As part of the historic $2.2 trillion CARES Act recently signed into law, a significant portion of these funds will be allocated to lending programs and incentives for small businesses to help stabilize employers, ensure they can continue to pay their employees, and ultimately help keep their workforces intact during these trying times.
To help better understand the options and possible benefits for your business under the CARES Act, we’ve highlighted a few things you might want to consider.
$10,000 Emergency Grant Available Under Expansion of SBA Disaster Loan Program (SBA 7(b))
The recent stimulus provides for $10,000 in emergency grants to small businesses and non-profits which apply for an SBA economic injury disaster loan (EIDL) within three days of applying for the loan based on basic eligibility criteria. Eligible entities must have 500 or fewer employees and include small businesses, sole proprietorships, private non-profits, independent contractors, cooperatives, ESOPs, and tribal units.
Loans may be used to pay for expenses that could have been met if not for the coronavirus pandemic, including payroll and other operating expenses. Grants do not need to be repaid, even if the grantee is subsequently denied a loan under the SBA program. These grants are available until December 31, 2020.
Attractive SBA Loans Available for Businesses Maintaining Payroll
The government has allocated nearly $350 billion of the CARES Act funds to support emergency loans to qualifying businesses under the Paycheck Protection Program (PPP) to help ensure American workers are paid or to help employers call back employees furloughed or laid off due to coronavirus hardships. The program provides eight weeks of cash-flow assistance to small businesses with 500 employees or fewer. Here are a few highlights of the program:
Maximum Loan Amount
The maximum loan amount was raised from $5 million to $10 million during the covered period of February 15, 2020 through June 30, 2020. The maximum loan amount will be the lesser of $10 million or the sum of 2.5 times the average total monthly payroll costs incurred during the one-year period before the date of the loan. The maximum term of the loan is 10 years and the maximum interest rate for the loan is capped at 4%.
Loans may be used for payroll costs, costs related to the continuation of healthcare benefits, employee salaries (those less than $100,000), mortgage interest obligations, rent and utility payments, and interest on debt incurred before the covered period.
Certain payroll costs are excluded from the maximum loan amount including employees making over $100,000 in annual compensation, payroll and income taxes, compensation for an employee whose principal place of residence is outside the United States, and qualified sick leave or family leaves wages for which the business will receive a credit under the Families First Coronavirus Response Act.
Businesses are eligible to have all, or part of the loan forgiven. The amount ultimately forgiven will be reduced by any reduction in employees compared to the prior year and can also be reduced by the reduction in pay of any employee beyond 25% of their prior year compensation. To help encourage employers to rehire employees laid off due to COVID-19, borrowers who bring back these employees after accepting the loan can receive additional credit to cover wages.
Other Key Features
Collateral and a personal guarantee are not required except if the funds are used for excluded costs
Typical SBA loan fees are being waived
Payments of principal and interest are deferred for six months to one year
Not subject to a prepayment penalty
Good Faith Certification Process
To participate in the Paycheck Protection Program, a business is required to certify:
That the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
Acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
That the business does not have an SBA (7)(a) loan pending for the same purpose and duplicative of amounts applied for or received under a covered loan;
During the period beginning on February 15, 2020 and ending on December 31, 2020, the business has not received amounts under the Paycheck Protection Program for the same purpose or duplicative amounts applied for or received under a covered loan.
Employee Retention Payroll Tax Credit
Employers are eligible for a maximum 50% refundable payroll tax credit on qualified wages up to $10,000 per individual employee paid between March 12, 2020 and December 31, 2020. Available to employers whose operations were disrupted by the virus and who experienced a decrease of 50% or more in gross receipts compared to the same quarter last year. The credit can also be claimed by employers with 100 or fewer employees for employee wages up to $10,000.
Delay of Payment of Employer Payroll Taxes
Many employers will be allowed to delay the 6.2% Social Security tax on employee wages through December 31, 2020. Half of this deferred amount would be due on December 31, 2021, and the remaining half by December 31, 2022. Similar deferment is available for up to 50% of the self-employment tax.
Modification of Net Operating Losses (“NOLs”)
Firms may take net operating losses (NOLs) incurred in 2018, 2019, or 2020 and carry back those losses five years. The NOL limit of 80 percent of taxable income is also suspended, so firms may use NOLs they have to fully offset their taxable income. The bill also modifies loss limitations for non-corporate taxpayers, including rules governing excess farm losses, and makes a technical correction to the treatment of NOLs for the 2017 and 2018 tax years.
Alternative Minimum Tax
Firms with tax credit carryforwards and previous alternative minimum tax (AMT) liability can claim larger refundable tax credits than they otherwise could prior to COVID-19.
Net Interest Deduction
The net interest deduction limitation, which limits a businesses’ ability to deduct interest paid on their tax returns, has been expanded to 50% of EBITDA for 2019 and 2020, up from the previous 30% limitation. This will help businesses increase liquidity if they have debt or must take on more debt during the crisis.
Employer Student Loan Repayment
Employers are allowed to provide a limited Federal student loan repayment benefit to its employees on a tax-free basis. Specifically, employers may contribute up to $5,250 annually to each employee on a tax-free basis. The annual limitation applies to both the new Federal student loan repayment benefit as well as other educational assistance provided by the employer under current law (ex. tuition, fees, books, etc.). The provision applies to student loan payments made after the enactment date and before January 1, 2021.
The government has stepped up in a big way to help ensure our businesses and our teams can remain together during these unsettling times. Don’t miss this opportunity to take advantage of some of these programs.
To provide further detail on the above provisions, as well as possible next steps you can take for your business, here is a link to The Small Business Owner’s Guide to the CARES Act.