, or any type of specialized equipment you’ve purchased for your business. Just know that if you default on the loan, that collateral can be seized by the lender. Balance Sheet Your business’s balance sheet is used to determine your assets and to ensure you have enough income to pay back your loan. You will likely be asked for a year-to-date balance sheet, as well as the previous two years of balance sheets. Lease If your business is entirely online, then you won’t have to worry about this; however, if you have a brick and mortar shop then you’ll need to provide a copy of the lease. This shows that you’re able to conduct business. Debt Lenders need to know what kind of debt you already have, as well as your current debt payoff schedule. This is used to determine if you can take on any additional debt. You’ll need to be below a certain threshold for the lender to approve the loan, which is determined by your cash flow and existing debt. Typically this is referred to as a debt service coverage ratio (DSCR). Accounts Receivable and Accounts Payable How fast do clients pay you? If your business isn’t efficient at collecting payments, a lender may not be overjoyed to lend to you even though on paper your business may be profitable. You also need to show that you’re good at paying invoices, too. If you have a lot of outstanding invoices, it won’t be a good sign that you’ll make payments on time. Legal Agreements and Contracts If your business has any existing legal contracts or agreements, you may need to disclose each to your lender. Commons ones include: Equipment purchase agreement Franchise agreement Sales agreement Commercial real estate purchase agreement This is done so the lender understands your business on a holistic level and can better gauge its complete situation. Every lender is different in their exact requirements for applying for a loan. Check multiple offers with just one streamlined application with Naleu.

3 Tax Tips for Small Businesses with Debt

By Alex Hunter • December 14, 2020
Taking on debt as a small business can help in a number of situations, from providing the opportunity to expand to keeping your company cash flow positive while going through a rough patch. When you do get a small business loan or line of credit, there are a few federal tax considerations to keep in mind. Follow these three tips to minimize your taxes and ensure proper compliance. #1: Make Sure You Deduct Eligible Debt Interest  In general, the IRS allows you to deduct interest paid on most financing vehicles. Interest from term loans (both long-term and short-term) are eligible for this deduction, as are SBA loans. Lines of credit are eligible but the deduction may be limited depending on how much you actually draw on your line. Finally, the interest paid on personal loan funds that are used exclusively for business purposes also qualify. However, you cannot deduct interest payments on any of the money that you used for personal uses, so it may be helpful to have your accountant prorate the business-related interest. According to the IRS, the amount you can deduct may not exceed 30% of your adjusted taxable income. There are also some restrictions on deducting other loan fees. For instance, points and loan origination fees for any loans used for commercial real estate aren’t tax deductible. Also note that the loan balance itself is not deductible — only the interest you pay to the creditor. #2: Utilize the Bad Debt Deduction If your business has gone into debt and has unpaid invoices that you’re unable to collect, you may qualify for a Bad Debt Deduction . It’s treated as a loss that is considered worthless. The IRS classifies three types of business bad debt: Loans made to clients, employees, distributors, or suppliers Customer credit sales Business loan guarantees You’ll subtract this type of write-off from your business’s gross income in order to lower your tax liability. Also note that if you later recover some or all of the bad debt that you’ve written off, you’ll have to include it as part of your gross income, even in a later tax year. A tax accountant can be helpful in determining the best write-off method for your bad debt and which form should be used for your incorporation status. #3: Consider a Tax Payment Plan For businesses in debt with cash flow issues, it may be difficult to make tax payments to the IRS. Missing out on tax payments comes with a number of negative consequences, including a 5% penalty fee each month you’re overdue filing, and a 0.5% penalty fee for each month you’re late paying. Rather than incurring fees (and potentially leading to a tax lien on your business), consider applying for a payment plan with the IRS. There are options for both a short-term and long-term installment plan. The short-term option gives you up to 120 days to pay your tax debt and comes with no set-up fees. If you need more time, a long-term installment plan could be the best option. Set-up fees range from $31 to $225, depending on how you apply and what payment method you choose. If your company is struggling with various types of debt, stretching out your tax payments may give you some breathing room to focus on paying down other balances more aggressively. As you grow your small business and develop more complex financials, be sure to include a sound tax strategy to complement those changes. Utilize the expertise of a reputable tax accountant throughout the year. Also think about tax considerations as you choose the best type of financing for your company. Ready to compare options? Apply for small business financing with Naleu.