Coronavirus: Help for Small Business Owners & Self Employed whose businesses are impacted
I own a small business which is shut down due to the shelter in place rules in California. Is there any money available to small business owners who can’t afford to pay expenses because our business can’t make sales?
Joshua Escalante Troesh, CFP | MBA
Currently, there are two primary sources of help available to small business owners and the self employed. The first is the new Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The second is you may have benefits under an insurance policy you have for your business. This article will deal with the Paycheck Protection Program:
Eligible business and individuals can borrow 2.5 x prior average payroll (up to $10 million)
No loan payments are due for six months
If you maintain your workforce, the SBA will forgive 8 weeks of payroll plus certain other expenses
Paycheck Protection Program (The Program)
The Program is a federally guaranteed loan for small businesses, nonprofits, self-employed, and independent contractors and may be forgiven if the business owner follows specific rules and qualifies. The Program is designed to help keep people employed or to help the self-employed pay for living expenses while businesses are shut down.
Eligibility
Eligibility for the program is very broad and includes small businesses, nonprofits, and even individual people running their own business or working as independent contractors. There are size limitations to ensure the money goes to small businesses who are likely in greater need.
Your business also must certify:
that the money is needed to support ongoing operations
you will use the money to keep workers employed or make mortgage, lease, or utility payments
you have not applied for or received other loans which fulfill the same purpose.
Emergency loans already taken may be folded into the new loan under the Program to avoid this issue.
Small Businesses
Generally, the Program is available to small businesses with fewer than 500 employees, although there are additional SBA size standards which may make businesses with more than 500 employees eligible. Employees include full-time, part-time, and any other status but franchises and accommodation & food service sector businesses are counted on a per-location basis. Tribal business concerns may also qualify for the Program.
Nonprofits
Nonprofits include 501(c)(3) organizations and 501(c)(19) organizations. Churches and other religious organizations which are not 501(c)(3) may also qualify depending on the interpretation of the law. (Currently the application has faith-based organizations as an option for describing your business). Nonprofits have similar size restrictions as described above for small businesses.
Individuals
Individuals who work as a sole proprietor or independent contractor will also qualify for this program. If you own a small business you are eligible, even if you have no other employees. Similarly, if you earned money as a 1099 employee (review your tax forms to see if you were issued 1099 wages) you are eligible for the Program.
How Much Is Available
Loans can be for up to 2.5 times the businesses average monthly payroll costs. Payroll costs include all forms of employee compensation (including tips), retirement and insurance benefits, accrual expenses for paid leaves and other allowances, and payment of state or local taxes.
The calculation excludes:
compensation above $100,000 annually prorated* between February 15 and June 30, 2020
income earned by employees whose principal place of residence is outside the U.S.
payroll taxes and other federal taxes
sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act
Individuals: Sole Proprietors, Independent Contractors, and Self-Employed
For individuals, “payroll costs” are defined as total income and compensation of the sole proprietor or independent contractor including net self-employment earnings (profits), wages, commissions, income, or similar compensation. The amount is also limited to $100,000 in annual income pro-rated* for the covered period.
*Excluded income being pro-rated means the $100,000 ‘cap’ is divided by 52 weeks and then that weekly number is applied for the covered period. Which would be approximately $1,900 per week — [$100,000/52]
Forgiveness of the Loan
The loans may be forgiven by the Federal Government for amounts the business spent on the following expenses during the 8-weeks after the loan origination date:
Payroll costs - defined the same way as above
Interest on mortgage obligations incurred by the business
Rent or leasing costs
Utility payments including telephone, transportation, and internet
Additional wages paid to tipped employees
The amount forgiven is reduced if the business eliminates employees or reduces employee pay by more than 25%. Forgiveness for employers of highly compensated employees may not be impacted by a 25% reduction in employee wages as the reduction does not fully apply for employees who earned more than $100,000 annualized in 2019.
What If I Already Laid Off Employees or Cut Hours?
If you’ve already laid off employees or cut hours, the reduction in forgiveness does not apply if the business reverses the layoffs or wage reduction by June 30, 2020.
How to Apply
Businesses apply to the program through a qualified SBA Lender, which is usually a local bank or potentially a credit union. You can begin the process and get an advance on the loan up to $10,000 through the SBA’s Disaster Loan Assistance application.
Sources: CARES Act, SBA.gov, USChamber.org
Pro Bono Financial & Business Advising
I am one of many financial advisors in XYPN and NAPFA who are offering pro-bono financial planning for those who are impacted by the pandemic. If you and your family have been impacted by the pandemic and would like advice on your situation, you can schedule a 1-hour financial planning session with no charge or obligation.
XYPN and NAPFA Advisors
Do NOT sell life insurance or other financial products
Do NOT accept compensation from third-parties for the advice given
And ARE legally required to provide advice as fiduciaries.