Cash Flow Relief for Independent Consultants: the CARES Act & Other Ideas

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We’re in an unprecedented situation because of the COVID-19 coronavirus, and the economic fallout has been drastic for many business sectors, such as travel and restaurants. For us as consultants, the effects are likely to be more gradual but our income will likely be affected.

This article explains your options for cash-flow relief, whether you need it immediately or in the near future, and how to get it. I have summarized how the new Coronavirus Aid, Relief, and Economic Security (CARES) Act applies to self-employed management consultants, whether you’re a single-person entity (sole proprietor, LLC or S-Corp) or if you’re a small business with employees or subcontractors. However, lawyers and accountants are still reviewing this 880-page law so it will be some time before we know all the specifics. Moreover, how it applies to you will depend on your specific situation. Nonetheless, this summary should help you decide whether to consider pursuing any of these options.

There are several ways to get some cash-flow relief to help you pay your bills in the near term as a result of the $2 trillion CARES Act:

1.       A stimulus payment from the U.S. government

2.       A loan from the Small Business Administration

3.       Time sensitive! A $10,000 federal grant

4.       Unemployment insurance payments

5.       Borrow from your IRA penalty-free

Possible other options, roughly listed by desirability and likelihood:

6.       Money you’ve set aside for your quarterly taxes

7.       Your home equity

8.       Credit cards

A cash payment from the U.S. government

Most individuals with less than $75,000 in income on their federal tax returns can expect a one-time cash payment of $1,200 within the next three weeks. Married couples filing taxes jointly and earning less than $150,000 will receive up to $2,400. They will also receive $500 for every child who was under age 17 in 2019. If your earnings are higher than those limits but less than $99,000 for individuals and $198,000 for married couples, your payments will be reduced on a sliding scale. If you earned more than $99,000 or over $198,000 as a couple, you will get nothing.

Eligibility is based on your adjusted gross income from your most recent tax return, either for 2019 if you already filed it, or for 2018 if you haven’t. (See line 8b on your federal 1040 tax return.)

If you qualify, your payment will automatically be processed if you are a U.S. citizen who has filed a tax return in the last two years. You don’t have to do anything. It’s a one-time, tax-free payment.

A loan from the Small Business Administration (SBA)

The loan program provided by the CARES Act is getting a lot of press, but naturally it’s complicated. I’ve participated in two webinars and read countless articles to understand it. The information I’m sharing is certainly not financial or legal advice. It’s intended to help you decide if the program is a viable option for you.

There are two types of SBA loans that can be used: the old loan program called the Economic Injury Disaster Loan (EIDL) program, and the new program created by the CARES Act called the Paycheck Protection Program (PPP). EIDL loans are available now, the PPP loan program is being set up now. The key differences are that a PPP loan does not require collateral or a personal guarantee and has a loan forgiveness program. That said, consultants are unlikely to qualify for the loan forgiveness because it’s based on payroll and rent/mortgage payments made by a business. An accounting firm has published a good comparison chart of the two loan programs here. It will likely be at least two weeks before the PPP application process is available, but here are a few of the details:

  • You’ll have to prove you were a small business prior to February 15 of this year.

  • You’ll need to provide evidence of your qualifying status, such as 1099-MISC tax forms from your clients, and accounting statements like an income statement and/or balance sheet.

  • Your loan amount will be based on your average monthly income, but it will be capped at $100,000 annually or $8,333 monthly. The maximum loan you can get as a solopreneur will be about $20,800 (2.5 x average monthly income).

  • The loan will accrue interest, probably 3.75% but not to exceed 4%.

For more details see the SBA’s Emergency Loan Guide; I’ve highlighted the parts that apply to us as solopreneurs and provided some comments.

For the most current information about the loan programs, visit the SBA coronavirus webpage, or go directly to the SBA loan application page. The PPP loans will also be available through most major banks in the coming weeks.

Note that although the CARES Act dramatically streamlines the process of getting an SBA loan, it’s still a loan that will accrue interest and need to be repaid. It’s highly unlikely that the loan forgiveness program will apply to solopreneurs because it’s based on business payroll. It’s always wise to avoid taking on debt if you can, so you may want to explore the other options on this list first.

Time Sensitive! Up to $10,000 as a grant

The CARES Act also includes the opportunity to receive up to a $10,000 advance for emergency capital if you’ve been impacted by the economic situation. This is offered as part of the traditional EIDL loan, not the new PPP loan.  

Applying sounds complicated, but it’s really not. First, complete the online application to apply for an EIDL loan, even if you have no intention of accepting the actual loan. By applying for the real loan, you’re also applying for the $10,000 emergency grant. Just be sure to check the box to request the emergency advance of up to $10,000. If you get it, that money will be sent even before the real loan is approved. Even if the actually loan is not approved, you get to keep the $10,000 advance for free with no penalties.

If you ask for more and the loan is granted, the difference in the loan amount and the $10,000 becomes a loan with interest capped out at 4%. Thus, if you want/need the loan then you can get it. But if you’ve been impacted, you should apply for the $10,000 in forgivable money.

