What options does a small business have from the Coronavirus Aid, Relief and Economic Security (CARES) Act?  In this blog, Christopher Plagge, CPA, EA, reviews the options and their requirements. Still stumped? Our flow chart for small business owners can help you determine what you qualify for.

As I write this, the President just extended the social distancing guidelines through April 30. What this means for a lot of small business owners is that the initial disruption they were looking at weathering just became 200% longer. This makes taking advantage of the options available from the CARES Act even more important. Here is a high level summary of the options and their requirements.

Paycheck Protection Program

The option most small business owners are talking about, and the largest relief being provided to them (approximately $350 billion), is the new loans issued by the Small Business Administration. The CARES Act creates a partially forgivable loan program with loans that can carry a maximum maturity length of 10 years, are 100% guaranteed by the SBA, and have a maximum interest rate of 4%. They also have an initial deferment of loan payments for between 6 and 12 months. The Treasury released guidance late on 3/31/2020 that all borrowers would receive the same terms: 2 year maturity term, 0.50% interest rate, and 6 month payment deferral period.

All of this is great, and many of our clients will likely take advantage of them. However, it is very important to apply in a timely manner. The reasoning is twofold: one, there is a hard cutoff of June 30, 2020 for loan applications, and two, there is a limited pot of $350 billion (without additional stimulus being passed). The guidance released by the Treasury late on 3/31/2020 also set the application date of April 3, 2020 for small businesses and sole proprietors and April 10, 2020 for independent contractors and self-employed individuals.

So what are the requirements?

  • The applicant needs to be a business but that includes sole proprietors, independent contractors, and other self-employed individuals
  • The applicant needs to have fewer than 500 employees or meet the NAICS Employee Small Business Size Standard
  • The applicant needs to make a good-faith certification that the loan is necessary due to current economic conditions caused by COVID-19

How large a loan can a business receive?

  • Lenders will be able to issue loans up to the lesser of $10 million or 2.5 times the average monthly payroll costs from the prior year (excluding the annual compensation amount greater than $100,000 for individuals)

What can these loans be used for?

  • Payroll costs
  • Group health insurance premiums
  • Salaries and/or commissions
  • Rent
  • Mortgage obligations
  • Utilities

As helpful as that sounds, it gets even better. If you are able to meet certain terms, the loan or a portion of it can be completely forgiven AND not included as taxable income.

What terms need to be met for loan forgiveness?

  • The portion considered forgivable must be spent within 8 weeks on payroll costs, rent, utilities, or group health care premiums
  • The business must maintain the same number of employees
  • Employees earning under $100,000 of compensation cannot have their compensation cut by more than 25%

Employee Retention Credit

While not helpful for cash flow purposes, the Act does create a payroll tax credit for businesses that qualify and ARE NOT receiving a Paycheck Protection Program loan. Unfortunately, from what you will see in the qualification requirements, the credit only accounts for lost revenue, not profit. This means that low margin businesses may be operating at a net loss due to COVID-19 but not qualify due to revenue loss not being high enough.

So what are the requirements?

  • Business operations must have been fully or partially suspended during a quarter as a result of governmental authority, or
  • 2020 revenue during a quarter must be less than 50% of revenue from the corresponding quarter in 2019

How large of a credit can a business receive?

  • If the business has 100 or fewer employees, it can receive 50% of wages and qualified health care expenses paid to employees (capped at $10,000 per employee)
  • If the business has more than 100 employees, it can receive 50% of wages and qualified health care expenses paid to employees that are not currently working due to governmental authority or revenue loss but continue to be paid (capped at $10,000 per employee)

Deferment of Payroll Taxes

All businesses, as long as they ARE NOT receiving a Paycheck Protection Program loan, will have the ability to defer payroll taxes due from the enactment date (3/27/2020) through the end of 2020 (this includes the employer portion for self-employed individuals). These deferred amounts will be due 50% on December 31, 2021, and 50% due on December 31, 2022.

Net Operating Losses

The rules around deductibility of business losses have also been loosened for both corporate and non-corporate tax filers. Corporations (excluding REITs) can now take Net Operating Losses from tax years 2018, 2019, and 2020 and carry these losses back five years. In addition, the offset amount has been increased from 80% to 100% of taxable income for those tax years. Non-corporate filers, Section 461(l) has been temporarily repealed for tax years 2018, 2019, and 2020. This code section capped claimed losses attributable to businesses at $250,000 for single filers, and $500,000 for joint filers. Every business should investigate whether or not these changes warrant filing amended returns for prior years to seek a refund.

Thank you for the continued trust you have placed in us. Should you have any questions or concerns, feel free to reach out to your advisor. Together, we will all get through this.

Author Christopher R. Plagge Tax Growth Leader

Chris has been involved in the tax and financial services industry since 1983. He earned a bachelor of science degree in accounting from Elmhurst College and has a membership interest in Savant.

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