COVID-19

Federal Assistance for Businesses Affected by COVID-19

The emergence of the coronavirus disease 2019 (COVID-19) has had far-reaching economic consequences. The pandemic is ongoing and the widespread distribution of vaccines is still some months away. Reaching a full economic recovery likely will be a slow process that will depend heavily on continued progress on management and treatment of the virus. In the meantime, significant amounts of federal fiscal stimulus have provided financial assistance directly to households and businesses. In this post, we discuss four federal bills that provided financial assistance to businesses affected by COVID-19:

• Coronavirus Aid, Relief, and Economic Security (CARES) Act Provided About $900 Billion for Financial Assistance to Businesses. H.R. 748, which was signed by President Trump on March 27, 2020, provided $377 billion for financial assistance to small businesses—this generally included businesses and nonprofits with fewer than 500 employees—and more than $500 billion for financial assistance to air carriers and other federal programs that broadly support the economy.

• Paycheck Protection Program (PPP) and Health Care Enhancement Act Provided Additional Funding. The funding for small businesses provided by the CARES Act was quickly exhausted. H.R. 266, which was signed by President Trump on April 24, 2020, provided an additional $331 billion for those programs created by the CARES Act and $50 billion for the existing Economic Injury Disaster Loan (EIDL) program.

• The Response and Relief Act Funded a Second Round of PPP Loans and Provided Financial Assistance for Theatres. H.R. 133, which was signed by President Trump on December 27, 2020, provided $284.5 billion to fund a second round of PPP loans. H.R. 133 also included funding for other financial assistance programs—including $15 billion for theatres—and significant tax benefits for businesses.

• American Rescue Plan (ARP) Provided $54 Billion for Restaurants and Small Businesses. H.R. 1319, which was signed by President Biden on March 11, 2021, provided $28.6 billion for a new grant program for restaurants and additional funding for small business financial assistance.

Figure 1 summarizes the major business assistance provisions of these four federal economic stimulus bills.

Financial Assistance to Small Businesses

Small Business Administration (SBA) Generally Helps Businesses Get Loans. The federal SBA provides financial assistance, and other services, to small businesses. The SBA defines a small business using either revenue or employee headcount standards that vary by industry. The primary SBA program is a loan guarantee program. The SBA promises to repay a portion of the amount borrowed by qualified businesses in cases where the borrower cannot. Loan guarantees reduce the risk to the lender, which allows the small business to get more favorable terms—meaning that they may borrow the money for a longer period of time at a lower interest rate. The SBA also directly makes low-interest loans to businesses and nonprofit organizations following declared disasters. Small businesses that have been affected by a declared disaster can apply to the SBA for an EIDL. Businesses may use the proceeds of an EIDL to replace or repair physical assets damaged in a disaster and to cover their operating expenses.

PPP Provides Forgivable Small Business Loans. The CARES Act created a new forgivable loan program called the PPP. This program subsidizes small businesses so that they continue paying employee salaries and other bills while their revenues are reduced by the current public health efforts to reduce the transmission of COVID-19. Eligible businesses apply for these loans from a participating lender. Unlike a typical loan program, however, businesses will not be required to repay these loans if the money is used to pay employee wages and benefits. Instead, if they have maintained employee and compensation levels, the recipients may apply to the SBA through their lender to have their PPP loans forgiven. (See here for the federal PPP regulations.) The SBA cannot forgive PPP loans without documentation and cannot forgive amounts that are used for ineligible purposes, such as to buy inventory or equipment. (Amounts not forgiven will be treated as a regular five-year loan with a 1 percent interest rate.)

Second Draw PPP Loan Program Created in December 2020. H.R. 133 provided funding to allow many businesses and nonprofits that received a PPP loan earlier in 2020 to receive a second draw PPP loan in 2021. In addition, H.R. 133 allowed eligible businesses that did not previously receive a first draw PPP loan to apply for one. The second draw PPP program is somewhat more limited. We describe the differences between the first draw and second draw PPP programs in more detail below:

• Which Employers Are Eligible for Assistance? Most businesses and nonprofit organizations with fewer than 500 employees are eligible to apply for a first draw PPP loan. Sole proprietors and self-employed people also are eligible for this program. Some employers that used the full amount of their first draw PPP loan may apply for a second draw PPP loan. However, eligibility for the second draw PPP loan is more limited. Employers must have fewer than 300 employees (instead of 500) and demonstrate that their gross receipts during 2020 were at least 25 percent lower than the same period of 2019.

