The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law by President Donald J. Trump on March 27, 2020, is a record-breaking expenditure designed to help individuals and certain businesses weather the economic storm they are facing in light of
the current COVID-19 pandemic.
Paycheck Protection Program
The Paycheck Protection Program (“PPP”) is a new program being administered through the Small Business Administration to provide continuity of income for employees of small businesses throughout the coronavirus crisis. Qualifying businesses can receive loans from the Small Business Administration in order to keep their employees on the payroll, with the loans to be forgiven if the employees remain on the payroll for 8 weeks, and the amounts loaned are used for payroll, rent, mortgage interest, or utilities, with at least 75% being used for payroll.
Who is eligible? Small businesses with less than 500 employees. This may include sole proprietorships. Restaurants and other food service entities qualify if they employ fewer than 500 employees at a single location.
When is the program available? Qualifying small businesses may apply for loans beginning on April 3, 2020. The PPP will continue through June 30, 2020.
How can a business apply? Through an existing SBA 7(a) lender or through any federally-insured depository institution or credit union. Other lenders may be available to make loans after submitting for approval and being enrolled in the program through the Small Business Administration.
How large of a loan can these businesses receive? 2.5 times the business’s average monthly payroll based on the 12 prior months, with a cap of $10 million.
What terms apply to these loans? Payments on these loans will be deferred for 6 months. The loans are unsecured, so businesses need not give any collateral in order to receive them. No fees apply. The loans have a maturity of 2 years and an interest rate of 0.5%. Forgiveness is based on the businesses either maintaining or quickly rehiring employees and maintaining salary levels. The amount of the loans to be forgiven will be reduced if the number of full-time employees decrease, or if their salaries or wages decrease. Businesses will generally not incur a tax liability on the forgiven amount of loans.
Can businesses receive tax credits under the CARES Act, or those that defer certain payroll taxes, also receive forgiveness of these loans? No. These benefits are mutually exclusive under the CARES Act. The tax credits available for businesses and provisions for deferral of certain payroll taxes are described in further detail below.
Deferral of Employer Payroll Taxes
Employers are required to withhold payroll taxes from wages paid to employees, as well as pay their own share of payroll taxes based on employees’ wages. The majority of these taxes fund Social Security, but a portion funds Medicare as well. The CARES Act allows employers to defer (but not forgo) payment of their share of the social security portion of these taxes. No deferral is available to the employees’ portions of payroll taxes.
What payroll taxes may companies defer? Those incurred from the effective date of the CARES Act – March 27, 2020 – through December 31, 2020.
How long may businesses defer payment of these taxes? 50% of the amounts deferred must be paid by December 31, 2021. The remaining amounts must be paid by December 31, 2022.
Do businesses who defer payroll taxes incur interest on the amount of deferred taxes? No, the CARES Act provides for tax-free deferral.
Payroll Tax Credits
Employers can claim a 50% tax credit on wages paid to their employees from March 13, through December 31, 2020, with a maximum of a $5,000 credit per employee.
What businesses qualify for this credit? Those that have had their operations fully or partially suspended due to a government restriction related to the coronavirus, or have a 50% decline in gross receipts compared to the prior year. Businesses with 100 or more employees can only take the credit for employees who are unable to work for a coronavirus-related reason.
Where does a business report its credit? On its Form 941, filed with the IRS on a quarterly basis. The credit can be made against Social Security taxes, but not Medicare taxes.
Net Operating Losses
The Tax Cuts and Jobs Act of 2017 substantially changed the law regarding net operating losses (“NOLs”), limiting such a loss to 80% of taxable income, and prohibiting the carryback of NOLs to prior years. Under the CARES Act, NOLs incurring between the 2018 and 2020 tax years may be carried back to each of the five tax years preceding the year of the loss, and the 80% limitation does not apply to such losses.
What can a business do to take advantage of this? A business with such losses may be able to immediately claim a tax refund for prior tax years. There are many other considerations of which businesses should be aware before making such claims, and would be well-advised to consult with a tax advisor before doing so.
Rees Broome’s Summary
While these programs available for certain businesses under the CARES Act can provide a lifeline for business and employment continuity, businesses should consult with attorneys and other professionals before pursuing a program. Some aspects of the CARES Act are unavailable if a business avails itself of others, and a careful analysis should be undertaken before deciding which programs are appropriate for a given business. Similarly, there may be tax consequences that are not obvious at first glance.