CARES Act, Small Businesses - Aspiriant

The CARES Act and Small Businesses

(UPDATE: Because the CARES Act loan programs ran out of money so quickly, Congress subsequently passed another coronavirus-relief bill. The package, signed by the president April 24, provides an additional $484 billion for small businesses and hospitals.)

As Americans across the country shelter in place to protect themselves and others from COVID-19, many small businesses struggle to survive. Congress recognized that to save our economy, small businesses need big support. The CARES Act, signed by the president on March 27, offers several relief valves to assist small businesses. Here are the key provisions.

Loans

Paycheck Protection Program

To help small businesses with near-term liquidity concerns and to encourage the retention of employees, the CARES Act authorized $349 billion in loans from February 15 through June 30, 2020, under of the Small Business Act. These Paycheck Protection Program (PPP) loans are administered by banks and credit unions under guidelines being implemented by the U.S. Small Business Administration (SBA).

Loans up to $10 million are available to eligible businesses, nonprofit organizations and veterans’ organizations with 500 or fewer employees as an incentive to keep their workers employed for the eight-week period (“covered period”) beginning on the date of the loan. PPP loans will not require personal guarantees, collateral or fees. The loans will have a maturity of two years and carry an interest rate of 1%. Principal and interest payments will be deferred for six months.

PPP loans will be forgiven tax-free if employees are kept on payroll during the covered period and at least 75% of the forgiven amount is used for payroll, with the remainder going toward mortgage interest, rent and utility payments. Businesses that have already reduced their payrolls can get loan forgiveness if they restore their payrolls after obtaining the loan. Eligible payroll costs are capped at $100,000 in annualized compensation (prorated for the covered period) paid to any employee or independent contractor.

Economic Injury Disaster Loan

In addition to payroll support, the CARES Act relaxes the Economic Injury Disaster Loan (EIDL) program to help small businesses overcome the temporary loss of revenue they are experiencing. Businesses with not more than 500 employees are eligible to apply to the SBA for an EIDL advance of up to $10,000. Applicants must have been in business for one year before the disaster, and funds will be distributed by the SBA within three days of a successful application. This loan advance does not have to be repaid, but it would be subtracted from the amount forgiven under the PPP.

Tax provisions

Employee Retention Tax Credit

Certain employers are eligible for a tax credit against their employment tax equal to 50% of qualified wages (up to $10,000) paid to each employee.

  • For employers with more than 100 full-time employees, qualified wages are wages paid when employees are not working due to COVID-19 related circumstances
  • For employers with 100 or fewer employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order
  • The credit is provided for wages paid or incurred from March 13 to December 31, 2020

An employer is eligible for this credit only if they were carrying on a trade or business in 2020 and either:

  • The business is fully or partially suspended by the government due to COVID-19
  • The business has seen a significant decline in gross revenue (50% less than in the calendar quarter of the prior year) and for so long until the business recovers to 80% of prior year’s revenue

A business is NOT eligible for this credit if they receive a loan under the PPP described above.

Delay of payment of payroll taxes

Employers (for profit and not-for-profit) and self-employed individuals can defer the employer portion of payroll taxes with respect to their employees. This is the 6.2% portion of Social Security taxes. This applies to payroll taxes for the period from March 27 to December 31, 2020.

To be clear, this assistance is a deferment and will need to be repaid as follows:

  • 50% of the deferred payroll taxes will be payable on December 31, 2021
  • The remaining 50% will be payable on December 31, 2022

Also important, if the business receives loan forgiveness under the PPP, it is not eligible to defer payment of payroll taxes.

Net operating losses modification

Many companies are expected to suffer losses in 2020 due to mandatory closure and other economic hardships. Those losses may not be known until the company files its 2020 taxes in early 2021. Once determined, those losses could be carried back to offset income, and thus lower taxes, from profitable years.

The CARES Act relaxes the limitations on a company’s use of losses. Losses from 2018, 2019 and 2020 can be carried back for five years without regard to a taxable income limitation, and so the losses can fully offset income.

Some of those losses would be carried back to tax years when the business was subject to a 35% tax rate (the current corporate rate is 21%). This will provide relief, but not immediate relief, to struggling businesses.

Increased limit for business interest expense

For 2019 and 2020, businesses can deduct business interest up to a limit of 50% of taxable income, an increase from the usual limit of 30%. Special rules apply to pass-through businesses.

Charitable deduction limitation increased

The deduction limitation for corporations for certain charitable cash contributions made in 2020 is increased to 25% of taxable income (up from 10% of income under the normal rules), as long as the contribution is made to a public charity. Corporations can also deduct charitable contributions of food inventory made during 2020 to public charities up to 25% of taxable income (up from 15%).

Find clarity through calamity

The CARES Act is a robust and ambitious law that established many programs and tax law changes to help prop up the economy and enable it to recover when this pandemic is over. So not surprisingly, it’s extremely complex.

Business owners should consult a tax professional to be sure they are maximizing their opportunities, including provisions for individuals, and following the law correctly. Regardless of your situation, a comprehensive wealth management team can help provide peace of mind during this stressful time of uncertainty, so you can stay focused on keeping your company running.

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