The third coronavirus relief package – the Coronavirus Aid, Relief and Economic Security Act (CARES Act) – has been passed by Congress and signed by President Trump. The CARES Act contains provisions designed to help both businesses and individuals. Click here to read about the provisions affecting individuals. Below is a look at those provisions aimed at businesses.
Paycheck Protection Program
The CARES Act allocates $350 billion to help small businesses, which are those with fewer than 500 employees per physical location, that have been impacted by the coronavirus pandemic and economic downturn. This aid is meant to help these businesses make payroll and cover other expenses from Feb. 15 to June 30.
Small businesses may take out loans of up to $10 million. The amount is limited to a formula tied to payroll costs (250% of average monthly payroll) and can cover employees making up to $100,000 per year. Covered payroll costs include:
- Salary, wages and payment of cash tips up to an annual rate of $100,000
- Employee group health care benefits, including insurance premiums.
- Retirement contributions; and
- Covered leave.
The loan cannot be used to buy back corporate stock or use funds for executives making more than $3 million. Furthermore, a business cannot apply for an SBA disaster loan related to COVID-19 and loans under this program at the same time.
The cost of participation in the program would be reduced for both borrowers and lenders by providing fee waivers, an automatic deferment of payments for one year, and no prepayment penalties.
The loans will be available immediately through more than 800 existing American Bankers Association-certified lenders, including banks, credit unions and other financial institutions. The Small Business Association will be required to streamline the process to bring additional lenders into the program.
The Act allows businesses with more than one physical location that employs no more than 500 people per physical location in certain industries to be eligible. It waives the affiliation rules for businesses in the hospitality and restaurant industries, franchises that are approved on the SBA’s Franchise Director, and small businesses that receive financing through the Small Business Investment Company (SBIC) program.
The SBA lenders will be able to determine eligibility credit worthiness by determining whether a borrower was operational on March 1, 2020, and had employees that they paid salaries and payroll tax.
The loans may be forgiven if a company uses the loan for payroll, interest payments on mortgages, rent, and utilities. It would be reduced proportionally by any reduction in employees retained compared to the prior year and a 25% or greater reduction in employee compensation.
Canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.
Employers Payroll Tax Credit
Employers are eligible for a 50% refundable payroll tax credit on wages paid up to $10,000.
The credit would be available to employers:
- whose businesses were disrupted due to shutdowns as a result of COVID-19; or
- who had a decrease in gross receipts of 50% or more when compared to the same quarter last year.
For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers’ closure or reduced gross receipts are eligible for the credit. Note that no credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit. The credit applies to wages paid after March 12, 2020, and before Jan. 1, 2021.
The term “wages” includes health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee. Wages do not include amounts taken into account for purposes of the payroll credits, for required paid sick leave or required paid family leave in the Families First Coronavirus Act, nor for wages taken into account for the employer credit for paid family and medical leave.
Employer payroll taxes
The CARES Act allows employers to delay Social Security payroll tax payments until Jan. 1, 2021, with 50% owed on Dec. 31, 2021, and the remaining 50% owed on Dec. 31. 2022. The Social Security Trust Fund will be backfilled by the general fund.
Temporary repeal of taxable income limitation for net operating losses
The CARES Act temporarily removes the taxable income limitation to allow a net operating loss, or NOL, to fully offset income. Taxpayers can take and carryback those losses for five years. The NOL limit of 80% of taxable income is also suspended, so businesses may use the NOLs they have to fully offset their taxable income.
The CARES Act also modifies loss limitations for non-corporate taxpayers, including rules governing excess farm losses, and makes a technical correction to the treatment of NOLs for the 2017 and 2018 tax years if the taxpayer has a fiscal year.
Companies with tax credit carry forwards and previous AMT liability can claim larger refundable tax credits than they otherwise would.
Modification of limitation on losses for noncorporate taxpayers
The CARES Act temporarily modifies the loss limitation for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020. This applies to tax years beginning after Dec. 31, 2017.
Deductibility of interest expense temporarily increased
The net interest deduction limitation – which currently limits business’ ability to deduct interest paid on their tax returns to 30% of earnings before interest, tax depreciation, and amortization (EBITDA) – has been expanded to 50% of EBITDA for 2019 and 2020. This will help businesses increase liquidity if they have debt or must take on more debt during the crisis.
Bonus depreciation technical correction for qualified improvement property
The CARES Act provides a technical correction to the TCJA, and specifically designates QI Property as 15-year property for depreciation purposes. The provision enables businesses – especially those in the hospitality industry – to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39 year life of the building. The provision, which corrects an error in the TCJA, not only increases companies’ access to cash flow by allowing them to amend a prior year return, but it also provides incentives to continue to invest in improvements as the country recovers from the COVID-19 crisis.
Other emergency lending
The CARES Act includes $32 billion in grants to cover wages at passenger air carriers, cargo air carriers and contractors. There is also $10 billion in a Coronavirus Relief Fund for state and city government expenditures incurred in dealing with the coronavirus emergency. The fund will be allocated by population proportions, with a minimum of $1.25 billion for each state.
The CARES Act includes provisions addressing supply shortages, coverage of diagnostic testing for COVID-19, support for healthcare providers, improving telehealth service access and flexibility, encouragement for the creation of drugs to treat the virus, strengthening related Medicare and Medicaid provisions, and providing support for educational institutions.
This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.