During the pandemic caused by the coronavirus, employers who are attempting to keep their payroll and liquidity stable have access to a variety of relief options thanks to the CARES Act. For instance, the CARES Act allows for loans to be forgiven for up to eight weeks’ worth of an employer’s eligible payroll expenses, provided that the employer continues to pay employees employers that are comparable to those paid before the crisis. This is the Program for the Protection of Paychecks (PPP). Borrowers who obtained certain small business loans prior to the financial crisis and are currently unable to make their payments are eligible for debt payment assistance under the legislation. The program’s official name is the Small Business Debt Relief Program (SBDRP).
In addition, the law makes available emergency economic injury grants (EEIGs) to employers that apply an application for Economic Injury Disaster Loans (EIDLs) and have a requirement for an advance of up to $10,000. Additionally, the CARES Act provides payroll tax credits for distressed employers on wages paid up to $10,000 and permits firms to delay their employer-side payroll tax payments until 2021 or 2022. These benefits are provided in order to alleviate some of the burdens that have been placed on these businesses.
These provisions are intended to assist businesses in meeting their payroll obligations, effectively managing their debt, and enhancing their liquidity. In spite of the fact that these actions are required in the near term to forestall additional business failures and relieve pressure on unemployment insurance programs, they ought not to be used as long-term policy prescriptions outside of the context of an economic slowdown.
The provisions for small businesses have a similar goal, but their eligibility requirements and administration are different. There are some instances in which the programs serve the same purpose, and there is room for improvement in their level of complexity given that it is unnecessary for them to do so. Streamlining these programs would assist to lessen the likelihood of confusion, cut down on the number of administrative barriers, and shorten the amount of time between the submission of an application and the receipt of funding for people who are in need.
An Overview of the Relief Programs Offered by the Small Business Administration (SBA)
Paycheck Protection Program (PPP): Offers small businesses, certain nonprofit nonprofits, and self-employed individuals access to loans that are 100 percent backed by the federal government for certain payroll expenses through the 30th of June, with the possibility of up to eight weeks of loan forgiveness. If employers are able to keep their employees at comparable compensation levels prior to the crisis, then the loans will be forgiven. In addition, all SBA costs are covered by the PPP, and loan repayments can be postponed for a period of at least six months and up to a year at the most.
Provides debt-payment assistance on the principal, interest, and fees for up to six months for SBA loans that are not tied to a natural catastrophe (for example, 7(a), 504, and micro-loans). Those who previously had taken out a loan before to the crisis and those who take out new loans within six months of the passage of the CARES Act are eligible for assistance from the SBDRF (i.e., until September 2020). It is important to note that applicants for SBDRF are not permitted to utilize any assistance in paying back loans obtained through PPP. In addition, businesses can’t utilize SBDRF funds to pay off any other loans linked to disaster relief.
Emergency Economic Injury Disaster Grants (EEIDG)/Economic Injury Disaster Loans (EIDL): This program enables businesses to get an advance of up to $10,000 in the form of an EIDL after applying for one. An EIDL is a loan with a reduced interest rate that is available for up to $2 million, and the SBA has the option to make modifications to both the principal and the interest.
After filing for an EIDL, you have three days to submit an application for an EEIDG. EEIDGs are available to small businesses, co-ops, employee stock ownership programs (ESOPs) with up to 500 employees, self-employed individuals, and private nonprofit nonprofits that have suffered losses as a result of the slowdown in the economy brought on by the coronavirus outbreak. Before submitting a request for an advance, businesses are required to apply an application for an EIDL (EEIDG). According to the Senate Committee on Small Business, the advance does not have to be repaid and can be put toward keeping employees on the payroll, paying for sick leave, meeting increased production costs due to supply chain distortions, and paying business obligations such as debt, rent, and mortgage obligations.
Credits against payroll taxes and deferred payments
Employers may be eligible for a “Employee Retention Tax Credit” equal to fifty percent of the payroll tax credit on wages paid during the crisis that are up to ten thousand dollars. Employers who experienced a drop in gross receipts of at least 50 percent when compared to the same quarter the previous year would be eligible for the credit. Additionally, the credit would be made available to employers whose businesses were shut down because of a virus. The credit can be claimed for employees who are retained but not currently working due to the crisis by firms with more than 100 employees, and for all employee wages by firms with 100 or fewer employees.
In addition, the CARES Act allows for certain employers to exercise their right to opt out of being required to pay employer-side Social Security payroll taxes until January 1, 2021. After that, those payments will begin again on December 31, 2021, with the first fifty percent due, followed by the remaining fifty percent on December 31, 2022. During this interim period, the Social Security Trust Fund will have its reserves refilled with general revenue. Firms that choose to participate in the PPP are not eligible for the payroll tax deferral or the employee retention credit.
Assessing the Alternatives
The three programs significantly overlap one another, with the exception of the restriction that funds from the SBDRF cannot be used to fulfill the obligations of PPP loans. PPP, payroll tax credits, and EEIG are all options for covering business obligations and payroll costs that arise. However, individuals who are eligible for PPP are not permitted to claim the employee retention tax credit at the same time. Both the SBDRF and the EEIG are designed to help businesses that had taken out loans prior to the financial crisis make their debt payment obligations. The programs are similar in that they have similar goals, recipients, and eligibility requirements.
Simplicity
The assistance is easier to obtain to the degree that it is more streamlined. It would be easier for small businesses and nonprofit nonprofits to understand and make the most effective use of their time if there were fewer programs, stipulations, and conditions to comply with. PPP, SBDRF, and EIDL are not straightforward or easy to understand for recipients who are qualified because they are convoluted and redundant.
Neutrality
The introduction of unique benefits for firms with less than 500 employees can cause compliance problems for a great number of businesses. Although it is not unethical to provide relief to small businesses in and of itself, restricting that relief to companies with less than 500 employees is unfair and penalizes those businesses with slightly larger payrolls.
Conclusion
When policymakers try to prevent cuts to payroll while simultaneously requiring workers to stay home in order to prevent the spread of the coronavirus, they face a number of significant challenges. The CARES Act includes provisions that support small businesses and nonprofit organizations that are looking for financial relief during this economic downturn. However, the creation of multiple programs that serve the same purpose but have different qualification requirements results in relief that is more complicated, less clear, and less objective.
Consider, for instance, the distinctions between the Paycheck Protection Program (PPP) and the employee retention credit. The first option, known as payroll tax credits, enables certain firms with more than one hundred workers to be eligible for a tax credit for the wages of employees who have been retained on staff despite the economic downturn but are not currently working. The same holds true for all employee wages at firms that have one hundred employees or fewer. Small businesses, defined as those with fewer than 500 employees, are the only ones that can apply for PPP loans.
Although firms can only choose to participate in one of the programs, many of the eligible costs are the same even though the eligibility requirements are different. In order for businesses to get by during this time of economic turmoil, they will need to overcome yet another bureaucratic obstacle. Both the employee retention credit and the PPP are experiencing difficulties with their administration, with the former struggling to provide clear rules based on firm size and the latter attempting to deal with demand and liquidity issues simultaneously. In the next round of legislation concerning the response to the coronavirus, policymakers should think about streamlining or revisiting these programs.