The COVID-19 pandemic has caused a large-scale economic downturn. Despite the COVID-19 support programs put in place, most businesses are experiencing the severe effects of this economic crisis to some extent. However, small businesses are particularly vulnerable and are struggling to survive.
Small businesses are generally defined as independent businesses with fewer than 500 employees. According to reports published by the Small Business Administration (SBA) Office of Advocacy, there are 31.7 million small businesses in the US with 61 million employees. Small businesses account for 99.9% of all firms, 47.1% of private sector employment and 40.3% of private sector wages. Of these small enterprises, 6 million (19%) have paid employees and 25.7 million (81%) have no employees. Most of the enterprises without employees are very small, unincorporated sole proprietorships owned by the self-employed. These enterprises may be the main source of income for the owner or they may only provide supplementary income.
Given their importance to the economy and jobs, and the disproportionate risks they face due to the COVID pandemic, small businesses need COVID-19 Support that is directly targeted to them. The U.S. Small Business Administration (SBA) is an independent federal government agency established to assist small businesses. Through its COVID-19 Support Financing Programs, the SBA offers important support for small businesses struggling with economic hardship due to the COVID pandemic.
The SBA had funding programs in place to help small businesses prior to the COVID-19 pandemic. The Coronavirus Relief and Economic Security (CARES) Act, enacted on March 27, 2020 to address the challenges posed by the COVID-19 pandemic, created several new temporary programs for COVID-19 support in addition to traditional SBA funding programs.
Signed into law on 27 December 2020, the Consolidated Appropriations Act, 2021 (CAA) provided $900 billion for COVID-19 Support by extending existing COVID assistance programs with additional funding and creating new assistance programs. This new COVID-19 Support package provides the capital small businesses need to survive the pandemic and includes resources specifically earmarked for the hardest-hit, smaller and disadvantaged businesses.
The Small Business, Nonprofit Organizations, and Locations That Have Taken an Economic Hit Act (COVID-19 Relief Act) appropriated a total of $325 billion to the SBA to continue PPP and other small business COVID-19 Assistance programs for hard-hit small businesses. These funds will be used for new Paycheck Protection Program (PPP) loans, Economic Injury Disaster Loan (EIDL) advances to small businesses in low-income communities, payment assistance for debts owed to the SBA, grants to shuttered venues, and improvements to other SBA loan programs.
Salary Protection Program
Ending on August 8, 2020, the first Salary Protection Program (PPP) provided critical COVID-19 Support to 5.2 million small businesses with forgivable PPP loans worth $525 billion. The COVID-19 Relief Act revitalized the PPP with an additional $284.5 billion in funding and made some changes to improve the program. Extended until March 31, 2021, the PPP is open to businesses that did not receive a PPP loan the first time, and it is possible for certain businesses to receive a second PPP loan.
PPP Improvements
The COVID-19 Relief Law also includes a number of provisions to improve the PPP. These changes primarily make PPP COVID-19 support funding more available to businesses experiencing severe income losses.
As before, only businesses in operation as of February 15, 2020 can apply for PPP loans. However, small non-profit organizations with 300 or fewer employees, including housing cooperatives, 501(c)(6) organizations and tourism bureaus (DMOs), as well as news organizations with 500 or fewer employees, are now eligible for PPP loans.
The rule that at least 60% of PPP Loans must be used for salary costs in order to be fully forgivable has been retained. However, forgivable salary expenses have been expanded to include group insurance payments, and non-salary expenses have been expanded to include supplier costs related to existing contracts and purchase orders, expenditures to protect employees, property damage costs and technological expenditures to improve operations. These expansions also apply to previous PPP loans if the loan has not been forgiven.
Borrowers who have repaid all or part of their PPP loans, or who qualify for more loans due to changes in regulations, will be able to reapply to top up the loan amount to the maximum possible amount.
For smaller loans up to $150,000, the loan forgiveness application process has been simplified so that the borrower only needs to sign and submit a consent document no longer than one page.
To ensure that PPP loans are made available to smaller and underserved businesses, funding was allocated for borrowers with 10 or fewer employees or located in Low to Moderate Income (LMI) areas, as well as for loans made by local financial institutions and small depository institutions.
