There’s been a lot of attention given to the CARES act – the legislation passed March 27th which provided relief to small businesses in the wake of the Coronavirus pandemic. The big news surrounded the Paycheck Protection and Economic Injury Disaster Loan programs. Both have already provided billions in aid to small businesses but have also been criticized for their complexity, delays, and the way funds have been distributed.
Regardless of the above programs, there are at least three other significant financing options that the government has provided which are not getting as much attention. If you’re running a small business you should know about them.
Payroll Tax Deferrals
Whether or not you participate in the Paycheck Protection Program, you can defer all of your employer payroll taxes (that’s the FICA 6.2 percent tax) with half becoming due by the end of 2021 and the remaining half due at the end of 2022. True, this is just a deferral of taxes so you will owe the money. However, it’s an interest free loan for those amounts and 6.2 percent adds up each month. You don’t have to apply for anything. You just stop paying and then make sure that’s reflected on your quarterly Federal 941 returns. Ask your accountant, your attorney or your payroll service for help if you need.
Employer Retention Tax Credit
The Employer Retention Tax Credit is not a deferral. It’s literally a forgiveness of your employer (again, FICA) taxes where you can even get money back if the credit exceeds what you owe. You have to have been significantly impacted by the pandemic which means either you’ve been forced to shut down or your revenues in a quarter are more than 50 percent less than they were in the preceding year’s quarter.
The credit is 50 percent of each of your employee’s quarterly salary up to $10,000 or a maximum of $5,000 per employee. If you add that up, it’s pretty huge. Like the payroll tax deferrals above, you don’t have to “apply” for anything – you just make sure it’s reflected on your Form 941 and again get help from experts if you need. If your tax credit is higher than the taxes you owed then you can apply to a future quarter or get the money back in cash.
Section 7(a) Loans
The above two programs can provide significant funding for your business and they’re both effective through December 31st. However, there’s a third form of funding that’s effective only through September 27th. That has to do with the Small Business Administration’s Section 7(a) loans.
The 7(a) loan program has been around for a while. They’re provided through member lenders and are for small businesses (less than 500 employees) who need financing that they otherwise couldn’t receive without the SBA backing the loan. Your financing can be to buy a business, real estate, inventory or equipment. Or it can be just for working capital. The loan terms vary from 5-25 years depending on what you’re using the money for and interest rates will vary based on the prime rate.
But here’s the thing: thanks to the CARES Act, borrowers that were issued 7(a) loans between March 27 and September 27 will see their first six months of principal, interest and fee payments waived – and the principal balance will continue to be reduced. For example, a business owner getting a $500,000 loan at 6 percent interest would save $33,000.
The Real Value in CARES
I’ve spoken with many financiers and they all agree that this is unprecedented. You can use this money to grow your business. You can hire people, buy out a competitor, snap up some older equipment or a piece of real estate. It’s a form of financing that will not only help a business survive the current economic downturn, but help that business owner grow beyond the pandemic.
If you’ve received a Paycheck Protection or Economic Injury Disaster Loan, then good for you. But if you have the opportunity to take advantage of the tax deferrals, credits or a new Section 7(a) loan then you should be jumping on it. Speak to your advisors and take advantage. It won’t last forever.
For more information on the CARES Act, read the U.S. Department of The Treasury statement here.