On Friday, March 27th, 2020 the President signed into law the CARES Act. This legislation contained very significant tax law changes, the majority of which are temporary and will only be relevant for the 2020 calendar year. We’ve spent the last five days digging through this 880 page legislation to highlight the most relevant changes for you.
Below is a summary of these provisions, as they relate to businesses:
Paycheck Protection Program (PPP)
PPP loans are available to small business owners (with under 500 employees) or self-employed individuals (sole proprietorships or independent contractors), intended to be only used for the following operating costs:
- Payroll costs (including payments to contractors)
- Interest on mortgage obligations
- Rent
- Utilities
- Interest on other debt obligations incurred before the PPP
Eligible entities can borrow up to the lesser of $10 million or 2.5 times the average monthly payroll for the 1-year period before loan application, of which a portion can be forgiven subject to the provisions of the CARES Act. The amount of forgiveness is based on the total of costs 1 to 4 above over the 8-week period after loan grant, subject to reduction based on number of employees laid off and employee pay cuts implemented. No collaterals or personal guarantees are required for application. PPP loans are expected to be made available through all SBA-approved lenders soon and you’ll have until June 30, 2020 to apply.
These loans are best suited for businesses that intend to bring back employees that have been laid off or furloughed, or employers who need additional capital to retain their existing workforce.
SBA Loan Debt Relief
The SBA will pay all principal, interest and fees on existing 7(a) SBA loans for six months (disaster loans, PPP loans, 504 loans, and microloans are not eligible).
Economic Injury Disaster Loan (EIDL) and Grants
Small businesses and self-employed individuals can also apply for EIDLs, especially now with the CARES Act providing waivers for some stricter requirements (no available credit elsewhere and must have been in business for at least 1 year). You can borrow up to $2 million and would just have to provide proof of economic injury for the application. Unlike the PPP loan, EIDL provides more leeway in terms of the type of expenses it can be used for. As a working capital loan, you can use the proceeds to pay for all operational costs, as well as any outstanding debts obligations you were unable to meet due to the disaster.
The CARES Act also allows for a $10,000 emergency grant advance that you can receive within 3 days of an EIDL application. And the kicker? You don’t have to pay any of it back, regardless of whether your EIDL was approved or not.
EIDLs are available until December 31, 2020, directly through the SBA website.
Employee Retention Tax Credit (ERTC)
This provision would allow employers to claim a refundable payroll tax credit equal to 50 percent of a maximum of $10,000 per employee of qualified wages paid (i.e. a maximum credit of $5,000 per employee) from March 13, 2020 to December 31, 2020. The credit is restricted to employers who see a full or partial suspension of operations due to a shutdown order or who see gross receipts decline by more than 50 percent relative to the same quarter the previous year. For employers with more than 100 full-time employees, the credit is restricted to wages paid to employees not providing service due to COVID-19. For employers with fewer than 100 full-time employees, it is applicable to all wages.
This credit is not available to businesses who receive small business interruption loans and is subject to recapture.
Payroll Tax Payment Deferral
The CARES Act provides for the deferral of paying certain employer payroll taxes through the end of 2020. Applicable payroll taxes include (1) 50% of the self-employment taxes, and (2) 100% of the employer portion of FICA taxes. Payments for the deferred payroll taxes are expected to be due in two equal installments, with one-half paid by December 31, 2021, and the other by December 31, 2022.
It is important to note that the above provisions are not available for any businesses that take advantage of the loan forgiveness program of the PPP.
Qualified Improvement Property
This provision would correct an error in the 2017 Tax Cuts and Jobs Act preventing businesses, particularly in the hospitality industry, from writing off facility improvement costs immediately rather than over 39 years. This change is intended to allow businesses to amend prior year returns to provide liquidity during the outbreak and to correct the technical issue.
Net Operating Losses (NOLs)
The CARES Act allows for a net operating loss carry-back for losses arising in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021 to offset income in the preceding five (5) years.
Should I take the PPP, EIDL, or the payroll tax credits?
Finding out the best program to take advantage of ultimately requires a separate evaluation for each individual business, considering industrial, operational, and financial requirements. We at Launch Consulting are always here to help – whether with assessing which loans or credit to take, or even with applying for the loans. Please feel free to reach out if you need assistance.
Looking for more information? Here’s a link to the Senate Committee on Small Business & Entrepreneurship’s Guide for Small Business Owners.