• How Much Money Can a Small Business Get? Eligible businesses and nonprofits may borrow 2.5 times their average monthly payroll. However, businesses in the accommodations and food services industry (those with a North American Industry Classification System code that begins with 72) may receive a second draw PPP loan for 3.5 times their average monthly payroll. The maximum first draw PPP loan is $10 million and the maximum second draw PPP loan is $2 million.

CARES Act Funding for PPP Quickly Exhausted. PPP loans are made on a first-come, first-served basis. The CARES Act initially provided $349 billion for PPP loans but these funds were exhausted by April 17, 2020. Faced with high demand, banks and credit unions administering the program appear to have prioritized their existing customers. Many small businesses—especially those which were unable to immediately apply for a loan and those that do not already have an outstanding loan with a bank participating in the program—reported having difficulty getting funding. In addition, California businesses initially received less assistance than would be expected (about 10 percent) based on the state’s share of U.S. jobs (about 12 percent).

Congress Subsequently Increased PPP Funding and Adopted Other Safeguards. The PPP and Health Care Enhancement Act provided an additional $321.3 billion for the PPP in April 2020. When the program stopped accepting applications on August 8, 2020, $134 billion in authorized funding had not been used. California businesses and nonprofits received $68.6 billion in PPP loans, or 13 percent of the total. In December 2020, H.R. 133 provided $284.5 billion for additional PPP loans. The program reopened on January 11, 2021. To prevent some of the equity concerns that had been raised about the PPP program last spring, H.R. 133 also set aside $35 billion for first-time borrowers with ten or fewer employees and for loans under $250,000 to businesses located in low-income areas. In addition, the SBA provided a two-week exclusive application period during February for smaller borrowers. The ARP provided an additional $7.3 billion for PPP loans and broadened eligibility to certain nonprofits that previously had been ineligible. The PPP currently is scheduled to stop accepting applications on March 31, 2021. As of March 21, 2021, the program had $95.6 billion, or 33 percent of the appropriated amount, available for PPP loans.

Taxation of Forgiven PPP Loans. State and federal tax laws typically require taxpayers to report forgiven loan amounts as income. However, the PPP and Health Care Enhancement Act excluded forgiven PPP loans from income for federal tax purposes. On April 30, 2020, the federal Internal Revenue Service (IRS) issued a regulation stating that PPP recipients cannot claim a deduction for expenses funded from forgiven PPP loans. In September, the state conformed to these federal rules for the first round of PPP loans. Together, these actions made the PPP loans roughly revenue neutral from the perspective of the federal and state governments. In December, H.R.133 reversed the April IRS ruling and allowed PPP recipients to claim deductions on their federal taxes for expenses funded from forgiven PPP loans, in addition to excluding the forgiven loan from taxable income. This tax treatment significantly increases the total amount of financial assistance to PPP recipients. As of March 23, 2021, California has not conformed to H.R. 133. We estimate that fully conforming to federal law could reduce state tax revenues by up to roughly $8 billion. There currently are legislative proposals to partially conform to the federal treatment of PPP loan forgiveness.

Provided More Than $20 Billion to Small Businesses With Existing SBA Loans. The CARES Act provided $17 billion to pay—generally to private lenders—six months of principal and interest payments on existing SBA loans. In December 2020, H.R. 133 provided an additional $3.5 billion to extend this debt relief program. Debt relief was made available to all businesses with existing loans guaranteed by the SBA (including PPP loans). Many banks allowed borrowers to defer payments on existing loans for six months to one year because of COVID-19. If a borrower has requested a deferment from their bank, the SBA will provide six months of payments following the end of the deferment. The additional funds provided by H.R. 133 allowed the SBA to provide additional debt relief beyond the initial six-month period. (The duration of this additional debt relief varies and the SBA currently directs borrowers to contact their lenders.)