There is one catch, however. There is only $10 billion available for these grants/loans so only about 1 million small businesses will get this out of the estimated 45,000,000 in the U.S.

To apply for a COVID-19 Economic Injury Disaster Loan, click here.  It should take about 10 minutes to apply. Use your federal employer tax ID number (FEIN) because it doesn’t seem to work with a social security number. After you apply, you may be contacted by the SBA to provide other documents such as financial statements and tax returns. Reply quickly because the funds are disbursed on a first qualified, first served basis.

Note, there’s not much information available yet as to exactly how this program will be administered. The SBA may roll out new guidelines over the next few days but it’s worth getting in line by applying now.

Unemployment insurance benefits

For the first time in history, gig workers and the self-employed are eligible for unemployment benefits under the CARES Act. Even if you still have some consulting business, you may be eligible since the act also covers those who are partly unemployed. It also covers people who must self-quarantine, although I don’t know how this is verified.

Basically, the expanded program is intended to help people who lose work as a direct result of the public health emergency. For the self-employed, the qualifications and amounts are determined by the Disaster Unemployment Assistance Program, which is complicated but here’s gist of it.

Eligible people will receive a $600 weekly payment plus unemployment benefits based on your state’s rates and formulas. Your payment amount will be based on your average weekly pay rate, calculated using the net profit from Schedule C of your most recently filed tax return. (If you’re newly self-employed and haven’t ever filed a Schedule C as part of your federal 1040 tax return, you’ll have to provide additional documentation.) Different states calculate this weekly pay rate differently, as well as the duration of benefits.

Under the CARES Act, the maximum benefit a self-employed worker will receive is the $600 per week plus half the average benefit available in your state, not half the maximum benefit. To give you an idea, maximum weekly benefits range from $235 per week in Mississippi to $823 per week in Massachusetts. Find your maximum state payment amount here.

If you are still working part-time or continuing to make some money (say, one of your clients is still active but the other two have stopped), your benefits will be adjusted accordingly. But you don’t have to be completely unemployed or without clients to file a claim. 

The duration of the weekly payments will vary by state with 26 weeks the most common but 9 states provide fewer weeks and 1 provides more. (Click here for a duration map.) The CARES Act provides for up to 13 additional weeks of federally funded benefits once regular state benefits have been exhausted.

It’s unlikely you will have to prove that the pandemic caused your unemployment status so file a claim and see what happens. The only cost to apply is time, and doing so won’t affect your credit score. To file a claim, contact your local unemployment office. Do an internet search on “file an unemployment insurance claim in <your state>.” Note, most websites warn of delays because of the surge in new claims.

Unemployment benefits are taxable.

Borrow from your IRA without penalties

Borrowing from yourself is much better than paying interest on a loan. The CARES Act allows you to withdraw up to $100,000 from your IRA with no federal tax liability, as long as you repay it within three years. You can use this money for whatever you wish, including paying bills, helping your kids, or paying down other existing loans. You can take it out all at once or as multiple withdrawals, and repay it back (a “recontribution”) in a lump sum or in phases. If you’re under age 59½, the nasty 10% early-withdrawal penalty tax will not apply.

The details are still murky until the IRS offers guidance, but the act states that a coronavirus-related distribution must be made during 2020, and the withdrawal must be made from “an eligible retirement plan, including an IRA.” There is also language about who qualifies, including:

  • If your spouse or a dependent has been diagnosed with COVID-19 with a test.

  • If you experience “adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced due to COVID-19”

  • If you’ve experienced “adverse financial consequences due to other COVID-19-related factors to be specified in future IRS guidance.”

Most importantly, if you live in a state with an income tax, as of now you will have to pay state income taxes (and maybe a penalty) on any money you withdraw. States might change their laws to also exempt these withdrawals, so look for updates.

Use your quarterly tax payment money in the near term

Hopefully you’ve set aside money for your quarterly taxes that were due in April, but now they aren’t due until July 15. This means you can use the money you’ve earmarked for taxes for other bills for the next three months. Be careful though; your second quarter estimated tax payments are still due on June 15. Don’t be late paying your taxes — the penalties and interest add up fast.

Use your home equity

With mortgage rates at historical lows, now is an excellent time to refinance your mortgage to lower your payment or take out some equity. Alternatively (or at the same time) consider getting a home equity line of credit (HELOC). Interest rates on a HELOC are almost as low as a mortgage so it’s fairly cheap money, plus you’ll likely get a bigger loan than through an SBA loan. The downside? It’s a hassle to apply and the whole process takes considerable time. Plus, mortgage lenders are swamped. (Legal note: Technically, loan proceeds must be used to buy, build, or substantially improve the home that secures the loan.)

Consider a credit card balance transfer

Credit card interest is insidious, so use this option with extreme caution. Still, if you are expecting a client payment but it’s going to take another 60 days or so to process, you may consider using a cash advance or balance transfer. Many cards don’t start accruing interest on balance transfers for several months. That said, don’t use this option unless you know you’ll have money coming from elsewhere in the next two months to pay it off. While credit cards, cash advances, and balance transfers are an option, use them as a last resort.

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