While the CARES Act specifically states that forgiven PPP loans are excluded from gross income, the IRS has ruled that expenditures made on forgiven loan amounts cannot be deductible, even though they would normally be a tax-deductible expense. The COVID-19 Relief Act provided an additional COVID-19 relief by explicitly stating that expenses related to a forgiven PPP loan can be deductible under normal tax rules.
PPP Second Draw Loans
PPP second-shot loans are designed to provide additional COVID-19 support to small businesses in specific sectors most affected by the COVID-19 pandemic, such as restaurants and hotels.
Small businesses with no more than 300 employees and at least a 25% reduction in gross revenues in any quarter of 2020 compared to 2019 will be eligible for a second PPP loan. Second draw loans are capped at $2 million. Accordingly, the maximum loan amount can be 2.5 times the average monthly salary expense of the borrowing business, not exceeding $2 million. For small businesses in the accommodation and food services industry, the maximum loan amount can be 3.5 times the average monthly salary of the borrowing business, not exceeding $2 million.
COVID-19 Support for Economic Injury Disaster Loans
Emergency Economic Injury Disaster Loans
The Economic Injury Disaster Loan (EIDL) is SBA's long-term direct loan program to provide economic relief to businesses experiencing temporary revenue losses due to disasters such as major storms, droughts, or other nationwide declared disasters. EIDLs provide loans of up to $2 million on very favorable terms, with interest rates of 3.75% for small businesses and 2.75% for nonprofit organizations, terms of up to 30 years, and automatic deferral of monthly payments for one year. The amount of a loan to a business is determined by the SBA on a case-by-case basis, depending on the amount of economic loss incurred by the business. EIDL loans can be used to meet a wide range of working capital needs and normal operating expenses, including health care, rent, utility bills, and continuation of fixed debt payments. EIDLs can be closed at any time under penalty without early repayment. Loan repayments can initially be deferred for 1 year, but interest accrues during the deferment period.
On March 13, 2020, the COVID-19 pandemic was declared a national emergency as of March 1, 2020. This declaration made it possible for small businesses suffering losses due to the COVID-19 pandemic to turn to EIDL as a critical source of COVID-19 support. The CARES Act, signed into law on 27 March 2020, made some changes to the EIDL program to provide COVID-19 support to a wider range of businesses, effective from 31 January 2020 until 31 December 2020:
- In addition to small businesses, private non-profit organizations and small agricultural cooperatives, the EIDL program has been expanded to include businesses with no more than 500 employees, cooperatives, employee stock ownership plans (ESOPs), tribal small businesses and agribusinesses, and individuals operating under sole proprietorships with or without employees or as independent contractors.
- The following requirements for EIDL loans have been removed;
- Personal guarantee requirement for loans of no more than $200,000
- If the business was in operation on January 31, 2020, the applicant must have been in operation for 1 year prior to the disaster
- The condition that the applicant cannot obtain a loan elsewhere
- Eliminated the requirement that an applicant submit a tax return, allowing SBA to approve EIDL loans based solely on an applicant's credit score. The SBA may also use appropriate alternative methods to determine an applicant's ability to repay.
Following the declaration of COVID-19 as a national emergency, the SBA approved $197 billion in low-interest EIDLs and provided working capital financing to more than 3.6 million small businesses, nonprofits, and agribusinesses to help them weather this challenging period.
The recent COVID-19 Relief Act extended the EIDL COVID-19 support program, which was set to expire on December 31, 2020, until December 31, 2021. The SBA announced that it will accept EIDL loan applications through December 2021, provided that the funds available under the program have not been exhausted. Small businesses will be able to apply for both PPP and EIDL, but funds from both cannot be used for the same purpose.
Emergency EIDL Grants
In addition to expanding the scope of the EIDL program, the CARES Act also created a $20 billion Emergency EIDL Grant program (also known as an EIDL advance). Accordingly, a small business applying for EIDL can request an advance of up to $10,000 to be disbursed by the SBA within 3 days. The amount of the advance is based on the number of employees indicated in the EIDL application, at $1,000 per employee, not to exceed $10,000.
The EIDL advance can be used to provide paid sick leave to staff who are unable to work due to the direct impact of the COVID-19 pandemic, salary costs incurred to keep employees employed, increased costs due to disrupted supply chains, rent or mortgage payments, and repayment obligations that cannot be met due to lost income.
As this advance is provided as an Emergency EIDL Grant, it does not have to be repaid even if the loan request is not approved. If loan requests are approved, the amount of the advance is deducted from the total amount of loans that can be taken.