Provided $50 Billion for Disaster Loans. On March 16, 2020, the SBA approved an EIDL assistance declaration for California, allowing businesses to apply for disaster loans directly from the SBA. (This declaration has since been expanded to the entire U.S.) At that time, there was about $7 billion available for SBA disaster loans. In April 2020, H.R. 266 provided an additional $50 billion in funding for the EIDL assistance program. Eligibility for disaster loans is similar to the PPP, but the purpose is to provide loans for other operational expenses beyond payroll. Businesses may borrow up to $2 million at low rates—3.75 percent for small businesses and 2.75 percent for nonprofit organizations. Repayment terms vary depending on the individual circumstances of the borrower. Eligible small businesses must apply for an EIDL directly from the SBA. As of February 16, 2021 568,000 California businesses received EIDLs totaling $35.4 billion.

Initially Provided $20 Billion for Emergency $10,000 EIDL Grants. The CARES Act also provided $10 billion to the EIDL program to provide emergency grants of up to $10,000 to small businesses that applied for a disaster loan. In April 2020, H.R. 266 provided an additional $10 billion for these emergency grants. Any small business that applied for an EIDL automatically received an advance of up to $10,000 that does not need to be repaid, regardless of whether they eventually were approved for the loan. The amount of the grant was based on the number of employees—$1,000 per employee, including the owner. The initial $20 billion for emergency EIDL grants was exhausted in July 2020. Of this amount, 810,000 California businesses received EIDL grants totaling 2.7 billion, or 13 percent.

Provided $35 Billion for Additional, More Targeted EIDL Grants. Subsequent funding for emergency grants was targeted at low-income communities. In December 2020, H.R. 133 provided $20 billion for targeted EIDL grants and the ARP provided an additional $15 billion for targeted EIDL grants. The SBA is making the first round of EIDL grants available first to businesses in low-income communities that previously received an EIDL grant for less than $10,000. In February 2021, the SBA began contacting EIDL emergency grant recipients that received less than $10,000 to notify them of their possible eligibility and to provide information about how to apply for additional funds. Later in 2021, the SBA will contact businesses that previously applied for EIDL emergency grants and did not receive one because of insufficient funding.

Provided $16.3 Billion for Theatres and Some Cultural Institutions. In California, many theatres and cultural institutions have been closed for the entire duration of the COVID-19 pandemic. While these businesses and nonprofits were eligible for PPP loans, most theatres and cultural institutions have been more affected by the state’s COVID-19 public health restrictions than other kinds of businesses—which were allowed to reopen under reduced occupancy. In December 2020, H.R. 133 created the Shuttered Venue Operators Grant (SVOG) program and provided initial funding of $15 billion. The ARP provided an additional $1.3 billion to allow SVOG recipients to also apply for second draw PPP loans. Eligible businesses and nonprofits include theatres, performing arts organizations, and many cultural institutions (such as museums, zoos, and aquariums). The grant amount will be for 45 percent of the organization’s 2019 revenue up to $10 million. As of March 23, 2021, the SVOG program has not begun to accept applications. When the SVOG program opens, the SBA will give priority to venues with fewer than 50 employees and to venues that experienced a decline in revenue of 90 percent or more. Cultural institutions that do not have at least one auditorium, theatre, or performance space with fixed seating and regular programing are ineligible for funding under this program, regardless of their decline in revenue. While SVOG applicants may also apply for and receive PPP loans, the amount of the grant will be reduced by the amount of any PPP loan received after December 27, 2020.

Provided $28.6 Billion for Restaurants. The ARP created the Restaurant Revitalization Fund to provide grants to restaurants, caterers, and bars that have experienced a decline in revenue due to COVID-19. The maximum grant is $10 million and, similar to the SVOG program, restaurant grants will be reduced by the amount of any PPP loan received after December 27, 2020. As of March 23, 2021, the SBA has not provided any additional details about this new program.

