United States Congress Passes CARES Act, Relief Available for Small Businesses and Their Employees
Lindsey & Lacy, PC is following closely business and legal developments related to COVID-19. As a service to our clients, we plan to release brief general summaries of relevant developments as they become available.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) became law in the United States on March 27, 2020. The CARES Act provides financial assistance to businesses and individuals impacted by the COVID-19 health emergency.
The CARES Act is over 800 pages long and provides financial assistance in a number of different ways. This summary briefly explains six types of financial assistance that are likely to be of interest to small businesses in our community. Although a complete summary of the CARES Act or any of its various components is all but impossible to provide, it is our hope that this summary will help serve as a starting point for our clients and their employees should they decide to seek relief under the CARES Act.
ForgivablePaycheck Protection Program Loans. To encourage employers to retain and continue paying their employees during the COVID-19 health emergency, Congress has authorized certain employers to request and potentially obtain Paycheck Protection Program Loans (“PPP Loans”). The PPP Loans are administered by the United States Small Business Association (“SBA”) through lenders approved under the SBA’s Section 7(a) loan program. Generally, employers with 500 or fewer employees are eligible to receive a PPP Loan. The PPP Loans require no guarantees or collateral.
Eligible employers may borrow up to the lesser of $10 million and 2.5 times the average monthly payroll costs incurred in the one-year period before the date of the loans. Payroll costs include, among other things, salaries and wages; commissions; tips; payment for vacation, parental, family, medical, or sick leave; payment for the provision of group health care benefits, including premiums; and payment of retirement benefits. Payroll costs specifically exclude any compensation paid to an individual employee in excess of an annual salary of $100,000 (prorated for the covered period). Loan proceeds may be used for payroll costs, interest on mortgage obligations, rent, utilities, and other enumerated expenses.
Perhaps the most attractive feature of the PPP Loans is the fact that they are forgivable. Up to the amount of the loan, a borrower may seek forgiveness for the payment of any payroll costs, interest on mortgage obligations, rent, utilities, and certain other expenses during the 8-week period after loan origination. Another departure from the normal rules is that any portion of a PPP Loan that is forgiven is excluded from taxable income. Note that the amount of forgiveness is subject to reduction if there is a decrease in the number of employees retained by the employer, or if the pay of employees who earned less than $100,000 in 2019 is reduced by more than 25% against their historical compensation.
The amount of any PPP Loan that is not forgiven will be repayable over a term not to exceed 10 years at interest rates not to exceed 4%. Importantly, any employer who obtains a PPP Loan may be ineligible for other forms of relief under the CARES Act, including the Employee Retention Tax Credits and the Deferral of Payroll Tax Payments described below.
A sample loan application from the SBA is available here.
Deferral of Payroll Tax Payments. All employers and self-employed individuals may defer payment of the employer’s share of payroll taxes due on wages paid through December 31, 2020. There is no requirement to show any specific COVID-19 related impact. Any taxes deferred must be paid in two installments: 50% by December 31, 2021 and 50% by December 31, 2022. An employer may not defer payroll tax payments if they have a PPP Loan forgiven.
Employee Retention Tax Credits. Employers may also apply for an employment tax credit of up to $5,000 per employee for wages paid to the employee between March 13, 2020 and December 31, 2020. The tax credit is calculated at 50% of up to $10,000 per employee of the employer’s share of certain employment taxes incurred during the covered period (in particular, the 6.2% Social Security tax imposed by I.R.C. § 3111(a)).
Unlike PPP Loans, which presume a negative impact from COVID-19 and are generally available to most small employers, the Employee Retention Tax Credits are only available to employers who (1) had operations fully or partially suspended as a result of an order of a governmental authority related to COVID-19, or (2) had gross receipts decline by more than 50% in a calendar quarter compared to 2019. Additional limitations apply to employers with more than 100 employees in 2019. The Employee Retention Tax Credits are not available to employers who obtain a PPP Loan.
Net Operating Losses. The CARES Act adjusted the rules applicable to net operating losses (“NOLs”) by allowing corporations to carry back NOLs from 2018, 2019, and 2020 for 5 years. Under the old rules, NOLs were only carried forward and applied in future tax years. For tax years starting before January 1, 2021, the CARES Act also departs from existing rules by allowing taxpayers to offset 100% of taxable income with NOL carrybacks and carryforwards. The old rules allowed only 80% of the NOLs to be offset against taxable income.
Unemployment Compensation. The CARES Act supports state unemployment compensation programs by funding an expansion of benefits available to unemployed individuals under state law, including, among other things, (1) an additional $600 per week in unemployment compensation for up to 4 months, and (2) an additional 13 weeks of unemployment compensation once state benefits are exhausted.
Withdrawals from Qualified Plans. The CARES Act also established special rules regarding the use of retirement funds in qualified plans. Certain individuals may now take up to $100,000 in coronavirus-related distributions from qualified plans without incurring the ordinary 10% early withdrawal tax. The distribution is still subject to income tax, but the individual may (1) repay the distribution to the qualified plan within three years of the distribution (in which case no income tax is due or, if already paid, may be refunded), or (2) spread the income tax over the three year period starting in 2020. Certain rules apply to these distributions.
Finally, the CARES Act also extended the due date for any loan repayment to a qualified plan by one year if the due date falls between March 27, 2020 and December 31, 2020.
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The contents of this summary are intended to convey general information only and not to provide legal advice or opinions. The contents of this summary should not be construed as, and should not be relied upon for, legal or tax advice in any particular circumstance or fact situation. The information presented in this summary may not reflect the most current legal developments. No action should be taken in reliance on the information contained on this summary and we disclaim all liability in respect to actions taken or not taken based on any or all of the contents of this summary to the fullest extent permitted by law. Because every situation is different, an attorney should be contacted for advice on specific legal issues.