Due to the high demand for the Emergency EIDL Grant program, all available funds for the EIDL advance program have been allocated until 11 July 2020. The SBA received 10.1 million Emergency EIDL Grant applications and approved 5.8 million advance applications for a total of $20 billion in emergency COVID-19 support.
Under the CARES Act, PPP borrowers who received an Emergency EIDL Grant had to deduct the EIDL advance amount from the forgiven PPP loan amount, which essentially amounted to repayment of the advance. The COVID-19 Relief Law has repealed this provision. From now on, EIDL Advances will not reduce the amount of PPP loan forgiveness. Borrowers whose PPP loans have been forgiven and whose EIDL advances have been deducted from the forgiven amount are also allowed to amend their PPP loan forgiveness applications.
Targeted EIDL Advance for Small Businesses
The COVID-19 Relief Act renewed the Emergency EIDL Grant program with an additional $20 billion in funding through December 31, 2020. This time, however, COVID-19 support through EIDL advances will only be available to small businesses in low-income communities that have been severely impacted by economic disruption.
The COVID-19 Relief Bill also provided more flexibility for the SBA to verify that Emergency EIDL grant applicants have submitted accurate information by removing the CARES Act restriction on requesting applicant's tax return and allowing the use information from the Department of the Treasury. Due to more detailed verification procedures, time for SBA to approve and disburse Targeted EIDL Advance was increased from 3 to 21 days.
Small enterprises that qualify for EIDL (except for certain agricultural enterprises) will be eligible to receive a targeted EIDL advance if they meet the following conditions
- Resident in a low-income community
- In an 8-week period between March 2, 2020 and December 31, 2021, suffered an economic loss of more than 30% compared to an 8-week period immediately preceding March 2, 2020 or in 2019
- No more than 300 employees
Small businesses eligible to receive a targeted EIDL advance will receive the full $10,000 advance amount, this time regardless of the number of employees. If a qualifying small business has already received an advance of less than $10,000, it will receive an advance equal to the difference.
The COVID-19 Relief Act also provided the SBA with more flexibility to verify the information submitted by applicants by removing the restriction imposed by the CARES Act not to require tax returns from EIDL grant applicants and authorizing the use of information from the Department of the Treasury. Due to more detailed verification processes, the SBA's timeframe for approving and disbursing the EIDL Advance has also been increased from 3 to 21 days.
COVID-19 Support for Non-Disaster SBA Loan Programs
Due to COVID-19, the newly created PPP and the expanded EIDL program provide direct COVID-19 support for businesses. However, other traditional non-disaster SBA loans are also important sources of financing for small businesses in these turbulent times.
Non-Disaster SBA Loans
The 7(a) loan guarantee program is SBA's primary program for providing financial assistance to small businesses. Instead of providing 7(a) loans directly, SBA guarantees a portion of the amount borrowed and sets a maximum interest rate, allowing small businesses that would otherwise be unable to obtain financing on reasonable terms and conditions to obtain loans. The maximum loan amount for a standard 7(a) loan is $5 million and the maximum SBA guarantee is 85% for loans up to $150,000 and 75% for loans greater than $150,000. For other types of 7(a) loans, the maximum loan amount and guarantee percentage differ.
The 504 Loan program provides long-term, below-market-rate fixed-rate financing to small businesses to purchase fixed assets such as equipment or real estate for capacity expansion or modernization. 504 loans are provided through Certified Development Companies (CDCs). In a typical 504 loan, at least 10% of the total project costs, up to 20% is borne by the borrowing enterprise, up to 40% by the CDC and up to 50% by the third-party lending financial institution. 504 loans are generally capped at USD 5 million, but for some projects, more than one 504 loan can be obtained for a maximum of USD 5.5 million.
The microcredit program provides loans of up to $50,000 to help start and expand small businesses and some non-profit child care centers. These loans are provided through local lenders who also provide business counseling and technical assistance.
Emergency Improvements to Non-Disaster SBA Loans
Unfortunately, the direct COVID-19 support programs described above are far from sufficient. For this reason, the CARES Act also included some improvements to traditional non-disaster SBA loans, effective until December 31, 2020. The COVID-19 Relief Act allocated $2 billion for improvements similar to the CARES Act to make non-disaster SBA loans more accessible to small businesses as an additional COVID-19 support:
- 7(a) loans was increased to 90% until October 1, 2021.