Provided Funding for Other SBA Programs. Small Business Development Centers (SBDCs) provide small businesses and entrepreneurs with consulting, mentoring, and training services at no cost to the business owner. Women’s Business Centers provide similar business development services as SBDCs, but specifically focus on assisting female entrepreneurs, to address economic justice issues related to gender. There are several dozen SBDCs and 13 Women’s Business Centers in California. The CARES Act provided $240 million for grants to SBDCs and Women’s Business Centers and additional funds for other SBA programs. Typically, such grants require the centers to match the grants with funds from other sources, but the CARES Act waived the matching funds requirement for these grants. Subsequent bills provided additional funding for SBDCs and other SBA business development programs.

Business Financial Assistance Administered by the Department of the Treasury

The COVID-19 pandemic has had severe economic effects across the entire economy. Just over half of all U.S. jobs are at businesses with more than 500 employees. Many of these larger businesses were ineligible for the SBA programs described above. The CARES Act provided $532 billion to the U.S. Department of the Treasury (U.S. Treasury) to support businesses in the aviation sector, specifically, and to generally support the nation’s financial system. The broader economic effects of the pandemic were ultimately not as severe as Congress initially anticipated. However, the COVID-19 pandemic has continued to severely affect the aviation sector and subsequent funding has been provided to the U.S. Treasury to continue providing financial assistance to air carriers. We describe these actions in more detail below.

Emergency Federal Reserve (Fed) Lending Programs. The CARES Act allowed the Fed to make loans and loan guarantees to large businesses not covered by other programs, as well as to state and local governments. Like the SBA programs described above, the intent of these loans is to allow businesses to continue paying employee salaries and other bills while revenues are reduced by the current public health efforts to reduce the transmission of COVID-19. Unlike those programs, however, the Fed cannot forgive these loans and borrowers must repay them with interest. Consequently, private companies must be able to provide adequate assurances that they would be able to repay the loans. The CARES Act provided a total of $500 billion to the U.S. Treasury to support emergency lending programs—of this amount, the U.S. Treasury set aside $454 billion as a backstop against losses that could result from loans made by the Fed. At the time, the U.S. Treasury estimated that these funds would enable the Fed to lend up to $4 trillion in support of the nation’s financial system. Fortunately, the pandemic’s effect on the economy—while quite serious—has not been nearly as severe as Congress anticipated in March 2020. By the end of the year, the Fed had outstanding loans under these programs of only $41.1 billion. In December 2020, H.R. 133 ended the emergency lending programs and reduced the total amount of funding in support of the outstanding loans to $25 billion.

Provided $46 Billion for Loans to Air Carriers. The CARES Act set aside, from the $500 billion described above, $25 billion for loans to passenger air carriers, $4 billion for loans to cargo air carriers, and $17 billion for loans to businesses critical to maintaining national security. This separate lending program for the aviation sector was administered directly by the U.S. Treasury. At the end of 2020, the U.S. Treasury had approved around $22 billion in loans under this program.

Provided $63 Billion for Grants to Air Carriers and Related Businesses. The CARES Act also provided the U.S. Treasury with $32 billion for grants to air carriers and related employers, such as caterers and airport contractors, specifically to pay employee wages and benefits and avoid layoffs in the aviation sector. Subsequently, H.R. 133 and the ARP provided an additional $31 billion for this payroll support program. Affected businesses received grants from the U.S. Treasury if they agreed to continue paying their workforce and not reduce pay rates and benefits. Larger carriers also were required to provide compensation to the U.S. Treasury in exchange for the financial assistance.

Funding for Other U.S. Treasury Programs to Support Community Based Lenders. The U.S. Treasury administers programs to certify and help fund community development financial institutions (CDFIs). CDFIs provide loans and financial services to underserved communities. In December 2020, H.R. 133 provided $12 billion to help fund CDFIs. In addition, the ARP provided $10 billion to reauthorize the State Small Business Credit Initiative (SSBCI) program in the U.S. Treasury. The SSBCI was created in 2010, with one-time funding of $1.5 billion, to provide grants to states, U.S. territories, and municipalities to establish small business lending programs that are similar to the SBA’s loan guarantee programs. California received $168.4 million, about 11 percent, from the 2010 program. While the federal funding for that program has been exhausted, in recent years, California used state funds to continue funding its small business loan guarantee program. We expect that California is well positioned to compete for the new SSBCI funding.