Over the past week, I have been studying the Coronavirus Aid Relief and Economic Security Act. I have communicated with clients and bankers regarding this act. I have helped clients either draft the applications or complete the applications. I have already done a virtual Zoom meeting for a well-known Wealth Management firm in San Francisco and have another Zoom meeting lined up for this next week.
While it seems confusing when you first read the law, it does have a certain logic to it. The goal of the law is to help bridge the gap from the sudden stop to our economy and assumes we will restart the economy and be back to work in 12 weeks. While this may or may not be the case, it was the best that could be developed in short order.
The CARES Act provides for substantial loans/grants administered by the Small Business Administration to companies impacted by the virus outbreak as well as certain industries, employees, independent contractors, and the self-employed. It also provides for certain employee retention credits, an individual recovery rebate, and certain important changes in retirement funds, and other tax law changes.
SBA Loans That Are Available: The Paycheck Protection Loan
The Paycheck Protection Program (PPP) is probably the most well-published part of this law for business. You must apply through your bank for whom you had a relationship with on February 15, 2020 (You should contact your banker to let them know you are interested and they can send you the link). There is a $350 billion fund that will be depleted quickly as businesses apply. It is important to get your application in as soon as possible. It offers 100% federally guaranteed loans to employers who maintain their payroll during the crisis. To be eligible, businesses an entities must have been in operation on February 15, 2020, and in some manner harmed by the COVID-19 crisis. Small businesses, including 501c3 nonprofits, that have less than 500 employees (this includes sole proprietors, independent contractors, and the self-employed).
The business entity can apply for the lesser of (a) 2.5 times the average monthly payroll costs based on the trailing twelve months of payroll costs (compensation to any employee over $100,000 for the year is excluded from the calculation) or (b) $10,000,000. (Please note that if the business was not in existence last year, then use January 1, 2020, to February 29, 2020 compensation.) Compensation is defined as salaries, commissions or similar, including severance, tips, vacation pay, family/parental leave, sick leave, and health care benefits (including paid sick leave, medical leave or insurance premiums). This calculation does not include Federal Payroll Taxes. Please note that independent contractors (or 1099 workers) are not included in this calculation as they have to file on their own).
As a simple example, let’s say you had 5 employees (one that earned $120,000 and four that earned $60,000 each). You would add $100,000 (eliminating the $20,000 over $100,000) for the one high-earning employee and $60,000 each (or $240,000) for the other four employees. This would be $340,000 eligible payroll costs (assuming no health insurance costs). If you divide that by 12 months, you get an average monthly payroll of $28,333 per month. You would then multiply that by 2.5 and your eligible loan amount would be $70,833.
The best part of this loan is that you can get loan forgiveness that is tax-free if you can demonstrate that the loan proceeds were used during the 8 week period after the loan origination date for amounts spent on payroll costs, rent, mortgage interest, utilities (including electricity, gas, water, transportation, and phone and internet access) and interest on other debt obligations incurred prior to February 15, 2020. Any remaining loan after this forgiveness will be a 2-year loan at 0.5%. However, one word of warning – the amount of forgiveness will be reduced (a) in proportion to any reduction in the number of employees retained and (b) if any wages to employees are reduced by more than 25%.
One other word of warning – be careful of Affiliation rules. If you own multiple businesses, there are rules that may exclude you from requesting PPP loans for more than one business. You will need to consult legal counsel on this matter.
Economic Injury Disaster Loan
Businesses are eligible for working capital loans with favorable terms. These are designed to help small businesses survive over the next few months. This loan program is for small businesses that have suffered substantial economic injury as a result of a declared disaster. You can apply directly at the Small Business Administration for this loan at https://covid19relief.sba.gov/#
A business is usually eligible for 50% of the prior year’s gross profit, but usually not more than $500,000. The uses that are permissible include working capital, fixed debt payments, payroll and accounts payable and the terms are favorable at 3.75% for up to 30 years. Owners of more than 20% have to give a personal guarantee and loans over $25,000 may require collateral.
There is a $10,000 emergency grant that is available through this program. This is paid within three days to the borrower even if you are ultimately denied for a loan. However, if you do get a PPP loan and it is forgiven, this grant is added to the outstanding amount due under the PPP program. In other words, you can’t double-dip on this $10,000 grant with PPP forgiveness.
Tax Relief for Payroll Taxes
If a business is not participating in the loan forgiveness program, it may take advantage of tax relief. The business may take a 50% refundable tax credit on the company’s share of payroll taxes on wages of up to $10,000 per employee. A business must show that operations were suspended because of a governmental order or that revenues dropped by 50% or more compared to Quarter 1 2019.
If a business is not participating in the loan forgiveness program, it may take advantage of tax relief. The business may take a 50% refundable tax credit on the company’s share of payroll taxes on wages of up to $10,000 per employee. A business must show that operations were suspended because of a governmental order or that revenues dropped by 50% or more compared to Q
The law also provides an option to defer payment of the company’s share of Social Security taxes for the period beginning March 27, 2020, and ending before January 1, 2021. The deferred payment needs to be paid 50% by December 31, 2021, and 50% by December 31, 2022. If a business decides to participate in this program, it should put the liability on the balance sheet so it does not lose sight of the liability to the government.
Tax Changes Under The CARES Act
The new law relaxes limitations on a corporation’s use of net operating losses (called NOL’s). An NOL arising in a tax year beginning in 2018, 2019 or 2020 can be carried back 5 years. The law also removes a taxable income limitation to allow an NOL to fully offset income. This would allow a loss in 2020 to offset income reported in 2015-2019 by amending those returns and to get a refund for those years, instead of having to wait for the business to record taxable income in 2021 or 2022. Businesses should consult with their tax advisors if they suffered a tax loss in 2018 or 2019.
The new law also temporarily increases the amount of interest expense a business can deduct on their tax returns by increasing the 30% limitation to 50% of taxable income.
Changes To Retirement Funds
CARES eliminates the 10% penalty on the distribution of retirement funds if taken before age 59 ½ if distributed during 2020, is less than $100,000 and you, your spouse, or dependent was diagnosed with COVID-19 and you experienced adverse financial consequences as a result of being quarantined, furloughed or laid off, or having work hours reduced, or being unable to work due to lack of childcare. The taxpayer can also spread income recognition over three years beginning in 2020 and can avoid income recognition by repaying the distribution within three years of receiving it. RMD’s are temporarily waived.
The bill provides for payments to taxpayers ( “recovery rebates”) which are being treated as advance refunds of a 2020 tax credit. Under this provision, individuals will receive a tax credit of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child. The credit is phased out for taxpayers with adjusted gross income (AGI) above $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 for other individuals. The credit is not available to nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they receive.
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