For Small Businesses: New COVID-19 Federal Assistance – CARES Act

Summary of Keypoints

• Overview of CARES Act relief for small businesses: The CARES Act, enacted March 27, 2020, provides payroll, rent, and cash-flow relief for small businesses, including loan forgiveness for eligible expenses and the option to defer employer Social Security tax payments over two years.
• Paycheck Protection Program (PPP) and loan forgiveness: The Act authorizes $349 billion in SBA 7(a) loans for businesses and eligible nonprofits with fewer than 500 employees, including sole proprietors and self-employed individuals. Loans are generally calculated as 250% of average monthly payroll (up to $10 million) and may be fully forgiven if used for qualifying payroll, rent, mortgage interest, and utilities, subject to employee retention requirements.
• Eligibility and certification requirements: PPP loans are available to businesses operating as of February 15, 2020, that paid employees or independent contractors, with borrowers required to certify in good faith that the loan is necessary due to COVID-19-related economic uncertainty. Forgiven loan amounts are excluded from taxable income.
• Employee Retention Tax Credit: Eligible employers may claim a refundable payroll tax credit equal to 50% of qualified wages (up to $10,000 per employee) if operations were disrupted by government shutdowns or if gross receipts declined by at least 50% compared to the prior year, with different wage rules based on employer size.
• Additional business tax provisions: The CARES Act allows deferral of employer and self-employed Social Security taxes, provides 100% bonus depreciation for qualified improvement property, and permits net operating losses from 2018–2020 to be carried back five years with the 80% limitation temporarily suspended.

The Cares Act, passed March 27, 2020, provides payroll and rent relief to small businesses. The Act includes a loan forgiveness provision for funds used to pay employees, rent, utilities or a mortgage. There is also a provision to defer payment of employer social security taxes with payment permitted over two years.

Here is a summary of the provisions, with more to come as details unfold.

Provions for Businesses

The bill provides funds to pay for employee salaries under $100,000, paid sick or medical leave, insurance premiums; and mortgage, rent, and utility payments.

Available to businesses and 501(c)(3) nonprofits with less than 500 employees, including sole proprietors, independent contractors, and other self-employed individuals.

Paycheck Protection Program, including Loan Forgiveness
Providing $349 billion in SBA 7(a) loans through December 31, 2020 for businesses with less than 500 employees, including sole-proprietors, independent contractors, self-employed individuals and certain not-for-profit entities. Key elements include:

Loan Calculation. Loans are equal to 250% of an employer’s average monthly payroll, capped at $10 million. Payroll includes salary, wages, cash tips, employee group health care benefits, insurance premiums, retirement contributions, and covered leave. Wages per person up to $ 100,000 qualify.

Allowable Uses. Loans shall be used for payroll support, such as salaries, paid sick or medical leave, insurance premiums, retirement contributions, and mortgage, rent, and utility payments (for expenses that existed prior to February 15, 2020 and continue through June 30, 2020)

Loan Foregiveness. The loan is eligible for 100% forgiveness if used for the stated purposes and in conjunction with guidelines related to staff retention. Loans that are used for payroll costs less than an annual rate of $100,000 in compensation per person, interest payments on any mortgage costs, rent, or utilities, may be forgiven. The amount of loan forgiven is proportionally reduced by any reduction in employees or payroll compared to the prior year.

Re-Hiring. To encourage employers to rehire any employees who have been already laid off, those who rehire workers will not be penalized for having a reduced payroll at the beginning of the loan period.

Employers must make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19.
Instead of determining repayment ability, lenders will determine whether a business was operational on 2/15/2020, and paid employees a salary subject to payroll taxes, or a paid an independent contractor.

The loan forgiveness under this Act is TAX FREE!

Employee Retention Tax Credit – Businesses receive a refundable credit for retaining employees.

Eligible employers receive a credit against employment taxes equal to 50% of qualified wages paid up to $10,000 for each employee during the crisis. It would be available to businesses that were disrupted due to virus-related shutdowns and firms experiencing a decrease in gross receipts of 50% or more when compared to the same quarter last year. Once eligible, employers remain eligible until gross receipts exceed 80% of gross receipts for the same calendar quarter in the prior year.

For employers with 100 or fewer employees, all wages paid qualify for the credit.

Credit is available for employees retained but not currently working due to the crisis for firms with more than 100 employees, and for all employee wages for firms with 100 or fewer employees.

Deferred Payment of Employment Taxes

Social security taxes for both employers AND Self-employed individuals can be paid over two years, half by 12/31/2021 and half by 12/31/2022.

As yet unclear how payroll processors like ADP and Paychex will deal with this provision. They generally impound taxes up front.

Qualified Improvement Property

Provides 100% bonus depreciation for costs associated with interior improvement of non-residential property.

Net Operating Loss (NOL) Carryback Allowed

NOLS generated in 2018, 2019, or 2020 can be carried back 5 years.

The 80% limit on use of NOLS is suspended to allow an NOL to fully offset income.

If applicable, taxpayers can apply for a refund using Form 3315, change in accounting method.

Pass-through businesses and sole proprietors can now benefit from the NOL carryback rules described above.