Apr 03, 2020
In light of the novel coronavirus (COVID-19) global pandemic, many small-to-medium-sized businesses are struggling to manage revenue losses amid prolonged economic uncertainty. To offset the pandemic’s financial impacts, Congress has passed several stimulus bills, including the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes provisions that can provide for increased cash flow as well as tax savings. Businesses should quickly consider how these provisions could help their companies during this uncertain time to ensure they are maximizing available benefits.
SBA Paycheck Protection Program
This $350 billion forgivable loan program, included in the CARES Act, significantly expands which organizations are eligible for Small Business Administration (SBA) loans. For organizations facing financial strain as a result of COVID-19, these loans can help offset a variety of costs.
What can the loan be used for?
The loan can cover costs including payroll, the continuation of health care benefits, employee compensation (excludes compensation in excess of $100,000 on an annual basis), mortgage interest obligations, rent or lease payments, utilities, and interest on debt incurred before the covered period.
Who is eligible for the program?
To qualify for the program, businesses must have either fewer than 500 employees (including full time, part-time and “other” employees), meet the SBA’s size standards, or have less than $15 million of tangible net worth and less than $5 million of average net income in the last 2 years. There are some special eligibility rules for businesses in the hospitality and dining industries.
How much can a business borrow?
The maximum amount for these loans is two times the average total monthly payroll costs, or up to $10 million. The interest rate may not exceed 4%. Businesses can also defer payment of the principal, interest, and fees for six months to one year.
Is there loan forgiveness?
Yes, provided your business meets certain conditions. Your business will be eligible to apply for loan forgiveness equal to the amount you spent during an eight-week period after the loan closing date on:
- Payroll costs
- Interest on mortgages
- Payments of rent
- Utility payments
Principal payments of mortgage payments will not be eligible for forgiveness.
How do you apply?
Applications and underwriting are handled by SBA-approved banks. While documentation requirements will vary between institutions, we would expect them to include the following:
- Current personal financial statement
- Latest available personal tax return
- Latest available business tax return
- Latest available internal 2019 YE financials
- YTD internal 2020 financials
- A spreadsheet detailing the following:
- List of all full-time employees with eight weeks salary + payroll taxes
- Cost of two months of rent with copies of leases
- Cost of two months of mortgage interest with a copy of loan payments
- Cost of two months of utility costs with a copy of utility payments
What is required to be eligible?
Borrowers will need to include a Good-Faith Certification that:
- The loan is needed to continue operations during the COVID-19 emergency.
- Funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments.
- The applicant does not have any other application pending under this program for the same purpose.
- From February 15, 2020, until December 31, 2020, the applicant has not received duplicative amounts under this program.
Are there any other considerations to be aware of?
- Given these very limited requirements for borrowers, we may see additional guidance from the SBA on how banks should be underwriting these loans.
- Additionally, the CARES Act does not appear to have overridden the SBA’s “affiliation” rules. Entities are considered “affiliates” when they are controlled by or under common control of another entity. This classification generally includes private equity owners. Business cannot exceed the size thresholds for either the primary industry of the business alone or the industry of the business and its affiliates, whichever is greater. For groups of affiliates that operate in different industries—a typical case for private equity portfolio companies—industry code is based on the primary income-producing entity. However, there is some ambiguity in the text of the CARES Act, so additional guidance may be forthcoming.
Employee Retention Credit
The CARES Act provides eligible employers with a refundable credit against payroll tax liability.
How much does the credit cover?
The credit is equal to 50% of the first $10,000 in wages per employee (including the value of health plan benefits).
Who is eligible for the credit?
Eligible employers must have carried on a trade or business during 2020 and satisfy one of two tests:
- Business operations are fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings.
- A year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year.
For employers of more than 100 employees, only wages for employees who are not currently providing services for the employer due to COVID-19 causes are eligible for the credit. For employers of 100 or fewer employees, qualified wages include those for any, regardless of if the employee is providing services.
Employers receiving a loan under the SBA Paycheck Protection Program are not eligible for this credit.
Delay of Employer Payroll Taxes
The CARES Act postpones the due date for employers and self-employed individuals for payment of the employer share of taxes related to Social Security.
When are the deferred payments due?
The deferred amounts are payable over the next two years – half due December 31, 2021, and half due December 31, 2022.
Who is eligible for the deferral?
All businesses and self-employed individuals are eligible. However, employers who receive a loan under the SBA Paycheck Protection Program and whose indebtedness is forgiven are not eligible for the payroll tax deferral.
How We Can Help
Small to medium-sized businesses have many potential avenues—including the SBA loan program and payroll tax incentives—to help offset costs during this uncertain time. However, navigating the complex loan application process is a daunting task. The payroll tax provisions in the CARES Act interact with the SBA loan provisions, adding to the complexity.
