The CARES Act is the topic of discussion around the USA right now—and for good reason. It’s providing economic relief in a time of great need. But it also plays a huge role in economic relief for small businesses. Darla and Natalie have been trying to muddle through what it means for their business and decided to ask a professional—Aaron Smyle.
Aaron is the owner of Smyle & Associates, tax consultants that serve businesses and individuals in the New York City area. He has an MBA, MST, and is an Enrolled Agent (EA), a federally-authorized tax practitioner who has technical expertise in the field of taxation. In this episode of Wingnut Social, he breaks down how the CARES Act helps small businesses.
What You’ll Hear On This Episode of Wingnut SocialAs of April 3rd, registration will open online for the CARES act. The Payroll Protection Program (PPP) was part of the legislation that was passed. So what is it? At its core, it’s a forgivable loan from the government to help cover payroll for 8 weeks. You’re allowed to borrow 2.5x the monthly average of your yearly payroll costs (wages, independent contractors, health insurance costs, and retirement benefits are included in the calculation). It also includes owners’ compensation.
As a simple example, if your average payroll is $10,000 a month, you can borrow up to $25,000 through the PPP. Eligible expenses that can be considered for forgiveness are rent, utilities, interest payments, and payroll. The caveat is that you HAVE to keep people on the payroll. If you do not have people on payroll (or wages being paid out), only an amount up to 25% of what is borrowed can be forgiven for rent, utilities and interest. If you’ve already laid some people off, you have until June 30th to hire them back and prove that you’re consistently paying the payroll that you were prior to the coronavirus pandemic.
If your numbers track correctly and you’ve proven you’ve retained your employees, the whole loan amount will be forgiven. At this time, the assistance is for 2 months. If the Coronavirus pandemic persists longer than projected, they may need to pass further legislation. Keep listening as Aaron covers some details for S-Corps, interest rates if your loan is not completely forgiven, and more.
Consider the Economic Injury Disaster LoanAaron points out that small business owners should apply for the Economic Injury Disaster Loan (EIDL)—where the first $10,000 is technically a grant. Supposedly, you should have access to the funds within 3 days of applying and no proof is necessary (unlike the records required for the PPP). You can still apply for the PPP, but the $10,000 will be subtracted from the amount that would be forgiven. So if you qualify for $50,000, $40,000 would be forgiven to account for this $10,000 grant. The EIDL is the best option for solopreneurs as it is eligible to cover their wages AND it can roll over into a loan if necessary.
During this time, payroll taxes that you owe can be deferred for a period of time. Aaron implores you to pay this if at all possible. If you go out of business, you as the owner will be personally liable for those taxes and required to pay them back. Aaron points out that we are all facing uncertainty and that you need to step back and evaluate and make the correct decision for your business despite your emotions. Aaron poignantly states,“Don’t make short-term decisions that have long-term consequences”.
Be sure to listen to the entire episode—Aaron unpacks the Tax Cut and Jobs Act, enhancement of charitable contributions, and all of the little details around relief for your small business.
UPDATE:
We told you this was moving fast. A recent update disallowed the payment of 1099 contractors from the definition of “payroll costs” going into the equation of what can be borrowed. The definition is now:
Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
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