The CARES Act provides welcome relief to businesses reeling from the impact of COVID-19
With nearly half of U.S. workers employed by businesses with fewer than 500 employees1 and the spread of COVID-19 resulting in unprecedented unemployment claims in March, Congress’ third legislative response to the crisis offers meaningful support for small businesses. In addition to direct financial aid to Americans and relief for major industry, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allocates over $377 billion to assist smaller businesses and workers.
Below are some key insights into how the Act may affect your business and employees and what each provision could mean for your bottom line.
Keeping workers employed and paid is a central focus of the Act. It allocates $349 billion to a new type of loan under Section 7(a) of the Small Business Act, called the Paycheck Protection Program (PPP). This program funds loans to support small businesses (including sole proprietorships), independent contractors, certain non-profit organizations and self-employed workers impacted by COVID-19. PPP is generally intended for employers with fewer than 500 employees, with waiver of affiliation rules for businesses in the hotel and food service industries. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.
A condition of qualification for the program is that the business needs to have been operational on February 15, 2020 and have employees for whom it paid salaries and payroll taxes. Independent contractors in business as of that date are also covered. PPP borrowers are required to certify that the loan is necessary due to the uncertainty caused by COVID-19 and that they will use the funds they receive to retain workers, or maintain payroll, mortgage, lease and utility payments.
PPP waives fees that typically apply for small business loans and eliminates collateral and personal guaranty requirements. The interest rate is 1.0% and the program defers loan payments by 6 months. The amount of each loan is based on a formula tied to eligible payroll costs, but is capped at $10 million per borrower.
If the proceeds of a PPP loan are put to work quickly, business owners may also qualify for loan forgiveness. Under the Act, a borrower is eligible for PPP loan forgiveness equal to the amount spent during the 8-week period after the loan origination date, provided that at least 75% of the money is spent on eligible payroll costs, with the remainder spent on interest payments on mortgages incurred prior to February 15, 2020, rent on leases in force prior to February 15, 2020, and utilities in service before February 15, 2020. Cancelled debt will not be included in taxable income.
However, the amount forgiven will be reduced if there is a reduction in the number of employees, or a material reduction in pay, but these actions can be mitigated by rehiring employees. Loan amounts that are not forgiven will be continued for 2 years with no prepayment penalty.
If you are eligible for a PPP loan, it may be helpful to think of the loan in two parts – a forgivable portion to be used for eligible expenses over the first 8 weeks, with the remaining portion payable over 10 years at a maximum interest rate of 4%. Consider revisiting your business’ financial forecast under multiple scenarios to determine whether you might benefit from participating in the PPP loan program and the size of loan that is appropriate for your business. As you do, take into account your immediate cash flow needs over the next two months and understand other potential opportunities for generating near-term liquidity (for example, revisiting your existing loan arrangements or applying for an Economic Injury Disaster Loan offered by the Small Business Administration).
The Act invokes a number of strategies to provide much needed liquidity and to support cash flow for businesses. It provides for a refundable credit of employment taxes for 50% of qualified wages for eligible employers, including non-profits, whose business is suspended or declines significantly due to COVID-19. The Act also delays the due date of an employer’s share of payroll taxes through the end of 2020. Fifty percent of the 2020 deferral amounts will now be due December 31, 2021, with the remaining 50% payable December 31, 2022. In addition, for corporate taxpayers, the Act makes previously generated alternative minimum tax credits immediately refundable.
Consult with your tax advisor to determine your eligibility and the extent to which your business can take advantage of these credits and deferrals. Key questions to address in that discussion include:
How was your business impacted by COVID-19? For example, was your business fully or partially suspended, or did your gross receipts decline by more than 50% relative to the same calendar quarter in the prior year?
Are the wages you paid considered “qualified wages”? The definition is different for businesses with more than 100 full-time employees.
Have you availed yourself of a PPP loan as described above? Doing so may make you ineligible for these credits and deferrals.
The Act allows a 5-year carryback of net operating losses (NOLs) arising in 2018, 2019 and 2020 and removes the current 80% of taxable income limitations for certain NOL carrybacks and carryforwards. For taxpayers other than corporations, the Act permits deducting excess business losses for years before 2021. For 2019 and 2020, the Act increases the limit on the deduction of business interest from 30% to 50% of adjusted taxable income, with special rules for partnerships.
These provisions of the Act lift certain deduction limitations imposed by the Tax Cuts and Jobs Act (TCJA), enacted in 2017. Consider revisiting your tax filings for prior years to determine whether your business might now be able to realize additional tax benefits from the losses your business incurred during 2018 and 2019, as well as from the interest that your business paid in 2019.
For 2020, the Act increases the taxable income limitation on charitable deductions for corporations to 25%. Contributions must be in cash to a qualifying charity. The Act also increases the deduction for donating food inventory to a qualifying charity from 15% to 25%.
If your business plans to make charitable contributions over the next several years, consider accelerating a portion of those contributions into this year in order to take advantage of the more favorable tax deduction for 2020.
The business provisions of the CARES Act will be life sustaining for many businesses hit hard by the fallout of the coronavirus. The faster businesses can get back to full-force, and employees get back to full-time work, the quicker the recovery will be for individuals, families and communities. If you would like to discuss this or any other matter, please do not hesitate to contact your advisor. Additional COVID-19 resources may be found here.
- 2019 U.S. Business Profile, U.S. Small Business Administration Office of Advocacy