For the construction industry, there is still a lot to unpack around the recent passage of the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The largest stimulus of its kind in U.S. history, the CARES Act is designed to put money and resources into the hands of individuals and businesses as the nation grapples with the coronavirus pandemic. With cities, counties, and states issuing stay-at-home or shelter-in-place orders, construction projects from coast-to-coast have been put on hold, delayed, or canceled.
The impact, no doubt, will be staggering as construction businesses struggle to pay employees and cover overhead costs. While construction has mostly been viewed as “essential,” there are still pockets of the country where construction sites have been shuttered.
How the CARES Act Will Help Construction
Whether COVID-19 precautions are causing delayed shipments of materials or reducing the availability of craft workers, it appears that ongoing or planned construction projects will continue to be at risk for the foreseeable future.
With a goal of helping the U.S. economy recover from the coronavirus crisis, the CARES Act will provide cash to businesses to keep millions of workers on the payrolls. Just how will this $2 trillion bill help all in the construction industry? Whether you’re an architect or a cost estimator or a general contractor or a subcontractor, the CARES Act is aimed at softening the economic fallout of COVID-19.
With cash in short supply, contractors and suppliers will be eager for any financial help to get through the ensuing downturn. In the weeks following the pandemic shut-down, the numbers of Americans seeking unemployment benefits have surged to record levels—nearly 17 million by April 9th. The shut-down of the economy is having a rolling impact as rents, mortgages, and credit card bills come due.
Construction Priorities in CARES Act
The good news is that the CARES Act provides $350 billion for small-business loans, more than $100 billion for hospitals, $250 billion for unemployment aid, and more. Working on behalf of the construction industry, the Associated General Contractors of America (AGC) said construction industry priorities included in the CARES Act included provisions to:
• Establish loan programs that will help many construction businesses pay employees and overhead costs, while continuing operations
• Provide advanced-refundable tax credit for employers implementing new federal paid leave mandates in the Families First Coronavirus Response Act
• Delay the payment of employer payroll taxes through January 1, 2021, which will provide relief for businesses’ cash flow during this crisis
• Allow companies to “carry back” their net operating losses for up to five years, which would inject much needed cash into struggling businesses
• Suspend the limitation on pass-through business losses, which will allow owners of passthrough businesses to fully deduct any losses they incur this year
• Suspend the application of the limitation on interest expense deductions, which will avoid penalizing businesses for borrowing during this crisis
• Fix the so-called “retail glitch” from the 2017 tax reform law entitled the Tax Cuts and Jobs Act, which unintentionally increased the cost of many construction projects, such as improvements for restaurants, retail establishments, or commercial office property
Closer Look at Lending Programs
Experts say two major lending programs in the CARES Act are expected to benefit construction employers—a U.S. Small Business Administration (SBA) loan program and an Exchange Stabilization Fund loan program. The Paycheck Protection Program will be run through the SBA’s 7(a) lending program. Under normal circumstances, a 7(a) loan is available to small businesses, through an SBA lender, with a 75% federal guarantee on loans up to $5 million.
However, on April 8, the Treasury Department issued new guidance to allow any U.S. firms with 500 or fewer employees to qualify for the Paycheck Protection Program—regardless of revenue. The AGC raised concerns that the SBA lending program would leave out many firms that employ 500 or fewer employees, but whose revenues are above the SBA rule.
Specifically, the new guidance means a construction business does not have to qualify as a small business to participate in the program.
Under the Paycheck Protection Program, the SBA can guarantee 100% of the loans through the end of the year. To qualify, the small business must have been operational as of Feb. 15, 2020 and had employees for whom it paid salaries and payroll taxes, or paid as independent contractors.
Lifeline for Construction Industry
Under the $349 billion initiative, small businesses are eligible for loans of up to $10 million, which will not have to be paid back if they meet certain requirements, including using 75% of the money to retain or rehire employees. Businesses can receive a $10,000 loan advance that does not have to be repaid, according to The Washington Post. Earlier this week, Treasury Secretary Steven Mnuchin asked congressional leaders for an additional $250 billion for the program, which has received overwhelming demand.
The good news is that the loan can be used for payroll support, such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, utility payments, or interest on debt incurred prior to Feb. 15, 2020. Borrowers will have to self-certify that funds borrowed under the program are used for payroll, rent, utility payments, etc.
Also, the maximum interest rate is set at 4%, but all payments on the loan can be deferred for at least six months. All fees for the borrower and lender for participation in the program are waived and all requirements that the borrower post collateral for the loan are waived.
With the signing of the $2 trillion CARES Act, Congress has delivered a much-needed lifeline that will help construction firms and workers weather the storm. With small businesses making up a majority of the construction industry, the nearly $350 billion for small business loans will help construction professionals access capital and maintain cash-flow.
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