Understanding the CARES Act: What It Means for Your Business

The Coronavirus Aid, Relief, and Economic Security (CARES) Act is one of the most significant pieces of legislation in recent U.S. history. Enacted in March 2020, it provided unprecedented financial assistance to individuals, businesses, and healthcare institutions impacted by the COVID-19 pandemic. For small business owners, understanding the CARES Act and its ongoing implications can be a critical factor in ensuring solvency and success in a rapidly changing economic landscape. Let’s explore what the CARES Act entails, its key provisions, and how your business can benefit from it.

A Quick Overview of the CARES Act

The CARES Act is a $2.2 trillion economic stimulus bill aimed at mitigating the economic fallout caused by the COVID-19 pandemic. While it covers a broad range of financial relief measures, the provisions most relevant to businesses include:

• Paycheck Protection Program (PPP)
• Economic Injury Disaster Loans (EIDL)
• Employee Retention Tax Credit (ERTC)
• Expanded Unemployment Benefits
• Tax Provisions and Deferrals

Each of these components was designed to provide immediate relief while fostering long-term economic recovery. We will go over each of those.

Paycheck Protection Program (PPP)

The PPP was arguably the most talked-about provision of the CARES Act. Its primary goal was to help small businesses retain their employees during the pandemic. Here are the key details:

• Loan Amount: Businesses could borrow up to 2.5 times their average monthly payroll costs, capped at $10 million.
• Forgiveness: Loans were fully forgivable if at least 60% of the loan was spent on payroll costs, with the remaining 40% allowed for eligible expenses such as rent, utilities, and mortgage interest. This threshold was updated by the Paycheck Protection Program Flexibility Act of 2020 (initially, the requirement was 75% for payroll costs). Borrowers had to maintain employee headcount and wages during the covered period to qualify for full forgiveness.
• Eligibility: The program was open to small businesses, sole proprietors, independent contractors, and nonprofits (501(c)(3) organizations). Additionally, certain tribal businesses and veterans’ organizations were eligible.
  • Note: The eligibility criteria were expanded in subsequent rounds of PPP funding to include additional entities, such as housing cooperatives and certain 501(c)(6) organizations.
  • Impact: PPP loans were instrumental in helping businesses stabilize operations and retain employees. However, the application and forgiveness process did require meticulous record-keeping and compliance with program terms.

Many businesses were able to stabilize their operations and maintain their workforce thanks to PPP loans. However, navigating the application and forgiveness process required meticulous record-keeping and an understanding of the program’s terms. 

We are now going to next component:

Economic Injury Disaster Loans (EIDL)

The EIDL program provided low-interest loans to businesses suffering substantial economic injury due to the pandemic. Unlike the PPP, EIDL loans were not forgivable, but they offered favorable terms:

• Loan Amount:Businesses could borrow up to $2 million, based on the demonstrated economic injury caused by the pandemic. However, the SBA later capped loans at $150,000 for a period due to high demand, before raising the cap back to $2 million in 2021.
• Interest Rate: 3.75% for businesses and 2.75% for nonprofits.
• Repayment Terms: Loans had repayment terms of up to 30 years, with deferred payments for the first year (later extended to 24 months for loans made in 2020 and 2021).
• Advance Grants:  Businesses could receive up to $10,000 in advance grants that did not need to be repaid, even if the loan application was denied. This was referred to as the EIDL Advance.
  • Additional Note: The Targeted EIDL Advance and Supplemental Targeted Advance programs were later introduced to provide additional grants to businesses in low-income communities that suffered a revenue loss of more than 30% or 50%, respectively.
  •  EIDL loans provided critical cash flow for businesses to cover operating expenses such as rent, utilities, and fixed debts. The program was particularly valuable for businesses that did not qualify for PPP loans or needed additional funding.

EIDL loans provided critical cash flow for businesses struggling to cover operating expenses.

Okay, let’s go to our next component, which is ERTC.

