On Friday March 27, 2020 the President signed into Law the Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act”. In addition to the additional funding for hospitals and broader access to additional virus testing across the country the CARES Act includes over $2 Trillion in funding for individuals and businesses of all sizes through a variety of direct cash payments, loans, tax credits, and payment deferrals. The total Act is 880 pages long not including amendments, so we are outlining various provisions below, but we expect to have further clarity and potentially changes to many of the points below in the coming days. We are working to decipher the options available to you, and are planning to have discussions with all of our clients in the coming days regarding a plan of action – please do not hesitate to reach out with any questions you have
The majority of relief for businesses in the CARES Act is provided via the SBA, and as such businesses have to be a qualifying small business to receive funding. A qualifying business is one with not more than 500 employees, but as part of the CARES Act qualifying businesses also include sole proprietors, independent contractors (gig-economy workers), and self-employed individuals.
- SBA Paycheck Protection Program – This is the forgivable loan product that has received the most attention in the CARES Act. Secretary Mnuchin has stated that the Program will go live this Friday April 3, 2020 and SBA offices will be trained to provide detail as soon as possible.
- The total funding available to business owners is 2.5x the average monthly qualified payroll costs for the 1-year period prior to the loan date and any EIDL loan (discussed later) that has been refinanced into a Paycheck Protection Loan, not to exceed $10 million.
- Qualified payroll costs are defined as salaries, wages, commissions, cash tips, healthcare and retirement benefits, and state and local taxes up to $100,000 per employee. For sole proprietors and independent contractors qualified payroll is considered to be the total compensation or income received (net of expenses) not to exceed $100,000.
- Payroll taxes, income taxes, and compensation paid to employees outside of the US are not qualified payroll costs.
- Loan proceeds that are used for payroll costs, interest on certain mortgage obligations, rent, and utilities for the 8 weeks starting on the loan date will be eligible for forgiveness. The amount forgiven is based on the ratio of the number of employees employed during the period February 15, 2020 to June 30, 2020 to the number of employees employed during either a) the period February 15, 2019 to June 30, 2019, or b) the period January 1, 2020 to February 29, 2020. The amount of forgiveness is also reduced by the amount that total salary or wages of any employee is reduced by more than 25 percent. The amounts forgiven are excluded from gross income for federal income tax purposes.
- Any loan amounts not forgiven at the end of one year are carried forward as an ongoing loan with terms of a max of 10 years, at a maximum 4% interest. Payments on the loan will continue to be deferred, for a minimum of 6 months to a maximum of a year after disbursement of the loan.
- SBA Economic Injury Disaster Loans – EIDL loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the COVID-19 impact. Qualifying businesses are eligible for an immediate advance of $10,000, that does not have to be repaid even if the loan is denied, and total funding up to $2,000,000. Eligibility for Economic Injury Disaster Loans is based on the financial impact of the Coronavirus (COVID-19). The interest rate is 3.75% for small businesses or 2.75% for private nonprofit organizations. Loan proceeds cannot be used for refinancing existing debt, payment of other federal agency loans, paying federal, state or local tax penalties or fines, repairing physical damage, or making distributions to owners other than reasonable remuneration. These loans can be transferred to a Paycheck Protection Program loan subject to forgiveness, but otherwise do not have a forgiveness provision, however the SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years.
- Existing 7(a) SBA Loan Payment Assistance – The CARES Act also provides benefits to those with loans under Section 7(a) of the Small Business Act OTHER THAN the new paycheck protection loans, in the form of a government subsidy whereby the SBA will pay six months of principal, interest and fees on qualifying loans.
- Payroll Tax Deferral – Employers are able to significantly defer the deposit of the employer’s share of social security taxes, but importantly not Medicare taxes. Specifically, all employer social security taxes, otherwise required to be deposited between March 27, 2020 and December 31, 2020, are not required to be deposited on the normal deposit schedule. Instead, half of such taxes would be required to be deposited by December 31, 2021. The remaining deferred social security taxes would be required to be deposited by December 31, 2022. A company can elect to utilize this deferral option; however, this deferral provision will not apply if the company obtains a Paycheck Protection Program loan, and the loan is then forgiven. Theoretically an employer that incurs its 6.2% share of Social Security tax in 2020 may defer payment of that tax until 2021 and 2022, but also receive an immediate credit against those yet-to-be paid payroll taxes via the sum of the emergency medical leave credit, sick leave credit, and new employee retention credit. Importantly, this is just a deferral of payment and not an exemption from paying these taxes. We are not advising clients to take advantage of this deferral at this time.
- Employee Retention Credit – Employers are eligible for a 50% refundable payroll tax credit on wages paid up to $10,000 per employee during the crisis. It would be available to employers whose businesses were disrupted due to virus-related shutdowns and firms experiencing a decrease in gross receipts of 50% or more when compared to the same quarter last year. The credit is available for employees retained but not currently working due to the crisis for firms with more than 100 employees, and for all employees for companies with 100 or fewer employees. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. However, the credit is not available for those taking a Paycheck Protection Program loan.
- Various Tax Code Clarification and Rewrites – There are various other provisions included in the CARES Act relating to tax filing items. Examples include: Net Operating Loss carrybacks for 5 years if the NOL originated in 2018, 2019 and 2020, modification of loss limitations for flow through businesses and sole proprietors, available refunds of alternative minimum tax credits, modification of 163J interest limitation, and reclassification of qualified improvement property depreciation lives. All of these have nuanced provisions that do not make them universally applicable and we will review each provision with you individually.
As we noted above this is an extremely fluid situation, and we expect there to be additional clarifications to the current CARES Act over the coming days and weeks. Additionally there is an expectation that this will not be the only stimulus funding available to taxpayers, so as new information comes out we will keep providing updates on information that is useful to you. We hope that you are all healthy and safe, and we thank you for your continued trust in us – as always we are only a phone call away.