What does this mean for your business?
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law by the President on March 27, 2020. The CARES Act is the third stimulus bill passed by Congress and enacted into law in response to the COVID-19 pandemic. Below you will find the provisions that are most impactful to businesses and their owners in the CARES Act.
Paycheck Protection Program (“PPP”)
The PPP expands SBA loan eligibility for businesses suffering due to the coronavirus outbreak. It covers the period from February 15, 2020, through June 30, 2020, and allows businesses to borrow money to cover:
- Payroll costs
- The continuation of health care benefits
- Employee compensation (of those making less than $100K)
- Mortgage interest obligations
- Interest on debt incurred before the covered period
Companies that employ no more than 500 employees are eligible for loans up to 2.5x the average total monthly payroll costs at an interest rate not to exceed 4%. These loans also waive the typical requirements for personal guarantees and collateral. For your business to qualify for the loans, the business must have been operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes or paid independent contractors.
These loans may be forgivable up to the amount spent by the business eight weeks after the loan date on rent, payroll costs for workers making less than $100K, interest on a mortgage, and utility payments. The amount forgiven may not exceed the principal of the loan. The incentive is for companies to retain or rehire employees. There will be no penalty for a reduced payroll at the beginning of the period for borrowers that re-hire workers previously laid off.
Emergency Economic Injury Disaster Loans (“EIDLs”)
The CARES Act also addresses the previously existing SBA EIDLs that many businesses have already applied to receive. The law expands eligibility to qualify for EIDLs during the period between January 31, 2020, and December 31, 2020.
Eligible businesses include businesses with 500 or fewer employees operating under a sole proprietorship or as an independent contractor, and any cooperative, ESOP and small tribal businesses with fewer than 500 employees. The number of employees is determined together with any affiliated companies. Businesses may qualify for EIDLs based solely on credit score or use of another tool that demonstrates the business’ ability to repay. Applicants may also request an advance of up to $10,000 if they meet eligibility requirements. The advance may be used for any purposes under§7(b)(2) of the Small Business Act and is not subject to repayment, even if the loan application is denied. Similar to the PPP, the requirement of personal guarantees for loans up to $200,000, operations for at least a year (but must be operational on January 31, 2020), and the ability to obtain credit elsewhere test are waived.
Unemployment Insurance Benefits
The CARES Act broadens the definition of individuals who are eligible for unemployment benefits to include employees furloughed or out of work as a direct result of COVID-19, self-employed or gig workers, and those who have exhausted existing state and federal unemployment benefit provisions.
Individuals who have the ability to telework with pay and those who are receiving paid sick leave or other paid benefits are excluded from coverage, even if they otherwise meet the requirements of the law. Each state will administer these unemployment benefits under terms they have agreed upon with the Secretary of Labor.
The law increases unemployment benefits by $600 per week for unemployment payments made from the date of the law’s enactment through July 31, 2020. Individuals must be able and available to work and actively seeking work unless they are unable to do so as a result of COVID-19 illness, quarantine, or movement restriction. The law also provides unemployment benefits to covered individuals for unemployment, partial unemployment, or inability to work caused by COVID-19 during the period January 27, 2020, through December 31, 2020. The total benefit may not extend beyond 39 weeks, including any benefits received under existing state or federal law.
Taxpayers can benefit from a tax credit equal to the sum of $1,200 for single filers ($2,400 for those filing a joint return) plus $500 per qualifying child. These credits will be phased-out by 5% of the amount by which the taxpayer’s adjusted gross income exceeds $150,000 for joint-filers, $112,500 for heads of household, and $75,000 for all other types of filers.
Delay of Payment of Employer Payroll Taxes
he CARES Act allows most employers to defer employer side payments of applicable employment taxes through December 31, 2020. Half of this deferred amount would be due on December 31, 2021, and the other half by December 31, 2022.
Employee Retention Credit for Employer Subject to Closure Due to COVID-19
Employers are eligible to receive a quarterly employment tax credit equal to 50% of the qualified wages for each employee. To qualify for the tax credit, your business must have a full or partial suspension of operations due to COVID-19. This suspension includes government orders or a decrease in gross receipts greater than 50% from the same calendar quarter of the prior year. There are specific timelines and calculations required for eligibility. Furthermore, this credit does not apply to employers also taking advantage of the small business interruption loan programs.
Other Provisions in the CARES Act.
In addition to the provisions described above, the law contains several other tax benefits for business owners and individuals including:
- Waiver of Penalty for Retirement Account Distributions
- Modifications for Net Operating Losses
- Modification of Limitation on Losses for Taxpayers Other Than Corporations
- Modification of Credit for Prior Year Minimum Tax Liability of Corporations
- Modification of Limitation on Business Interest
- Write-Offs Related to Qualified Property Improvements
The above information is a summary of the CARES Act concerning key provisions that impact businesses. The law contains many details required to apply these benefits to your business correctly. Many of these details need further guidance from the Secretary of the Treasury. They may also be dependent upon a separate agreement between your state and the Department of Treasury before implementation. You should talk with your tax and legal advisors before taking action.