03/30/2020
Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
On March 27th, Congress passed the CARES act. The law provides significant relief and opportunities. Regulatory guidance on implementing the law and addressing the questions that arise will be highly anticipated in the days ahead. The following are highlights of the provision affecting businesses, employers and individuals. We believe the most impactful piece of the act for our clients is the small business loan under the paycheck protection program act. We choose to highlight this piece of the legislation below and provide a summary of a few other items in the CARES Act.
Paycheck Protection Program
These loans are referred to as “7(a) loans” because they are authorized by that section of the laws governing the Small Business Administration to guarantee loans to small businesses. What makes these loans beneficial to all small businesses is that the loan or a portion of the loan may be forgiven, essentially turning it into a grant.
Who Can Apply?
Any business with 500 or fewer employees.
The business does not have to be shut down completely or partially. Any business that applies is presumed to need the loan and will get it. The only underwriting standards are the company was in business on February 15, 2020 and had employees for whom it paid salaries and payroll taxes.
The self-employed and independent contractors are also eligible for these loans.
These loans are non-recourse, meaning no personal guarantees or liens on assets.
What is the Maximum Loan Amount?
The loan amount (capped at $10million) is tied to payroll costs. The maximum loan is calculated as 2.5 times your average “payroll costs” during the 1-year period before the loan is taken.
How Do You Apply?
The SBA is guaranteeing these loans, and businesses will need to apply through lenders. You will need to submit an application that includes a sizable amount of documentation. Wall Titus is ready to assist our clients with this effort.
What Can the Loan Proceeds be Used For?
The loan proceeds can be used for more overhead expenses than what went into calculating the amount of the loan including:
• Payroll Costs
• Interest payments on mortgages (not principal)
• Rent
• Utilities
• Interest on any debts that were incurred before February 15, 2020
How long can you defer repayment on the 7(a) Loan?
Borrowers can completely defer repayment of principal and interest for at least six months but not more than one year. Apparently, the deferment period will be up to the discretion of the bank that issues the loan.
What Portion of the Loan Will be Forgiven?
The amount of loan forgiveness will equal the sum of the employer’s:
• Payroll costs (as broadly defined above)
• Interest (not principal) on any business debts that were incurred prior to February 15, 2020
• Rent
• Utilities, including electricity, gas, water, transportation, telephone and internet access . . .
which are incurred during the permitted 8 week period that begins on the origination date of the loan.
Loan forgiveness is not treated as taxable income.
What Must Be Done to Get the Loan Forgiveness?
The borrow must show evidence that it actually spent money on the things that are eligible for loan forgiveness by submitting an application to the bank.
This will include payroll tax filings, unemployment insurance filings, accounting records, and certification from an officer or owner that the information submitted is true and the amount requested for forgiveness was used for permissible amounts.
Other important items to note:
Any portion of the loan not forgiven will continue to be guaranteed by the SBA, have a maximum maturity of 10 years and bear interest at the rate of 4% or less.
There will be no prepayment penalties on these loans.
Other notable provisions of the CARES Act
Corporate and business tax
Net Operating Loss (NOL) carrybacks
The CARES Act restores NOL carrybacks that were eliminated by 2017 tax reform known as the Tax Cuts and Jobs Act or TCJA for businesses and individuals. The new carryback provision allows for a five-year carryback of NOLs incurred by corporations and individuals in the 2018, 2019, and 2020 tax years.
Employer tax credits and payroll relief
Certain employers might be eligible for a refundable and advanceable payroll tax credit (reduced by other payroll tax credits) against the employer 6.2% Social Security tax. Eligible employers are those with operations that are fully or partially suspended due to a
COVID-19-related government shutdown order or whose gross receipts declined by more than 50% compared to the same quarter in the prior year.
Employer payroll tax deposit deferral.
Businesses can defer the deposit due date for the employer 6.2% Social Security tax (reduced by other payroll tax credits, including those under the FFCRA) otherwise due from March 27, 2020, through Dec. 31, 2020.
Individual income taxation
Recovery rebates.
Eligible individuals will receive a check for $1,200 ($2,400 for married joint tax
filers) plus $500 for each qualifying child (as defined) who has not reached the age of 17 by the end of 2019. Eligible individuals include any individual other than a nonresident alien, a dependent, an estate, or a trust. The rebate amount phases out by 5% of adjusted gross income exceeding $150,000 in the case of married joint tax filers, $112,500 for head of household taxpayers, and $75,000 for all other taxpayers, with full phase-out at $198,000, $136,500, and $99,000 respectively. The IRS has been directed to provide an advanced refund of this amount as rapidly as possible, but no later than Dec. 31, 2020, based on an individual’s adjusted gross income reported on his or her 2019 Form 1040, “U.S. Individual Income Tax Return.” If the 2019 Form 1040 has not been filled as of the date the IRS determines eligibility, the 2018 Form 1040 will be used.
Expanded charitable contribution deductions.
The CARES Act allows non-itemizers a charitable contribution deduction for up to $300 of cash contributions beginning in 2020. The law also relaxes the overall limitation on cash contributions. In 2020, the 50% limitation on cash contributions by an individual will not apply. This relaxation does not apply to cash contributions to private foundations or to contributions to donor advised funds. Corporate charitable contributions typically are limited to 10% of taxable income. The law increases the limitation to 25% of taxable income for 2020.
The Senate's $2 Trillion Coronavirus Aid Package is intended to speed relief across the American Economy. There is a very long list of provisions intended to provide relief. Contact us to assist you with these challenges and to ensure you are getting the relief you and your business needs.
