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COVID-19 CARES ACT (BUSINESS)

By a unanimous vote on March 25, 2020, the Senate passed a third coronavirus relief package, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, H.R. 748, the Act). This article discusses the tax relief provisions for individuals that are contained in the Act.

GO TO INDIVIDUAL PROVISIONS

 

PAYCHECK PROTECTION PROGRAM.

SBA PPP Loan FAQs

This is a loan that is available to businesses with up to 500 employees to cover payroll, rent and related expenses. 

Loan amount: 2.5 times the average monthly qualifying payroll costs (not to exceed $1Million).

Loan forgiveness. Eligible borrowers will have tax-free forgiveness of the loan to the extent they spend the proceeds on allowable items during an eight-week(8) period after the origination date of the loan. The amount forgiven would be reduced proportionally if their average number of employees declines or average employee wages decline by 25% or more.

Collateral or guarantee:  None required.

Eligible borrowers: Businesses with 500 or fewer employees.  Consult with a banker on eligibility for this program in conjunction with other COVID loan programs.

RECOMMENDATIONS FOR HANDLING LOAN PROCEEDS:

  • Open a separate bank account and have funds placed there.
  • Create a “PPP” version of each qualifying account. For example, Gross Payroll - PPP, Health Insurance – PPP, Rent - PPP, Utilities – PPP. 
  • Include a label on each applicable transaction that distinguishes an expenditure as a being PPP funded. 
  • It may have been impractical for many borrowers to open a seperate account.  The next best thing you can do is be sure that the amounts reflected in your bank statements for qualifying costs match the amounts in your expense account details.  That will make it easier for the lender to follow your use of the proceeds for qualifying purposes. 
  • Start tracking your expenditures to be sure you are meeting the spending requirements in order to obtain forgiveness.  You can do this by running reports each week from your accounting software or, you may find it easier to track in a spreadsheet like the one included with the downloadable calculator below.  
     

FORGIVENESS CALCULATOR

Follow the link above to download an Excel file to estimate the amount of your PPP Loan fogiveness.

FORGIVENESS APPLICATION

Follow the link above to download a draft of the SBA's PPP Loan fogiveness application.

NOTE: It is up to your lender to determine how much of your loan will be forgiven so it is strongly recommended you maintain good communication with your lender about what information they will be looking for to make their determination and how they plan to compute the amount of forgiveness.

 

 

ECONOMIC INJURY DISASTER LOANS

This is a loan program directly through the SBA.  No bank intermediary is required.

As of early May, 2020, SBA is only accepting applications from agricultural businesses.  Check the SBA website for updates.

 

 

NOL (net operating loss) CHANGES

80% LIMIT:  The CARES Act temporarily removes the taxable income limitation (max offset was 80%) to allow an NOL to fully offset income. 

CARRYBACK:  The CARES Act provides that NOLs arising in a tax year beginning after Dec. 31, 2018 and before Jan. 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss.  If your business had income in prior years but had an NOL in 2019, it can be carried back to obtain refunds.  

 

EMPLOYEE RETENTION CREDIT

New law. This provision provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. (Act Sec. 2301(a))

Eligible employers. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. (Act Sec. 2301(c)(2))

The credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act. (Act Sec. 2301(j))

Wages paid to which employees? For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers' closure or reduced gross receipts are eligible for the credit. (Act Sec. 2301(c)(3)(A))

No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the employee. (Act Sec. 2301(h)(1))

Wages. The term "wages" includes health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee. 

Wages do not include amounts taken into account for purposes of the payroll credits, for required paid sick leave or required paid family leave in the Families First Coronavirus Act (part of PL 116-127 (Act Sec. 2301(c)(3)(A)), nor for wages taken into account for the employer credit for paid family and medical leave. (Act Sec. 2301(h)(2))

Other. IRS is granted authority to advance payments to eligible employers (Act Sec. 2301(l)(1)) and to waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit. (Act Sec. 2301(k))

Effective date. The credit applies to wages paid after March 12, 2020 and before Jan. 1, 2021. (Act Sec. 2301(m))

 

DELAY OF PAYROLL TAXES

Background. Employers are required to withhold social security taxes and tax under the Railroad Retirement Tax Act (RRTA) from wages paid to employees. Self-employed individuals are subject to self-employment (SECA) tax.

New law. The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. Thus, notwithstanding any other provision of law, the payment for "applicable employment taxes" for the "payroll tax deferral period" won't be due before the "applicable date." (Act Sec. 2302(a)(1))

For purposes of the above rules, the term ''applicable employment taxes'' means: social security taxes (FICA) and Self-Employment Taxes

The term ''payroll tax deferral period'' means the period beginning on the date of enactment of the Act and ending before Jan. 1, 2021. (Act Sec. 2302(d)(2))

The term ''applicable date'' means: (A) Dec. 31, 2021, with respect to 50% of the amounts to which Act Sec. 2302(a) (employment taxes) and Act Sec. 2302(b) (self-employment tax), as the case may be, apply, and (B) Dec. 31, 2022, with respect to the remaining 50% of those amounts. (Act Sec. 2302(d)(3))

Notwithstanding Code Sec. 6302 (which authorizes IRS to set deadlines for tax deposits), an employer will be treated as having timely made all deposits of applicable employment taxes required (without regard to Act Sec. 2302) to be made during the payroll tax deferral period if all such deposits are made not later than the applicable date. (Act Sec. 2302(a)(2))

The above rules won't apply to any taxpayer which has had indebtedness forgiven under Act Sec. 1106 with respect to a loan under Small Business Act Sec. 7(a)(36), as added by Act Sec. 1102, or indebtedness forgiven under Act Sec. 1109. (Act Sec. 2302(a)(3))

Notwithstanding any other provision of law, the payment for 50% of the taxes imposed under self-employment taxes for the payroll tax deferral period won't be due before the applicable date. (Act Sec. 2302(b)(1))

Effective date . The provisions apply to the period beginning on the date of enactment of the Act.