In the immediate term, we can assist in analyzing which approach will be the most beneficial for your employees and your company. Those seeking SBA loans will need to move quickly to get their loans approved and funded. We can help you navigate the required paperwork and help organize the necessary information in an expedited manner—so you can boost your cashflow ASAP.
In addition to maximizing these available options, there are also beneficial income tax provisions to claim on income tax returns, including 2019 returns. We can assist companies in determining possible cash tax refunds through net operating loss (NOL) carrybacks and quick refunds of 2019 taxes already paid. Contact your William Vaughan Company advisor today!
Mar 28, 2020
Late Friday, the President signed a bipartisan relief bill entitled the “Coronavirus Aid, Relief, and Economic Security Act” or the CARES Act. The $2 trillion coronavirus response Act is intended to provide relief across America and to keep businesses and individuals afloat during the unprecedented freeze on most American life.
Key Provisions for Businesses
$10,000 Grant awarded within three days under Expansion of SBA Disaster Loan Program (SBA 7(b))
For eligible applicants, small businesses with 500 or fewer employees, sole proprietors, and independent contractors, the CARES Act makes changes to the SBA Disaster Loan program by waiving: 1) rules related to personal guarantees on loans of up to $200,000, 2) the 1 year in business requirement and 3) the requirement that an applicant is unable to find credit elsewhere; and allows lenders to approve applicants based solely on credit scores or other appropriate methods to determine ability to repay.
Applicants can request an emergency advance of up to $10,000 which does not have to be repaid, even if the loan is later denied. Advances are to be awarded within three days of application.
Forgivable Loans under SBA 7(a) Payroll Protection Program
For small businesses, one of the more important sections of the CARES Act is the Paycheck Protection Program. This program gives the SBA the ability to guarantee $350 billion in loans to small businesses via a network of more than 800 banks. The program provides eight weeks of cash-flow assistance to small businesses with 500 employees or fewer, and administration will be handled by banks. Businesses would be well advised to communicate with their lending institutions soon, and all qualifying businesses are eligible without regard to entity type, including sole proprietors and independent contractors.
The low-interest loans are meant to cover payroll costs, paid sick leave, employee salaries, health-insurance premiums, utilities, and rent or mortgage payments. The maximum loan amount is $10 million, maximum maturity is 10 years, and the interest rate on the loans can’t surpass 4%. There is $17 billion available to cover six months of payments for small businesses already using SBA loans. Requirements and further details:
- A borrower can get an SBA 7(a) forgivable loan and add the outstanding amount of a loan made under the SBA’s Disaster Loan Program (SBA 7(b)) between January 31, 2020, and the date on which such loan may be refinanced as part of this new program.
- Increased eligibility is eligible for certain small businesses that employ less than 500 employees per physical location of the business. Generally speaking, this provision applies to accommodation and foodservice businesses.
- Loans are calculated on a formula of the average monthly payroll costs times 2.5 plus any outstanding amount made under the SBA’s disaster loan program as referenced above.
- SBA will waive the guarantee fee required for a 7(a) loan.
- SBA will eliminate the requirement that a small business concern is unable to obtain credit elsewhere.
- A good faith certification from the eligible recipient will be required, stating that the uncertainty of the economic conditions make the loan request necessary to support the ongoing operations of the recipient, acknowledge that the funds will be used to retain workers and maintain a pre-crisis level of full-time equivalent employees or make mortgage payments, lease payments and utility payments.
- The new program provides a process to allow borrowers to be eligible for loan forgiveness in the amount equal to their payroll costs, health benefits, the interest portion of mortgage payments, rent and utility costs during the 8-week period that begins on the origination date of the 7(a) loan.
- The amount of debt forgiveness will be reduced proportionally by the number of employees laid off during this time. Any staffing reductions made after February 15, 2020, that are remedied no later than June 30, 2020, shall not impact the amount forgiven.
- Any amount forgiven shall be excluded from gross income. For most borrowers, these provisions will convert the loan into a tax-free grant upon certification of the incurred costs.
Employee Retention Credit
- A 50 percent employee retention payroll tax credit for wages paid to employees during the COVID-19 emergency. The fully refundable credit would be available to any business or non-profit that has a furloughed or reduced workforce as a result of forced closure due to a federal, state or local government directive or as a result of quarantining of employees. The credit would also be available to any business that has seen a 50 percent drop in gross receipts.
- The credit is equal to 50% of “qualified wages,” which includes both actual wages paid plus qualified health plan expenses allocable to those wages. However, the credit ceases when qualified wages exceed $10,000 per employee. The maximum credit per employee then is $5,000.
- The Treasury Department would provide advance payments to get money to businesses more quickly.
- A special rule applies to eligible small employers (those with 100 employees or less) that provides a 50 percent credit for all wages paid, regardless of whether employees are furloughed or not.
- The credit would be available to businesses that do not receive the 7(a) payroll protection Small Business Administration loan described above. Business owners would be able to choose whether that SBA loan or employee retention credit is better suited to their situation. Disaster loans under 7(b) are still able to be received in conjunction with the credit.