- The maximum 7(a) Express Loan amount was increased from $350,000 to $1 million between January 1, 2021 and October 1, 2021, and set at $500,000 thereafter. In addition, the guarantee rate for 7(a) Express Loans up to $350,000 was temporarily increased from 50% to 75% until October 1, 2021 to provide easier access to needed working capital.
- In order to harmonize refinancing rules between 504 and 7(a) programs, refinancing rules for 504 loans were developed.
- SBA is required to waive (or reduce to the maximum extent practicable) borrower and lender costs for the 7(a) and 504 loan programs by September 30, 2021.
- The microcredit program was developed to provide greater access to micro capital and technical support for businesses affected by the COVID-19 pandemic.
COVID-19 Relief for Non-Disaster SBA Loan Debt
As an emergency COVID-19 relief, the CARES Act transferred $17 billion to the SBA Debt Relief program to cover 6 months of principal, interest, and related fees for all of SBA's existing performing 7(a), 504, and Microloans and new 7(a), 504, and Microloans through September 27, 2020.
The COVID-19 Relief Bill allocated an additional US$3.5 billion to the SBA Debt Relief program, continuing COVID-19 Support payments to 7(a), 504 and Micro loans. SBA will pay principal, interest, and all related fees for performing loans under the following conditions:
- For loans approved before March 27, 2020, SBA will make payments for an additional 3-month period starting with the first payment due on or after February 1, 2021. For very small businesses assessed as underserved or those most affected by the pandemic, SBA will make payments for an additional 5-month period immediately after the end of the 3-month period.
- For loans approved between March 27, 2020 and September 27, 2020, SBA will make payments for a period of 6 months from the first disbursement date.
- For new loans approved between February 1, 2021 and September 30, 2021, SBA will make payments over a 6-month period, starting with the first payment due.
- Monthly payments are capped at USD 9,000 per borrower.
- A borrower will only be able to receive payments for one loan approved after the CARES Law came into force.
COVID-19 Support for Operators of Closed Venues
Previous COVID-19 support programs have not provided much support for venue operators who have been completely closed due to the pandemic and will likely remain closed for most of 2021. As such, they are among the businesses that have been hit hardest by the pandemic and are in desperate need of COVID-19 support.
The COVID-19 Relief Act launched a new COVID-19 support program for shuttered venue operators to ease the burden for venue operators. The COVID-19 Relief Act authorized the SBA to award $15 billion in grants to eligible live performance venue operators or promoters, theatre producers, live performing arts organization operators, museum operators, movie theater operators, or talent agents. An organization or individual will be eligible for a grant if
- February 29, 2020 to be fully operational
- Gross revenues decreased by at least 25% in any quarter of 2020 compared to the same quarter of 2019
- They are operating or intend to continue operating as of the date of the grant
The grant amount will be equal to 45% of the applicant's or organization's 2019 gross revenues, up to a maximum of USD 10 million. The SBA may provide additional grants up to 50% of the initial grant, provided that the total grant amount does not exceed $10 million. Grant funds may be used for certain expenses, such as salary expenses, rent and utility payments, and personal protective equipment expenses, and some expenses are specifically prohibited.
The law set a timetable for the distribution of grants, giving priority to individuals and organizations with greater economic losses. In addition, an allocation of $2 billion was made for qualifying organizations employing up to 50 full-time employees.
Organizations receiving Closed Venue Operator grants will not be eligible for PPP loans.
To prevent fraud, the SBA has been mandated to conduct more oversight and audits of approved and awarded grants.
Taxation of COVID-19 Support Grants and Forgiven Loans
The COVID-19 Relief Act clarifies that loans forgiven under the CARES Act or the COVID-19 Relief Act, EIDL advances, loan debt repayment assistance and grants to operators of closed venues are not tax deductible. Furthermore, as an additional COVID-19 relief, the Law provides that expenses paid with these amounts that are not included in gross income are also tax deductible under normal tax rules.
As a result, the SBA provides critical COVID-19 support through substantial grants and advantageous loans. However, these funds are limited and requests are processed in order of application. Therefore, small businesses should review all available SBA COVID-19 support programs and, if eligible, apply as soon as possible. If you have any questions and/or need professional assistance regarding the SBA COVID-19 support programs and related tax issues, please feel free to contact us.