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CARES Act a 'first step' for business recovery

The $2 trillion U.S. stimulus package includes funds for payroll protection, tax credits

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Business owners inundated by the economic fallout from the coronavirus may see some relief from a $2 trillion economic stimulus package that was signed into law in late March.

The Coronavirus Aid, Relief and Economic Security Act includes expanded unemployment benefits, $560 billion for individual cash payments and over $140 billion to the U.S. health care system.

For local business owners, the crux of the act is the $350 billion Paycheck Protection Program created to cover payroll costs for businesses and allow employers to maintain cash flow.

Steve Mullins, an economics professor at Drury University, said the $2 trillion package is likely just the tip of the iceberg for the U.S. government’s economic recovery efforts.

“We have to protect businesses and individuals from the financial repercussions of not having business for six to eight weeks,” Mullins said. “We don’t really have any choice.”

Payroll protection
Through the Paycheck Protection Program, employers of 500 people or less can apply for a loan of up to 2.5 times a business’ average monthly payroll costs.

The loans, which can’t exceed $10 million, may be forgiven if the businesses maintain their payrolls during the COVID-19 crisis or restore their payrolls afterwards, according to information from the U.S. Chamber of Commerce. Borrowers who laid off workers are still eligible for the program, which is operated through the U.S. Small Business Administration, but they must reinstate jobs and salaries by June 30 to recover credit toward loan forgiveness.

Business owners can use the costs to cover rent, utilities, mortgage interest and payroll, excluding individual wages of over $100,000. It’s a move to keep people employed, especially with unemployment claims reaching 3.3 million in late March – smashing a decadeslong record. The St. Louis Federal Reserve recently estimated the U.S. unemployment rate could hit 32% with 52.81 million unemployed workers by the second quarter. The February unemployment rate was 3.5%.

“The typical knee-jerk reaction is to let your staff go,” said John Everett, Legacy Bank and Trust Co. CEO and president. “The ability to keep your staff paid for eight weeks and keep that cash flow going for them, … that’s problem No. 1 for small businesses right now.”

The application process to divvy out the $350 billion in federal loans started April 3, and Everett anticipated the funding would run out quickly. He said every local business client he’d been in contact with was interested in applying for the program, and most businesses in Springfield fit the requirements.

“It’s going to give an immediate boost to cash on hand, but this isn’t going to solve all of their problems,” Everett said. “This is maybe a week or two late. Most businesses can’t go two weeks with virtually no money coming in, and the reality is ... we don’t know when they’ll get it.”

Employers can file for both the paycheck program and an SBA economic disaster loan, which is available at up to $2 million, but Everett said they cannot receive both loans.

Bill Dunton, managing partner of Abacus CPAs LLC, said even with payroll assistance, some businesses won’t make it through the crisis. He said the rule of thumb for many is to have at least three months of overhead costs saved for an emergency.

“Not everybody had that or could have that money saved, so times like these flushes out those businesses,” he said.

Mullins pointed to a nationwide trend that could be the demise of some businesses.

“If you didn’t have the cash on hand saved a month ago, you don’t have that right now,” he said. “We’ve lost the national need to prepare for these black swan events that will happen.

“As a culture and a society, we haven’t set up an economy that’s geared to thinking about the next crisis; it’s about what my earnings per share will look like at the end of the next quarter.”

Mullins pointed to a lack of inventory for face masks and toilet paper at stores and hospitals as examples.

Aside from the financial impacts, Everett sees a corporate cultural shift coming, such as businesses adopting their temporary online or consumer-catering business models.

“Some businesses won’t be able to come back, consumer behaviors will change and we’re going to be in a new economy after this,” Everett said.

Tax credits, unemployment
Businesses that don’t get a loan through the Paycheck Protection Program are eligible for a refundable payroll tax credit if they retain workers among the COVID-19 pandemic.

The credit is equal to 50% of quarterly employee wages, or up to $10,000 per worker, and it can be claimed against quarterly payroll taxes. Eligible employers also must have been fully or partially suspended per a government order or they must report a 50% reduction in quarterly receipts because of COVID-19.

Owners with 100 or fewer full-time employees can claim the credit for all paid staff, and employers with more than 100 full-time workers can claim a credit for those who were furloughed, according to information from the Treasury Department.

The CARES Act also allows employers of small businesses to defer their portion of the Social Security payroll tax, which is a 6.2% rate.

Though the act is aimed to keep people employed and businesses operating, Congress also included $250 billion for an extended unemployment insurance program that offers unemployed workers an additional $600 per week for four months to what they’re already receiving from the state.

Dunton says this could affect business owners because some employees may choose not to rejoin the workforce as quickly.

Additionally, the Families First Coronavirus Response Act, which took effect April 1, requires employers provide two weeks of additional paid sick leave to all employees that are either quarantined or have to care for someone in quarantine.

Accountant Matt Clark of Abacus CPAs said the measure allows employers to keep an employee on payroll, but the payroll costs will be alleviated by the Social Security Administration.

“The employer will recover the funds through their normal payroll tax filings,” Clark said. “At the end of the day, the employee will get to still have a paycheck and the employer will not bear that burden.”

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