Our last blog post delved into the parts of the CARES Act mostly affecting individuals. We continue our look at the CARES Act with some provisions impacting small business owners.
Paycheck protection program and forgivable loans
This is a partially forgivable loan program through the SBA. Loans must be applied for by June 30, 2020 and can have a maximum maturity of 10 years.
Under this program, lenders can issue SBA 7(a) small business loans up to the lesser of $10,000,000 or 2.5 times the average monthly payroll costs over the previous year (up to $100,000 of salary per person). The proceeds of the loans can pay for a variety of costs, including:
- Group health insurance premiums
- Salaries and/or commissions
- Mortgage interest
- Other business interest incurred prior to February 15, 2020
The amount eligible to be forgiven is the amount spent during the first 8 weeks after the loan is made, on:
- Payroll (excluding prorated amounts for individuals with salaries over $100,000)
- Rent, as long as the lease was in force before February 15, 2020
- Electricity, gas, water, transportation, telephone, or internet access expenses for services which began before February 15, 2020
- Group health insurance premiums
For amounts to be forgiven, the business must maintain the same number of employee equivalents from February 15, 2020 through June 30, 2020 as it did during the same period in 2019 or from January 1, 2020 until February 15, 2020. Requirements not met will have the amount eligible for forgiveness reduced ratably. Amounts forgiven are not included in taxable income.
The maximum interest rate under this plan is 4%. Payments will be deferred for a period of 6 months to one year. Additional guidance will be coming in the next 30 days.
Employee retention credit for employers subject to closure due to COVID-19
Employers can potentially become eligible for this credit if operations were fully or partially suspended as a result of a governmental authority or have less than 50% of revenue from the same quarter in 2019. Qualifying businesses will continue to qualify for the credit until the earlier of the end of 2020 or business “recover” in relation to their initial qualifying criteria.
This credit is equal to 50% of wages paid to each employee, up to a max of $10,000 wages per employee. Note, for businesses with more than 100 employees, the calculation is a bit more complicated.
Deferral of Payment of Payroll Taxes
Starting from the date of enactment, through the end of the year, 50% of payroll taxes due during this period may be deferred until December 31, 2021. The remaining 50% is due on December 31, 2022.
Self-employed individuals can likewise defer 50% of the employer equivalent portion of their self-employment taxes, paying 50% of the deferred balance by December 31, 2021 and the remaining 50% by December 31, 2022.
Net Operating Loss rules are loosened
The CARES Act allows any NOL from 2018, 2019, or 2020 to be carried back up to 5 years. This could help companies reduce prior year tax bills and claim refunds to help with liquidity.
Again, this is just a brief overview of some very complicated legislation. IRS and the SBA will be coming out with specifics in terms of documentation that’s required and fleshing out what qualifies and how to document to ensure full benefits of credits and/or loan forgiveness. Please stay tuned for further developments as they come out, and reach out if you need guidance taking advantage of any of these resources.