By David Morse, Tax Policy Director
The president just signed the CARES Act after a week of negotiations in the Senate, and a Congressional kerfuffle that required an emergency recall of House members to the Capitol. Newspapers have spent much ink on individual check expectations and considerable corporate loan restrictions. Until Treasury releases guidelines, we won’t know much more. However, as usual, the small business provisions have been covered in only broad strokes. CPA intends to correct this oversight for its members.
First, there will be a Small Business Interruption Loan program, administered through the Small Business Administration. The first three following sections below comprise the key features of this program.
Paycheck Protection Program
The primary function will be a Paycheck Protection Program. To qualify, business interests (including ESOPs), sole proprietors, independent contractors, self-employed persons, and some others must have less than 500 employees, been in operation on February 15 of this year, and make a “good faith certification” to retain their employees. This program will provide low-interest, SBA-guaranteed loans from insured banks and credit unions with principal and interest deferred for six months, for up to a year. Current approved 7(a) lenders can approve these loans. New banks and credit unions may become available. The covered period starts on February 15, 2020, and runs til June 30, 2020
No collateral would be required, no credit refusal confirmation, nor any personal guarantee. Hotel and food service chains with 500 or fewer employees per franchised location will be considered separately. Additionally, the employee size limitation can be increased to the applicable size standard for the industry, as provided by SBA.
Loans can be up to 2.5 times monthly payroll and no more than $10 million per business. As much as eight (8) weeks of average payroll, pay mortgage interest, rent, utilities, health care benefits, and other qualified pre-existing debt interest payments will be forgiven by the SBA.
However, the amount forgiven can be reduced if the number of employees is reduced. The SBA will divide the average monthly full-time equivalent employees for the 8-week covered period of the start of the loan against two options: the same measure average monthly full-time equivalent employees of either January 1 to February 29 of this year, or, February 15 to June 30 of last year. Pay increases for employees can also affect forgiveness rates. These loans cannot be forgiven for payroll compensation to individual employees over $100,000 or for money spent on complying with the Families First Coronavirus Response Act.
Emergency Economic Injury Grants
The second purpose of the Small Business section is to provide emergency grants for immediate operating costs to small businesses, private nonprofits, sole proprietors and independent contractors, tribal businesses, and cooperatives and employee-owned businesses. These Economic Injury Disaster Grants will be for up to $10,000 and paid within three days of applying for an Emergency Injury Disaster Loan (EIDL).
Grants can only go to businesses that meet initial eligibility for the EIDL.
While Loans can be for up to $2 million, if the loan is below $200,000, regular credit requirements and business length are waived. But the business must have been in operation as of January 31, 2020. A credit score or viable alternative will determine the ability to repay the loan. If a grant was granted, but the loan is refused, the grant does not need to be repaid.
If the business gets an EIDL between January 31, 2020, and June 30, 2020, as a result of a COVID-19 disaster declaration, they can apply for a PPP loan or can refinance their existing EIDL into a PPP loan. But, the emergency EIDL grant award is subtracted from the amount forgiven in the payroll protection plan.
Existing and soon to be existing SBA Loans
SBA will cover all loan payments for current SBA borrowers, including principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out an SBA loan within six months after the President signs the bill. While SBA borrowers get their six months of debt relief, they may apply for a PPP loan that provides capital to keep their employees on the job.
However, PPP loans are not counted in this particular deferment provision.
Employee Retention Credit
Second, Congress has created an Employee Retention Credit for employers when operations were fully or partially suspended due to a COVID-19 related shut-down order, or if gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. This is a refundable payroll tax credit for 50 percent of wages paid by employers from March 13, 2020, to the end of the year. This credit is for the first $10,000 of compensations, including health benefits. But the credit cannot exceed payroll tax owed by the employer for all employees per quarter.
For employers with 100 or less full-time employees, all employee wages qualify for the credit regardless. However, if the employer has more than 100 employees, only wages not providing services due to COVID-19 qualify. For those larger employers, the employees cannot be actually working through work-from-home, essential services, or telework to qualify for the credit.
This credit does not include any payments under the Family First Coronavirus Response Act. Furthermore, any business that takes advantage of the Small Business Interruption loans above cannot make use of this credit.
Third, while unemployment assistance is a more individualized item, there are some cross-sections to note. Some states may adopt “Short-time compensation” programs to help keep people employed. In those states, businesses will get funding to support “short-time compensation” programs. If employers reduce employee hours instead of laying them off, those employees can receive a prorated unemployment benefit. The federal program would pay 100 percent of the costs businesses incur for this program through December 31, 2020.
Net Operating Losses
Net operating losses that are currently subject to taxable income limitation can now again be carried back for five years, for tax years beginning in 2018, 2019, and 2020. These net operating losses can fully offset the income temporarily. These benefits, once reserved for corporations, will be available to pass-throughs and sole proprietorships
If a business was owed alternative minimum tax credits under the Tax Cut and Jobs Act, the legislation accelerates the ability of companies to recover these credits.
Increased Interest Expenses for Business
The amount of interest expense that businesses are allowed to deduct on their tax returns has been raised from the current 30 percent up to a higher 50 percent of taxable income for 2019 and 2020
Correction of the Qualified Improvement Property Glitch
The hospitality industry has finally received the ability to immediately write off costs associated with improving facilities instead of having to depreciate these improvements over the 39-year life of the building under the TCJA technical error.
Temporary exception from excise tax for alcohol used to produce sanitizer
The federal excise tax on any distilled spirits used for, or contained in, hand sanitizers produced and distributed consistent with guidance issued by the Food and Drug Administration (FDA) has been waived.
There will be additional rules as the federal government and state governments roll out some of these new sections, and we will endeavor to keep you informed. But this specific breakdown is meant to give U.S. small businesses an understanding of what options this legislation will provide for them.