Delayed Payment of Employer Payroll Tax and Self-Employment Tax
For those businesses who do not receive a 7(a) payroll protection loan from the SBA, a delay of employer Social Security tax (6.2%) and one-half of the self-employment tax (6.2%) is available. Payments that would have been due from the date of the law’s enactment through December 31, 2020, are delayed and split into two equal payments due December 31, 2021, and December 31, 2022.
Net Operating Losses
Firms may take net operating losses (NOLs) earned in 2018, 2019, or 2020 and carry back those losses five years. The NOL limit of 80 percent of taxable income is also suspended, so firms may use NOLs they have to fully offset their taxable income. The Act also modifies loss limitations for non-corporate taxpayers, including rules governing excess farm losses, and makes a technical correction to the treatment of NOLs for the 2017 and 2018 tax years.
Alternative Minimum Tax (AMT)
Firms with tax credit carryforwards and previous alternative minimum tax (AMT) liability can claim larger refundable tax credits than they otherwise could.
Qualified Improvement Property
The CARES act contains a technical correction to a drafting error within the Tax Cuts and Jobs Act (TCJA). This correction changes the life of Qualified Improvement Property (QIP) from 39 years to 15 years and now eligible for 100% bonus depreciation, or immediate expenses. This retroactive for 2018 tax years. This is a substantial retroactive change for any business that had these additions.
Net Interest Deduction
Currently, this limits businesses’ ability to deduct interest paid on their tax returns to 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA). The Act expands it to 50 percent of EBITDA for 2019 and 2020. This will help businesses increase liquidity if they have debt or must take on more debt during the crisis.
Key Provisions for Individuals
Recovery Rebate Checks
Most single individuals earning less than $75,000 can expect a one-time cash payment of $1,200, with “earning” defined as adjusted gross income. Married couples would each receive a check for $1,200 ($2,400 in total) and families would get $500 per child. That means a family of four earning less than $150,000 can expect a total payment of $3,400. The checks start to “phase down” in amount and disappear completely for single individuals with no children making more than $99,000 and couples without children making more than $198,000. A married couple with two children wouldn’t lose all of their payment until their adjusted gross income exceeded $218,000. The cash payments are based on either your 2018 or 2019 tax filings. People who receive Social Security benefits but don’t file a tax return are still eligible, too.
Extended Unemployment Program
Major changes have been made to unemployment assistance, increasing the benefits and broadening who is eligible. States will continue to pay unemployment to people who qualify. That amount varies state by state. So does the amount of time people can claim it. The Act adds $600 per week from the federal government on top of whatever base amount a worker receives from the state, without a cap based on what the worker actually earned prior to unemployment (meaning an unemployed individual could receive more on unemployment than they earned while working). That boosted payment will last for 4 months. In addition, a new, temporary Pandemic Unemployment Assistance program has been created through the end of this year to help people who lose work as a direct result of the public health emergency. This is designed to aid contractors and freelancers who typically are unable to apply for unemployment.
There are several provisions to help individuals who experience financial hardships and disruptions due to COVID-19 to access their own money without penalty. Taxpayers can now take a “coronavirus-related distribution” of up to $100,000 in the year 2020, free from penalty, from their retirement account. Amounts distributed may be repaid at any time over the 3-year period commencing on the date of the distribution. To the extent that amounts are not repaid, the income inclusion can be made ratably over three taxable years beginning with the year of the distribution. Plan participants should very carefully consider whether the use of this provision is in their best interest, particularly considering that a distribution would occur while retirement plan assets are likely at low market valuations. Plan sponsors will need to review plan documents to ensure that their hardship provisions are up-to-date and will allow for emergency withdrawals by individual participants.
In addition, there is a temporary elimination of required minimum distributions. By waiving the required minimum distributions from retirement accounts for individuals who are 72 and older, the CARES Act provides the opportunity for individuals who do not need their money now to hopefully recoup some of what they’ve lost when the markets recover.
The CARES Act encourages individuals to contribute to churches and charitable organizations in 2020 by allowing a deduction of up to $300 of cash contributions regardless of whether they itemize deductions or not.
The Act allows student-loan borrowers to take a 6-month break from making payments on their federally backed student loans. Until Sept. 30, borrowers will not be penalized for late payments. If your employer pays student loans as an employee benefit, they can now provide up to $5,250 in tax-free student loan repayment benefits. That means an employer could contribute to loan payments and workers wouldn’t have to include that money as income. Finally, the Act also stops the involuntary collection of student loan debt during this period, including the garnishment of wages, tax refunds, and Social Security benefits.
Health Savings Accounts
Users of health savings accounts or flexible spending accounts will be able to use funds to cover over-the-counter medical products.
Delayed Tax Filings
Individuals have three additional months to file their taxes, with the April 15 deadline pushed back to July 15. No payments are required until July 15, 2020. Individuals who expect refunds would be wise to file quickly, without regard to the July 15 deadline.