Employee Retention Tax Credit (ERTC)

The ERTC offered a refundable payroll tax credit to encourage businesses to retain employees. The ERTC eligibility periods ended on September 30, 2021, for most businesses. However, recovery startup businesses (those that began operations after February 15, 2020, and had average annual gross receipts of $1 million or less) could claim the credit through December 31, 2021. The IRS has paused processing of new ERTC claims as of September 2023 due to concerns about fraudulent claims. Businesses should ensure compliance with all requirements before filing. The information provided is largely accurate, but the following clarifications and updates are important:

• The ERTC was available to businesses that also qualified for PPP loans, provided they did not use the same wages for both programs.
• The IRS has paused processing new ERTC claims due to fraud concerns, and businesses should exercise caution when amending returns.
• The CARES Act provisions, such as payroll tax deferrals and NOL carrybacks, were critical liquidity tools for businesses during the pandemic.
• Credit Amount: This was calculated as 50% of qualified wages (up to $10,000 per employee) for the entire year. For 2021, the credit was expanded to up to $28,000 per employee. This was calculated as 70% of qualified wages (up to $10,000 per employee per quarter) for the first three quarters of 2021, resulting in a maximum of $7,000 per quarter
• Eligibility: Businesses qualified if they experienced either:

• A significant decline in gross receipts (defined as a 50% decline in 2020 compared to the same quarter in 2019, or a 20% decline in 2021 compared to the same quarter in 2019).
• A full or partial suspension of operations due to a government-mandated COVID-19 shutdown order..

The ERTC was a lifeline for businesses that faced revenue losses but didn’t qualify for PPP loans.Initially, businesses could not claim both the ERTC and PPP loans. However, the Consolidated Appropriations Act of 2021 retroactively allowed businesses to claim both, provided they did not use the same wages for both programs. Clarification: the statement that the ERTC was a “lifeline for businesses that faced revenue losses but didn’t qualify for PPP loans” is partially correct. While the ERTC was indeed a lifeline, businesses could qualify for both programs (as of 2021), provided they adhered to the wage allocation rules.

Now we are going to next step which is Tax Provisions and Deferrals:

Tax Provisions and Deferrals

The CARES Act included several tax-related provisions to ease financial strain on businesses:

• Deferral of Payroll Taxes: The CARES Act allowed employers to defer their share of Social Security taxes (6.2% of wages) for wages paid from March 27, 2020, through December 31, 2020. The deferred amounts were due in two installments: 50% by December 31, 2021 & 50% by December 31, 2022.
• Net Operating Loss (NOL) Carrybacks: The CARES Act allowed businesses to carry back NOLs from 2018, 2019, and 2020 to the previous five years. This provision provided liquidity by enabling businesses to claim refunds for taxes paid in profitable years.
• Qualified Improvement Property (QIP): The CARES Act fixed the “retail glitch” from the 2017 Tax Cuts and Jobs Act (TCJA), allowing 100% bonus depreciation for Qualified Improvement Property (QIP). This applied to improvements made to the interior of nonresidential buildings (e.g., restaurants, retail stores) and was retroactive to January 1, 2018.

These provisions offered liquidity and long-term tax savings for businesses.

Since that makes sense, let’s now talk about our next point. 

Ongoing Impacts and What’s Next

Although many provisions of the CARES Act have expired, its effects continue to shape the economic landscape. For example:

• Forgiveness Audits: The SBA is auditing PPP loans over $2 million to ensure compliance with program requirements. Borrowers must demonstrate that the loan was necessary to support ongoing operations..
• ERTC Claims: Businesses can still amend prior payroll tax returns (using Form 941-X) to claim the ERTC for eligible periods. However, the IRS has issued warnings about aggressive marketing and fraudulent claims related to the ERTC, and businesses must ensure they meet the eligibility criteria.
• Legislative Updates: While many CARES Act provisions have expired, Congress may introduce new relief measures or extend existing programs depending on economic conditions. Businesses should monitor legislative developments.

Staying informed about these developments can help your business navigate future challenges.

Now lets go over how Solvency Now Bookkeeping Can Help: 

Navigating the complexities of the CARES Act and its related programs requires expertise in bookkeeping and financial management. That’s where Solvency Now Bookkeeping comes in. Our team can help you:

1. Ensure Compliance: We’ll keep your records organized and accurate, so you’re prepared for audits or reviews.
2. Plan for the Future: With our forward-looking financial strategies, you can build resilience and thrive in any economic climate.

The CARES Act was a game-changer for businesses during the COVID-19 crisis. By understanding its key provisions and leveraging professional expertise, you can turn challenges into opportunities. Solvency Now Bookkeeping is here to guide you every step of the way.

Contact us today to schedule a consultation and take the first step toward financial clarity and success.