A major part of the CARES Act, which was signed into law yesterday by President Trump, deals with an inflow of cash to small businesses, both directly (through new lending programs) and indirectly (through tax credits). Here are some of the main points, following the same FAQ format as my last post on stimulus payments to individuals. We will cover four main areas: the Payroll Protection Program, Economic Injury Disaster Loans & Grants, small business debt relief programs, and small business tax relief (which covers an employer-side payroll tax credit, and a small business credit related to wages paid during the COVID pandemic).
**Disclaimer: I am not a banker — no one at SagaTax is a banker. The main points of the two loan programs included in the CARES Act are included for your review, but the requirements and decisions around loan eligibility and amount will be determined by banks, who still have to implement rules and processes around these new programs.
Note: the SBA has released the application to apply for the PPP loan program (discussed below). You can access the application here.
Payroll Protection Program (PPP) Loans
The program provides cash-flow assistance through 100 percent federally-guaranteed loans to employers who maintain their payroll during the COVID pandemic. If employers maintain their payroll, the loans would be forgiven, which would help workers remain employed, as well as help affected small businesses and our economy to snap back quicker after the crisis. PPP has many features, such as forgiveness of up to 8 weeks of payroll based on employee retention and salary levels, no SBA fees, and at least six months of deferral (with maximum deferrals of up to a year).
Small businesses and other eligible entities will be able to apply if they were harmed by COVID-19 between February 15, 2020 and June 30, 2020. This program is would be retroactive to
February 15, 2020, in order to help bring workers who may have already been laid off back onto payrolls.
Loans are available through June 30, 2020.
What types of businesses and entities are eligible for a PPP loan?
The following businesses are eligible:
- Businesses and entities must have been in operation on February 15, 2020.
- Small businesses which have fewer than 500 employees.
- Individuals who operate a sole proprietorship or as an independent contractor and eligible self-employed individuals.
How much can I borrow?
The maximum loan size is always $10 million.
- If you were in business February 15, 2019 – June 30, 2019: Your max loan is equal to 250 percent of your average monthly payroll costs during that time period. If your business employs seasonal workers, you can opt to choose March 1, 2019 as your time period start date.
- If you were not in business between February 15, 2019 – June 30, 2019: Your max loan is equal to 250 percent of your average monthly payroll costs between January 1, 2020 and February 29, 2020.
- If you took out an Economic Injury Disaster Loan (EIDL) between February 15, 2020 and June 30, 2020 and you want to refinance that loan into a PPP loan, you would add the outstanding loan amount to the payroll sum.
What costs are eligible for payroll?
- Compensation (salary, wage, commission, or similar compensation, payment of cash tip or equivalent)
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment required for the provisions of group health care benefits, including insurance premiums
- Payment of any retirement benefit
- Payment of State or local tax assessed on the compensation of employees
What costs are not eligible for payroll?
- Employee/owner compensation over $100,000
- Taxes imposed or withheld under chapters 21, 22, and 24 of the IRS code (i.e. FICA, RRTA, and taxes withheld from wages)
- Compensation of employees whose principal place of residence is outside of the U.S
- Qualified sick and family leave for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (click here for a blog discussing the FFCRA)
What can I use the loan for?
- Payroll costs (as noted above)
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
- Employee salaries, commissions, or similar compensations (see exclusions above)
- Payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation)
- Rent (including rent under a lease agreement)
- Interest on any other debt obligations that were incurred before the covered period
What are the loan term, interest rate, and fees?
For any amounts not forgiven, the maximum term is 10 years, the maximum interest rate is 4 percent, zero loan fees, zero prepayment fee (SBA will establish application fees caps for lenders that charge).
How is the forgiveness amount calculated?
Forgiveness on a covered loan is equal to the sum of the following payroll costs incurred during the covered 8 week period compared to the previous year or time period, proportionate to maintaining employees and wages (excluding compensation over $100,000):
- Payroll costs plus any payment of interest on any covered mortgage obligation (not including any prepayment or payment of principal on a covered mortgage obligation) plus any payment on any covered rent obligation plus and any covered utility payment.
How do I get forgiveness on my PPP loan?
You must apply through your lender for forgiveness on your loan. In this application, you must include:
- Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings
- Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities.
- Certification from a representative of your business or organization that is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used in accordance with the program’s guidelines for use.
What happens after the forgiveness period?
Any loan amounts not forgiven are carried forward as an ongoing loan with max terms of 10 years, at a maximum interest rate of 4%. Principal and interest will continue to be deferred, for a total of 6 months to a year after disbursement of the loan. The clock does not start again.
Can I get more than one PPP loan?
No, an entity is limited to one PPP loan. Each loan will be registered under a Taxpayer Identification Number at SBA to prevent multiple loans to the same entity.
Small Business Debt Relief
This program will provide immediate relief to small businesses with non-disaster SBA loans, in particular 7(a), 504, and microloans. Under it, SBA will cover all loan payments on these SBA loans, including principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out loans within six months of the President signing the bill into law. You should talk with your existing banker to determine if you are eligible for any of the included loan types.
