Evaluating the Trade-offs of Small Business Relief Provisions of the CARES Act

April 9, 2020

The CARES Act provides several relief options for employers trying to maintain payroll and liquidity during the coronavirus pandemic. For example, the CARES Act provides forgivable loans for up to eight weeks of eligible payroll expenses provided employers retain employees at comparable salary levels prior to the crisis. This is the Paycheck Protection Program (PPP). The legislation also provides debt payment assistance to borrowers who took out certain small business loans prior to the crisis and are unable to pay. This is the Small Business Debt Relief Program (SBDRP).

Further, the law provides emergency economic injury grants (EEIGs) to employers who apply for Economic Injury Disaster Loans (EIDLs) and need up to $10,000 in advance. Additionally, the CARES Act provides payroll tax credits for distressed employers on wages paid up to $10,000 and allows firms to delay their employer-side payroll tax payments to 2021 and 2022.

These provisions are designed to help businesses maintain payroll, manage debt, and increase liquidity. While these measures are needed in the short term to prevent further business closures and strain on unemployment compensation programs, they should not be used as long-term policy prescriptions outside of an economic downturn.

The small business provisions are similar in purpose but vary in eligibility and administration. In some cases, the programs overlap in purpose and could be streamlined as they are more complicated than they need to be. Streamlining these programs would help to avoid confusion, reduce administrative hurdles, and accelerate the period between application and reception of funds for those who need it.

Overview of Small Business Administration (SBA) Relief Programs

Paycheck Protection Program (PPP): Provides 100 percent federally-backed loans for certain payroll expenses through June 30, with up to eight weeks of forgiveness for small businesses, certain nonprofits, and self-employed individuals. The loans are forgivable if employers retain employees at comparable salary levels prior to the crisis. The PPP also waives all SBA fees and provides deferral on loan repayments for a minimum of six months up to a maximum of one year.

Small Business Debt Relief Program (SBDRF): Provides debt-payment assistance on the principal, interest, and fees for up to six months for non-disaster-related SBA loans (e.g., 7(a), 504, and micro-loans). SBDRF applies to those who already had taken out a loan prior to the crisis and take out new loans within six months after the CARES Act was passed (i.e., until September 2020). Notably, those who apply for SBDRF cannot use any assistance to pay for loans received under PPP. Additionally, businesses cannot use SBDRF to pay off other disaster-related loans.

Emergency Economic Injury Disaster Grants (EEIDG)/Economic Injury Disaster Loans (EIDL): Allows employers to receive up to $10,000 in advance after they apply for an EIDL. An EIDL is a lower-interest rate loan of up to $2 million with principal and interest adjustments available at the SBA’s discretion.

EEIDGs can be applied for within three days after applying for an EIDL. EEIDGs are available for small businesses, co-ops, employee stock ownership programs (ESOPs) with up to 500 employees, self-employed individuals, and private nonprofits harmed by the downtown in the economy due to the coronavirus outbreak. Businesses must first apply for an EIDL and then request the advance (EEIDG). According to the Senate Small Business Committee, the advance does not need to be repaid and may be used to keep employees on payroll, pay for sick leave, meet increased production costs due to supply chain distortions, and pay business obligations, including debt, rent, and mortgage obligations.

Payroll Tax Credits and Deferred Payments

Employers are eligible for a 50 percent refundable payroll tax credit (“Employee Retention Tax Credit”) on wages paid up to $10,000 during the crisis. The credit would be available to employers whose businesses were disrupted due to virus shutdowns and those that had a decrease in gross receipts of 50 percent or more when compared to the same quarter last year. The credit can be claimed for employees who are retained but not currently working due to the crisis for firms with more than 100 employees, and for all employee wages for firms with 100 or fewer employees.

Additionally, under the CARES Act, certain employers may opt out of having to pay employer-side Social Security payroll taxes until January 1, 2021. Once those payments restart, 50 percent will be owed on December 31, 2021 and the other half on December 31, 2022. The Social Security Trust Fund will be backfilled by general revenue in the interim period. Firms that opt into the PPP cannot defer payroll taxes or take the employee retention credit.

Evaluating Trade-offs

Other than the prohibition that SBDRF funds cannot be used to pay back PPP loan obligations, all three programs overlap significantly. PPP, payroll tax credits, and EEIG can be used for payroll expenses and business obligations. However, those who qualify for PPP cannot also claim the employee retention tax credit. SBDRF and EEIG are both intended to provide debt payment assistance for firms that took out loans prior to the crisis. The programs overlap in purpose, recipient, and eligibility conditions.

Simplicity

The more streamlined the assistance, the easier it is to receive. Reducing the number of programs, stipulations, and conditions would make it easier for small businesses and nonprofits to understand and use their time most efficiently. PPP, SBDRF, and EIDL are complicated and duplicative, making them not simple nor transparent for eligible recipients.

Neutrality

Creating special benefits for businesses under 500 employees creates compliance issues for many firms. While providing relief to small businesses is not wrong in itself, limiting that relief to firms under 500 employees adversely punishes those with slightly larger payrolls.

Conclusion

Policymakers are facing huge challenges as they seek to prevent payroll cuts while requiring workers to stay home in order to prevent the spread of the coronavirus. The small business provisions in the CARES Act support small businesses and nonprofits seeking economic relief during this downturn. However, creating multiple programs with overlapping purposes and differing qualification requirements makes relief more complicated, vague, and not neutral.

Take the differences between employee retention credit and the Paycheck Protection Program (PPP), for example. The former (payroll tax credits) allows certain firms to qualify for a tax credit for employee wages for those retained but not currently working due to the crisis if they have more than 100 employees. The same applies for all employee wages on firms with 100 or fewer employees. Only small business firms with up to 500 employees are eligible for PPP loans.

While firms can only opt into one, the eligible expenses overlap even while the eligibility criteria differ. That’s one more bureaucratic hurdle businesses have to jump through during the crisis to make ends meet. Both the employee retention credit and the PPP face administrative challenges, as the former is struggling to provide clear rules based on firm size and the latter is coping with demand and liquidity challenges. Policymakers should consider streamlining or revisiting these programs in the next round of coronavirus response legislation.

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