On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law with the goal of aiding American individuals and businesses in navigating the international crisis caused by the COVID-19 outbreak.
The CARES Act provides loans, tax and employment benefits for businesses, and unemployment, qualified plan and tax-related benefits for individuals to alleviate the economic challenges individuals and businesses are facing due to the outbreak. This article is a broad overview of key provisions of the CARES Act that might affect you as as a business owner.
Economic Injury Disaster Loans
Economic Injury Disaster Loans (EIDLs) are also affected by the CARES Act in the following ways:
The CARES Act provides $10 billion to, and expands eligibility for, the EIDL program under the Small Business Act (SBA) which permits loans of up to $2 million.
Until December 12, 2020, the following additional entities will be eligible to participate in the EIDL program: (1) a business with 500 or fewer employees; (2) any individual who operates under a sole proprietorship or as an independent contractor; (3) a cooperative with 500 or fewer employees; (4) an employee stock ownership plan (ESOP) with 500 or fewer employees; and (5) tribal small businesses with 500 or less employees.
Applicants must have been in operation since at least January 31, 2020.
The funds may be used for paid sick leave to employees unable to work directly due to COVID-19, maintaining payroll during business disruptions or slowdowns, meeting increased costs due to supply chain disruption, making rent or mortgage payments, or repaying obligations that cannot be met due to revenue loss.
Whereas EIDLs typically require personal guarantees, through December 31, 2020, the SBA will waive personal guarantees on advances of not more than $200,000 for all applicants, and will waive restrictions on an applicant's ability to obtain credit elsewhere.
Applicants may request an emergency advance of up to $10,000, which amount will not be required to be repaid even if the EIDL application is denied. If the applicant transfers to the PPP (discussed below), the advance amount will reduce the loan forgiveness amount under that program.
Loans under EIDL are not forgiven.
The Paycheck Protection Program
We previously posted about the Paycheck Protection Program (PPP). Here are a few key points about the PPP:
The PPP provides $349 billion to the Small Business Administration's (SBA) Section 7(a) loan program. The PPP offers certain businesses affected by COVID-19 access to immediate financial assistance in the form of forgiveable loans.
Loans will be available to cover: payroll costs, costs related to continuation of group healthcare benefits during periods of paid sick, family, or medical leave, insurance premiums, interest payments on any mortgage obligation, rent, utilities, and interest on existing debt obligations from February 15, 2020 through June 30, 2020.
The PPP is available to companies employing 500 or less employees. Employees of affiliated companies are aggregated for purposes of determining the number of employees, but those affiliation rules are waived for accommodation and food services industries with less than 500 employees franchises that are assigned a franchise identifier code by the SBA, and businesses that receive financing from a company licensed under the Small Business Investment Act.
The maximum loan amount available is the lesser of $10 million or 2.5 times the company's average total monthly payments for payroll costs for the 12-month period preceding the loan, in addition to the amount of any EIDL loan made on or after January 31, 2020 that is being refinanced by the PPP.
To be eligible for the PPP, no EIDL loan may be applied for or obtained through December 31, 2020 for the same purpose.
Loans under this program are forgivable in an amount equal to the sum of certain payroll costs, payments of interest on any mortgage of the borrower incurred before February 15, 2020, payments on rent under previously-existing lease agreements prior to February 15, 2020, and payments for electricity, gas, water, transportation, telephone or internet services that begin before February 15, 2020. The amount forgiven will be subject to reductions based on the employer's reduction of salaries or workforce for certain periods of 2020, which can be exempted from the reduction if the salaries and workforce levels are restored by June 30, 2020.
Loan forgiveness may not be available if a borrower defers employer payroll social security tax as permitted under the CARES Act.
Borrowers obtaining loans under the PPP are not permitted to also receive an employee retention tax credit and as a result may be required to offset or repay any employee retention tax credit obtained under the CARES Act prior to receiving the loan.
If the loan is not forgiven, it will bear an interest rate of up to 4 percent and maximum maturity of ten years.
Other benefits to the PPP loans include: deferment of all payments for 6 months to 1 year, waiver of SBA fees, no personal guarantee or collateral requirements, SBA will not have legal recourse against any individual owner unless proceeds are used for unauthorized purposes, and waiver of existing requirement that a small business be unable to obtain credit elsewhere.
Tax Credits, Tax Deferrals, and Net Operating Losses
Employers whose operations were fully or partially suspended due to a COVID19-related governmental order or whose gross receipts for the calendar quarter are less than 50 percent when compared to the same quarter in the prior year, are eligible to receive a refundable payroll tax credit equal to 50% of qualified wages (including any "qualified health plan expenses" allocable to the wages) for wages paid or incurred between March 13, 2020 and December 31, 2020.
Net operating losses (NOLs) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The CARES Act reduces those limitations and allows companies to carry back NOLs from 2018, 2019, and 2020 for up to five years. The NOL limit of 80 percent of taxable income is also suspended, allowing companies to use their NOLs to fully offset their taxable income.
For employers with more than 100 employees in 2019, the credit is available only for wages paid to furloughed employees. For employers with 100 or fewer full-time employees in 2019, all wages are eligible for the credit.
The amount of qualified wages for each employee for all quarters may not exceed $10,000. The credit is not available for employers receiving an SBA Section 7(a) loan.
Whereas generally employers are responsible for paying a 6.2 percent Social Security tax on employee wages, under the CARES Act, employers and self-employed individuals may delay the employer portion of Social Security tax payments, with 50 percent of the amount to be paid by December 31, 2021 and the other 50% by December 31, 2022.
Business Interest, AMT, and Qualified Improvement Property
The current net interest expense deduction, which limits the ability of businesses to deduct interest expenses paid on their tax returns, is temporarily increased to 50 percent of adjusted taxable income for 2019 and 2020.
The CARES Act allows companies to claim larger refundable tax credits, including corporate alternative minimum tax credits now than they otherwise could.
The CARES Act corrects the Tax Cuts and Jobs Act relating to "qualified improvement property" (interior improvements to nonresidential buildings). The correction is retroactive to January 1, 2018, and provides for immediate expensing of certain improvements to real property through bonus depreciation. It also allows for a 15-year recover period, as opposed to the current 39-year depreciation life of the building.
Limitations on PTO Payments
Employers with 500 or fewer employees are not required to pay more than $511 per day and $5,110 in the aggregate for an employee taking paid sick leave because the employee is subject to a quarantine order, has been advised to self-quarantine, or is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
Employers with 500 or fewer employees are also not requierd to pay more than $200 per day and $2,000 in the aggregate for an employee taking paid sick leave because the employee is caring for an individual subject to a quarantine order, is caring for a child whose school is closed, or the child care provider or such child is unavailable or is experiencing substantially similar conditions.
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This Wandro & Associates Update is intended to inform firm clients and friends about legal developments, including recent decisions of various courts and administrative bodies. Nothing in this Practice Update should be construed as legal advice or a legal opinion, and readers should not act upon the information contained in this Update without seeking the advice of legal counsel.