Which SBA loans are eligible for debt relief under this program?
7(a) loans not made under the Paycheck Protection Program (PPP), 504 loans, and microloans. Disaster loans are not eligible.
How does debt relief under this program work with a PPP loan?
Borrowers may separately apply for and take out a PPP loan, but debt relief under this program will not apply to a PPP loan.
Economic Injury Disaster Loans (EIDLs) & Emergency Economic Injury Grants
These grants provide an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID-19 within three days of applying for an SBA Economic Injury Disaster Loan (EIDL). To access the advance, you must first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments.
What is an EIDL and what is it used for?
EIDLs are lower interest loans of up to $2 million, with principal and interest deferment available for up to 4 years, that are available to pay for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses.
Who is eligible for an EIDL?
Those eligible are the following with 500 or fewer employees:
- Sole proprietorships, with or without employees
- Independent contractors
- Cooperatives and employee owned businesses
- Tribal small businesses
Who is eligible for an Emergency Economic Injury Grant?
Those eligible for an EIDL and who have been in operation since January 31, 2020, when the public health crisis was announced.
How long are Emergency Economic Injury Grants available?
January 31, 2020 – December 31, 2020. The grants are backdated to January 31, 2020 to allow those who have already applied for EIDLs to be eligible to also receive a grant.
If I get an EIDL and/or an Emergency Economic Injury Grant, can I get a PPP loan?
Whether you’ve already received an EIDL unrelated to COVID-19 or you receive a COVID-19 related EIDL and/or Emergency Grant between January 31, 2020 and June 30, 2020, you may also apply for a PPP loan. If you ultimately receive a PPP loan or refinance an EIDL into a PPP loan, any advance amount received under the Emergency Economic Injury Grant Program would be subtracted from the amount forgiven in the PPP. However, you cannot use your EIDL for the same purpose as your PPP loan. For example, if you use your EIDL to cover payroll for certain workers in April, you cannot use PPP for payroll for those same workers in April, although you could use it for payroll in March or for different workers in April.
Summary of Small Business Tax Relief Provided by the CARES Act
The legislation includes many provisions to help small businesses and large corporations continue to support their employees and bounce back from the financial hit of this pandemic, including:
Employee Retention Credit
- The credit is equal to 50 percent of qualified wages paid to employees, which is capped at $10,000 for all calendar quarters per employee
- Qualified wages include: salary, commissions, tips, payments for vacation or medical leave, and allowance for dismissal or separation employee
- Applies to wages paid after March 12, 2020 and before Jan. 1, 2021
- Is not available to employers receiving PPP loans, as discussed above
- Is allowed in excess of taxes due, is refundable, and is not taxable
Payroll Tax Deferral
- Designed to help employers free up their cash flow and retain employees during quarantine or shutdown
- Defers payroll tax payments for matching social security taxes (6.2 percent of social security taxable wages) due between the date the CARES Act is signed until Dec. 31, 2020
- Requires payment of half of the deferred payroll taxes by Dec. 31, 2021, and the remainder by Dec. 31, 2022
- Applies to 100 percent of employer matching social security payroll taxes and 50 percent of self-employed individuals self-employment taxes
This benefit is reduced for any other credits claimed by the company under the employee retention credit included in the FFCRA. This benefit is also reduced by the R&D credit used against payroll withholding taxes.
Modification of Net Operating Losses (NOLs) Rules
- While the NOL carryback provisions were eliminated in 2017, this act allows for a five-year carryback of NOLs created in 2018, 2019 or 2020
- Businesses can amend tax returns for tax years dating back to 2013 to take advantage of this change
- Allows NOLs arising in 2018, 2019 and 2020 to be carried back five years and suspends the 80 percent taxable income limit until 2021
Business Interest Expense Limitations
- Increases the limitation, under IRC Section 163(j)(1), for allowable business interest deductions from 30 percent of a taxpayer’s adjusted taxable income to 50 percent for 2019 and 2020
- Special rule for partnerships: the 50 percent limitation will not apply to partners in partnerships for 2019. The 50 percent limitation applies only in 2020.
- Allows taxpayers to make an election to use their adjusted taxable income for 2019 when calculating the limitation for 2020
**Note that if you are a current client, this section most likely will not apply to you, since the type of small businesses served by SagaTax are mostly exempt from the interest expense limitations.
Qualified Improvement Property (QIP) Correction
This corrects a drafting error in the Tax Cuts and Jobs Act which exempted certain qualified improvement property from being eligible for bonus depreciation. This section of the CARES Act:
- Provides a technical correction that lowers the depreciable lives of QIPs from 39 years to 15 years, making the QIP eligible for 100 percent bonus depreciation
- Is effective for property acquired and placed in service after Sept. 27, 2017, which will allow taxpayers to amend their tax returns for 2017, 2018 and 2019
- IRS Form 3115 should be filed to change the accounting method, and it is unclear if this will be an automatic change, or one which has to be requested. I believe this will end up being an automatic change, which will simplify filing of the 3115.