As a follow up to last week’s communication on the CARES Act, we want to continue to provide information to our clients and their friends and family who may benefit during this uncertain time. The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) has many tax benefits to individuals which we detailed in our last communication. In addition, there are a surplus of loan and tax relief opportunities for small businesses. We’ll focus on the following provisions in the bill:
1. Paycheck Protection Program (PPP)
2. Economic Injury Disaster Loan (EIDL)
3. Employee Retention Credit
4. Delay of Payment of Employer Payroll Taxes
5. Expanded Unemployment Benefits
6. Miscellaneous Other Provisions
Note: Although the loan programs have been announced in the bill, many of the details and fine print continue to emerge on a daily basis through Treasury and IRS regulations and guidance. What constitutes “payroll costs”, how each provision overlaps and the consequences of such, exact timing on receipt of loan proceeds, and many other questions will continue to be answered over the coming days and weeks.
Paycheck Protection Program
The Paycheck Protection Program has received the most attention due to the opportunity for the entirety of the loan to be forgiven tax-free. This loan is from qualified Small Business Administration (SBA) lenders and each lender is to have identical terms. The loan is for small businesses with <500 employees who have been negatively affected by Covid-19. As the name suggests, it was written with the goal of helping continue payroll costs.
The maximum loan amount is the lessor of $10M or 2.5 times the average total monthly payroll costs.
The terms of the loan are 2 years and 1.0% interest rate.
If at least 75% of the loan is used for payroll costs and the remaining funds are used for expenses such as continuation of health insurance, utilities, mortgage interest or rent payments, or interest on debt obligations prior to 2/15/2020 then the entirety of the loan may be forgiven. If employees are laid off or compensation is decreased, the amount of the loan eligible to be forgiven may decrease.
Economic Injury Disaster Loan
The Economic Injury Disaster Loan (EIDL) is similar in the sense it is for small businesses with <500 employees who are negatively affected by Covid-19, but it is offered directly through the SBA with no forgiveness available.
The maximum loan amount is $2M with terms up to 30 years at 3.75%.
The EIDL funds are also to be used on payroll costs, sick leave, rental costs, repaying prior debt obligations, and other expenses. A business may have both EIDL and PPP loans but the funds may not be used on the same expenses. Although the EIDL does not offer forgiveness, there is a $10K emergency grant provision of the EIDL; however, if the EIDL and PPP are both utilized, $10K of the PPP loan no longer qualifies for forgiveness.
Employee Retention Credit
The Employee Retention Credit is not a loan but rather an opportunity to retain funds by reducing required deposits of quarterly payroll taxes. Qualified employers include those whose operations are partially or fully suspended due to governmental orders, or any employer whose gross receipts for the quarter are less than 50% of gross receipts for that same quarter in the prior year.
The credit is the lessor of 50% of qualified wages or $5,000 per employee for wages paid from 3/12/2020 through 1/1/2021. For employers with <100 employees, the credit applies to all employees. If there are >100 employees, the credit is for wages paid to employees who are no longer working due to mandated shutdown or a decline in revenues.
The Employee Retention Credit is not allowed to be used if a PPP loan has been issued.
Delay of Payment of Employer Payroll Taxes
The CARES Act allows employers to defer paying the 6.2% employer portion of Social Security payroll tax through December 31, 2020. The deferred taxation is due in halves; half due on December 31, 2021 and the other half due on December 31, 2022.
The payroll tax deferral program is not available for businesses that have a Payroll Protection Program loan that is forgiven.
Expanded Unemployment Benefits
The CARES Act and the Families First Coronavirus Response Act (FFCRA) expanded and increased unemployment benefits for employees and self-employed individuals. A few of the changes include:
Self-employed individuals which are generally ineligible for unemployment compensation will be eligible for 39 weeks of benefits.
Generally, individuals are ineligible to receive unemployment benefits the first week which they are unemployed. The CARES Act eliminated the one week waiting period.
Unemployment compensation is increased by $600 per week. Individuals may receive up to $600 in addition to their state’s regular unemployment benefits until July 31, 2020.
Benefits for unemployment are extended for an additional quarter (13 weeks).
Miscellaneous Other Provisions
Under prior law, Net Operating Losses (NOLs) were not eligible to be carried back to prior tax years and NOLs were only eligible to offset 80% of current year taxable income. The CARES Act updated both, allowing 100% of NOLs to be used and NOLs for 2018, 2019, and 2020 to be carried back up to five years. Therefore, companies may be able to amend prior year tax returns for immediate refunds.
Existing SBA loans are eligible for six months forbearance.
The amount of Section 163(j) interest expense businesses may deduct was increased from 30% to 50% for 2019 and 2020 tax years.
Businesses with fewer than 500 employees will be eligible for tax credits covering two weeks paid sick leave for employees who have been quarantined, have a sick family member, or have been affected by school closings. Also, tax credits for up to three months of paid family and medical leave.
Businesses with fewer than 50 employees will be exempt from paid sick leave and FMLA costs if the Department of Labor determines those costs would pose a threat to the company continuing to operate.
Gig workers and self-employed are eligible to receive paid sick leave benefits in the form of a tax credit.
Summary
The CARES Act offers significant amounts of relief, and in some cases “free” money, to help support small businesses. Many of the provisions are extremely nuanced and should not be approached haphazardly. With the ongoing uncertainty, we would highly recommend measuring twice to cut once. If Kotys Wealth Professionals can be of service to your business while determining and/or applying for financial assistance, please give us a call at (219) 465-6924.
This communication is intended to provide general information and is not intended to serve as legal, tax, or other financial advice related to individual situations. Please consult with your attorney, CPA, and/or other advisor regarding your specific situation.
Investment Advisory services offered through TKG Advisors LLC, a Registered Investment Advisor.