CARES Act for Businesses
The Us Senate and House have passed the largest Economic Relief package in history called the Coronavirus Aid, Relief, and Economic Security Act (CARES). https://www.documentcloud.org/documents/6819239-FINAL-FINAL-CARES-ACT.html
The package includes a wide range of provisions for forgivable loans, rebate payments and/or tax credits aimed at helping individuals, businesses, non-profits, healthcare entities and state and local governments. This relief package was meant to help with short term cash flow needs created by the Coronavirus. In this piece I will deal specifically with the key components of relief for Business owners.
The portion included in the package for “small business” owners is the Paycheck Protection Program,
Small business Loans (including Forgivable)
Section 1102: This is a loan (of which all or some can be forgivable which we will go through below), offered through the Small Business Administration (SBA) with a maximum maturity of 10 years and maximum interest rate of 4%. You apply for these loans by visiting an SBA approved lender (which are typically your local banks). No personal guarantee or collateral is required for the loan. These loans are 100% guaranteed by the SBA. For the part that is not forgivable the lender will defer fees, principal and interest for no less than six months and no more than a year.
Eligible small businesses are those that have less than 500 employees including sole proprietors, independent contractors and certain self-employed individuals. If the business provides accommodations, food or drink services then the 500 limit is applied to each location. The employees are both full and part time.
The lender will be able to issue small business loans up to a maximum of whichever is LESS
- 2.5 times the average monthly payroll costs over the previous year (excluding annual compensation of amounts over $100,000 per person). Payroll costs include all wages, tips, vacation, family and sick leave, contributions for group healthcare, payment of retirement benefits and state and local tax payments. As an example, if you have payroll costs of $120,000 for the year then you would have an average monthly payroll coast of $10,000 therefore the loan amount would be $25,000.
Applicants simply need to make a good faith certification that the loan is due to the current economic uncertainty caused by the Coronavirus and the funds will be used to maintain workers and pay business expenses.
Section 1106: The amount that would be eligible to be forgiven would be the amounts of the loan that are used to pay the costs incurred during the 8-week period starting on the loan origination date. The costs include payroll costs, rent if you had the lease in force before February 15, 2020, interest on certain building mortgage obligations, electricity, gas, water, transportation, telephone, internet access for services started before February 15, 2020 and Group Health insurance premiums and other healthcare costs. Loan forgiveness cannot exceed principal of the loan amount.
Another benefit of the loan forgiveness is that it will not be included in your taxable income for the year.
The forgivable portion will be reduced by a pro rata amount if the business did not maintain the same number of employees from Feb 15 through June 30, 2020 as it did during the same period in 2019 or from January 1 through February 15, 2020. Additionally, the employees cannot have had in excess of 25% or more reduction in total pay as compared to the previous quarter. Don’t worry, if you have any of these changes, they can be fixed by June 30, 2020
Remember only the money used for the above listed expenses will be forgiven, the money that is not forgiven will incur the maximum interest rate of 4% and is subject to the other terms of the loan.
In order to receive the forgiveness, the borrower will need to submit certain documentation to their lender (your lender will let you know what documents they are).
I know there are still many questions at this point, however, keep in mind additional guidance on the loans will be provided to lenders in due course.
Grants for emergency Economic Injury Disaster Loans
Section 1101: The CARES Act also provides emergency grants of up to $10,000 to small businesses and nonprofits that also apply for an economic injury disaster loan. You can apply for the Economic Injury Disaster Loan on the SBA website https://www.sba.gov/funding-programs/disaster-assistance
You can speak to your local SBA approved lender to find out if you are eligible for the Grant.
Employee Retention Credit for Employers subject to a mandated closure due to COVID-19
Section 2301 introduces a payroll tax credit to offset against the employer’s contribution to social security.
The credit is equal to 50% of the payroll tax liabilty on the wages paid up to a maximum of $10,000 of wages per employee from March 12, 2020 through December 31, 2020.
Eligible businesses will receive a credit for the ‘employer portion’ of social security payroll taxes. The credit can be claimed against the business or non-profits quarterly payroll tax liability (employers’ contribution to social security paid on all its employees) and is fully refundable if the credit exceeds the employer’s payroll tax liability. If it is refundable then the employer will be eligible for a tax refund for the excess amount. The Treasury can make advanced payments of the credit and to waive penalties for those employers who do not deposit appropriate payroll taxes in anticipation of receiving the credit.
To be eligible business operations must have been
- fully or partially suspended during a quarter as a result of government required shut down or suspension of operations or
- a quarter in which revenue in 2020 was less than 50% of the revenue for same quarter in 2019.
If a business fits these requirements they will continue to qualify until the earlier of:
- The end of 2020 or
- There is a quarter without the government required suspension or gross revenue from the current quarter exceeds 80% gross revenue from same calendar quarter in 2019 whichever is sooner.
For businesses with more than 100 employees’, only wages paid (up to $10k limit per employee) to individuals not working due to gov shutdown or because revenue has declined as explained above are eligible. These wages also include health care expenses as part of the wages. For small businesses (100 or less employees) all employees’ wages, working or not, are included.
This should help with cash flow because it could reduce tax payments required and additionally may result in a refund being issued.
This tax credit is not available if the employer takes out an SBA Paycheck Protection loan.
Please consult your Tax preparer and/or Payroll provider for additional information.
Deferral of Payment of Payroll Taxes
Section 2302: of the CARES Act provides employers with a payroll tax break.
This allows businesses to defer the payment of the employers share of the social security tax that is due from date of the enactment of the Act through December 31, 2020. The employer can pay half of those taxes due by December 31, 2021 and the other half by December 31, 2022.
If you are a self-employed individual, you can defer the ‘employer portion’ of the self-employment tax using the same dates as above.
Technically this should increase current cash flow for businesses by delaying payment of the employers share of the social security tax.
This is not available to businesses that had loan forgiveness under the Payroll Protection Loan Program through the SBA.
Additional guidance on how to claim the tax deferral is expected (hopefully soon).
Please consult your tax preparer.
Net Operating Loss Rules are Loosened
Section 2303: Amends the rules pertaining to Net Operating Losses (NOL).
This allows NOL’s from 2018, 2019, 2020 to be carried back 5 years before the taxable year of the loss. For ex if a business incurred a loss in calendar year 2018 that loss can be carried back all the way to 2013. In theory this should allow companies to reduce prior year’s tax bills by claiming a refund for income earned during the five-year period prior to the year in which the NOL was incurred. The claim should be filed no later than 120 days after the enactment of the Act if you are making elections for 2018 year.
Also, the CARES ACT temporarily removes the taxable income limitation therefore allowing taxpayers to utilize NOL’s to offset 100 percent of taxable income in tax years 2018, 2019 and 2020
Section 2307: Qualified Improvement Property: The CARES Act allows for a 15-year recovery period for all qualified improvement property (certain improvements to the interior of a non-residential building that occurred after the building was put in service) instead of a 39 year for some improvements. This will be retroactive from January 1, 2018. Technically this would allow a business to increase cash flow by amending prior years returns for a possible refund.
Please consult your tax preparer to see if any of these will pertain to you.
Pandemic Unemployment Insurance:
Section 2102: This is specifically geared to self-employed individuals, who would not normally be eligible for unemployment insurance, will now be eligible for up to 39 weeks of benefits due to this provision.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. None of the information contained within constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You understand that the information is not advising, and will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter.