On Friday, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) to provide certain economic relief to individuals in the form of additional unemployment benefits, and for businesses (including self-employed) through certain loans and other programs.
This update will focus on the portion of the CARES Act that provides additional assistance to businesses with less than 500 employees. These loans will be administered through the Small Business Association (“SBA”). The SBA offers guidance to businesses impacted by the coronavirus at https://www.uschamber.com/co/start/strategy/cares-act-small-business-guide
Paycheck Protection Program (Section 1102 of the Act)
This was one of the largest sections of the CARES Act as it sets aside $350 billion in government backed loans for most small businesses. For the coverage period of 2/15/2020 to 6/30/2020, businesses with less than 500 employees (and certain other businesses and organizations) may be eligible to receive loans to assist with payroll and other associated business costs at interest rates no higher than 4%.
The loan proceeds must be used for only certain purposes, including:
- Payroll costs
- Costs related to the continuation of group health care benefits during period of paid sick, medical or family leave and insurance premiums
- Employee salaries, commissions or similar compensations
- Payments of interest on any mortgage obligation (not including any prepayment of or payment of principal on a mortgage obligation)
- Rent (including rent under a lease agreement)
- Utilities (electricity, gas, water, transportation, telephone or internet access)
- Interest on any other debt obligation incurred before the coverage period
The loan proceeds cannot be used for paying for any emergency sick or family leave for which the business is allowed a payroll tax credit under the Family First Coronavirus Response Act. To evaluate eligibly, a lender may consider whether the applicant was in operation on 2/15/2020, and had employees or paid contractors.
All applicants will have to make a “good faith certification” to the lender that includes the following:
- The uncertainty of current economic conditions make it necessary for the loan request in order to support the ongoing operations of the eligible recipient
- Acknowledgement that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and other utility payments
- Eligible recipient does not have another application pending for a loan under this Act for the same purpose for duplicable amount
- During the relevant time period of 2/15/20 ending 12/31/20, the recipient has not received other amounts under this section
The SBA requires lenders to provide complete payment deferment relief (including payment of principal, interest and fees) for impacted borrowers with covered loans for a period of at least 6 months, but not more than a year.
Loan Forgiveness (Section 1106 of the Act)
After payout of the loan, a business’ expenses will be analyzed for eight weeks after the loan. Under this program, loan recipients will be eligible for some or all their loan forgiven on covered loans equal to the lesser of:
- The sum of certain covered costs, including payroll costs, payment of interest on a covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), and any payment on any covered rent or utility payment obligation; or
- The principal amount of the loan.
So long as the employer continues to pay employees at normal levels during the eight weeks following the origination of the loan, then the amount they spend on payroll (excluding costs for any compensation over $100,000 annually) may be forgiven. This forgiveness amount may be reduced for businesses that lay off employees during the first eight weeks following the loan. Also, businesses that reduce any employees’ salary who make less than $100,000 per year by more than 25% during this time period will also have the forgivable amount reduced. Loan recipients with tipped employees may receive loan forgiveness for additional wages paid to those tipped employees. Businesses that have already let employees go through layoffs before accepting the loan may not be subject to such penalties and if the business rehires employees after accepting the loan, this provision of the Act will give them additional credit to cover their wages.
The Act provides that all forgiven amounts will be considered “canceled indebtedness” by a lender who is authorized to provide such loans. The amounts of loan forgiveness shall not exceed the principal amount of the financing made available to the applicable covered loan.
In order to substantiate a loan forgiveness, the loan recipient must provide certification as part of the loan application:
- Verifying documents of the number of full-time equivalent employees on payroll and pay rates; and
- Certify that the documentation is true and accurate, and the amount for which forgiveness is requested was used to retain employees or make mortgage, rent or utility payments.
Emergency EIDL (Section 1110 of the Act)
Another aspect of the CARES Act was that It expanded eligibility for SBA Economic Injury Disaster Loans (EIDLs). SBA lenders will provide borrowers with emergency grants in the amount of $10,000 cash advance to certain businesses with less than 500 employees (and certain other organizations) that were in operation on January 1, 2020 and who have applied for a SBA economic injury disaster loan. The amount should be provided to the business within three days of applying. The applicant must provide a self-certification that it is an eligible entity to apply. Even if applicants are later not approved for the economic injury disaster loan they are not required to repay this advance payment.
The emergency grant must be used for allowable purposes including
- Providing paid sick leave to employees unable to work for COVID-19
- Maintaining payroll to retain employment during business interruption or slow downs
- Meeting increased costs to obtain materials unavailable due to interruptions in supply chains
- Paying rent or mortgage
- Repaying obligations that cannot be met due to revenue loss
You should check with the SBA or lender before applying for either loan so you understand the details and limitations on each loan. Further information may be obtained at https://www.uschamber.com/sites/default/files/023595_comm_corona_virus_smallbiz_loan_final_revised.pdf
Subsidy for Certain Loan Payments (Section 1112 of the Act)
SBA will offer certain subsidies to pay the principal, interest and fees owed on certain qualifying loan for six months. These payments will begin within 30 days of the due date of the loan. Payments will be applied in a manner so that the borrower is relieved of the obligation to pay for a certain time period.
Special Business Provisions – Seek the Advice of an Accountant
In the next two sections, this article will summarize some of the tax programs and credits provided for under the Act. This article is not meant to be tax advice and you should seek the advice of your tax advisor with regard to how the Act will impact your tax liability.
Social Security Tax Credit for Employers Subject to Full or Partial Suspension of Business Due to COVID-19 (Section 2301 of the Act)
An eligible employer will be allowed a tax credit against applicable employment taxes for each calendar quarter that equal to 50% of “qualified wages” paid to employees from March 13, 2020 through December 31, 2020 if: (1) your business was fully or partially suspended due to COVID-19 shut down order; or (2) gross receipts declined by more than 50% compared to the same quarter in the prior year. An eligible business may get a refundable 50% tax credit on wages up to $10,000 per employee.
The tax credit applies against the employer’s portion of employment taxes (Social Security taxes payable on W-2 wages) paid to all employees (after first applying the tax credits for payment of required sick leave and required FMLA leave)
The tax credit is based on the “qualified wages” paid by an eligible employer during the calendar quarter. For employers with more than an average of 100 full-time employees during 2019 – “qualified wages” includes ONLY wages that the employer continued to be paid to employees who are NOT providing services due to a COVID-19 suspension of business operations. For employers with 100 or less average number of full-time employees during 2019 – “qualified wages” include ALL wages paid to employees regardless of whether or not the employee is providing services.
In all cases, the total amount of qualified wages that can be counted for an individual employee during the entire COVID-19 period cannot exceed $10,000. Wages refers to W-2 wages used to determine FICA (Social Security and Medicare) taxes but does NOT count an employer’s FFCRA required sick leave payments and FFCRA required FMLA leave payments.
Delayed Payment of Employer Social Security Taxes (Section 2302 of the Act)
This is a summary of the Act’s provisions relative to delayed payment on a business or self-employed individual’s social security tax payments, and you must obtain advice from your accountant or tax attorney on how this provisions will apply to your circumstances. Under the Act all employers ( whether or not affected by COVID-19) will be permitted to delay payment of their 2020 employer Social Security taxes under the following plans:
- 50% of the deferred 2020 employer Social Security tax is payable by 12/31/2021
- Remaining 50% of the deferred tax is payable by 12/31/2022
You should obtain your accountant’s advice on how these or other tax changes from the CARES Act will impact your tax liability.
Unemployment Insurance Provisions (Section 2101 et seq. of the Act)
This Act has extended unemployment benefits by an additional 13 weeks and provides for up to four month enhanced benefits for certain circumstances related to COVID-19 pandemic. This will make unemployment available to many who may not normally qualify for these benefits, such as those who are self-employed or exhausted state compensation benefits, and provide additional unemployment funds to individuals impacted by the COVID-19 pandemic.
This benefit does not apply to those who are eligible to work from home or those who are on any form of paid sick, vacation, or other leave.
All states will have 30 days to enter into an agreement with the U.S. Secretary of Labor to participate and obtain these federal funds. Once the state does this it will also need to adopt procedures regulations on how they will apply the criteria for those who normally do not qualify so you should watch your applicable state’s unemployment website for updates in the coming weeks.
For information from the Massachusetts’ Division of Unemployment Assistance see this website https://www.mass.gov/how-to/apply-for-unemployment-benefits
For NH Employment Security please see this website at https://www.nhes.nh.gov/services/claimants/file.htm
This is a brief overview of the CARE Act and its provisions and it does not constitute legal or tax advice regarding your rights or the benefits under this Act. Please contact an attorney to determine how this law may impact you and a tax advisor to discuss the tax impact to your business.