The Coronavirus Aid, Relief and Economic Security (CARES) Act has been in effect for a couple weeks now. This is the second part of our analysis of the $2 trillion legislation and how you can take advantage of it.
The Paycheck Protection Program for small businesses
The flagship provision for small businesses is the Paycheck Protection Program (PPP), which offers loans at 1% interest to businesses impacted by COVID-19. It also provides up to eight weeks of forgivable loans to cover payroll, health insurance premiums, rent and utility payments.
The loan can be for an amount up to 250% of an employer’s average monthly payroll and the loan forgiveness component is not taxable. Notably, independent contractors and self-employed workers can take advantage of the program as owner draws and distributions are considered payroll for the purpose of obtaining one of these loans. (Last week, the Small Business Administration announced it had reached its $349 billion lending limit and is no longer accepting applications; as of late last week lawmakers in Congress were debating proposals to extend the program by adding $250 billion more in funding).
Of course, the idea behind these loans are to protect jobs, so there are stipulations to that effect. Most importantly, employers must maintain existing staff or rehire employees in order to be eligible for debt forgiveness for the eight weeks following the date of the loan.
For this reason, you may need to think about how to creatively utilize staffing resources until the economy is back up and running. Disaster assistance , enhanced debt relief and other options are available as well, and participation in the PPP may make you ineligible for other CARES Act provisions.
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This would be a good time to schedule a meeting with your banker or lender to determine if the PPP provisions make sense for your business.
Enhanced Unemployment Benefits
It’s no secret that the shutdown of non-essential businesses has had a dramatic impact on employment. Congress recognized the unique circumstances the coronavirus pandemic has put us in, and has greatly augmented unemployment benefits available to impacted workers.
The CARES Act provides an additional $600 in weekly benefits to unemployed workers on top of their regular benefit. This applies across the board, even if the benefit amount exceeds the worker’s rate of pay prior to losing their job. Benefits have also been extended by 13 weeks, even for those whose unemployment benefits had expired,
The plan also expands eligibility. Self-employed workers and contractors are eligible, as are people who have become breadwinners due to a death due to COVID-19 in the family, people who quit their jobs due to COVID-19, and people forced to quit to care for dependents at home.
Benefits are broadly subject to the typical unemployment regulations. In general, you must be available to work and you must be pursuing gainful employment. But if you lose your job, this will give you some breathing room in terms of depleting your emergency fund.
Relief from debt payments
For those impacted by the coronavirus, there is penalty-free deferral of payments for up to 180 days on federally backed mortgages. Doing so will not incur any interest, penalties or late fees, and the deferral will not be reported to credit agencies. Further, no payments are required on federal student loans through Sept. 30, 2020.
While all of these provisions are intended to provide relief, they all come with a catch. Knowing what is available is half the battle. Working with your adviser to determine which provisions gel with your financial goals is the other half.
