CARES Act Part II – Business Stimulus

If you haven’t read Part I and you have questions about individual stimulus provisions start here.

Recently, the government passed the CARES Act, an (estimated) $2 trillion piece of legislation aimed at supporting the U.S. economy. Apart from the numerous provisions that will directly impact working families, there are several additional resources for businesses.

I will briefly outline qualification and benefits here, as well as some “boots on the ground” commentary. That being said, for information on how this would impact your particular situation, contact your Gainplan team and work closely with your tax advisor.

Paycheck Protection Program

More than any other employer stimulus endeavor, the Paycheck Protection Program has received a ton of press and subsequently generated a lot of questions.

How Do I Qualify?

The Paycheck Protection Program (PPP) is available to businesses with fewer than 500 employees affected by COVID-19.

To apply, borrowers must complete a simple application and provide a “good-faith” certification stating that the loan is necessary due to the economic uncertainty caused by the pandemic—not just business outlook or revenue concerns.

The SBA will use the SBA (7)(a) program to issue partially forgivable loans based on the prior year’s average monthly payroll. Borrowers can receive up to 2.5 times their average monthly payroll, or $10 million, whichever is less. The loan proceeds can be used for the following expenses:

• Payroll costs, including salaries and commissions
• Group health insurance premiums and other healthcare costs
• Rent
• Mortgage interest (excluding pre-paid amounts)
• Utilities
• Other business interest incurred before February 15, 2020.

Benefits

The biggest advantage of these loans is the potential for debt forgiveness. During the first 8 weeks of the loan, amounts spent on the following will be eligible for forgiveness:

• Payroll costs (excluding prorated amounts for individuals earning over $100,000)
• Rent for leases in place before February 15, 2020
• Utilities (electricity, gas, water, transportation, telephone, or internet) that started before February 15, 2020
• Group health insurance premiums and other healthcare costs.

To qualify for debt forgiveness, businesses must maintain the same number of employees for 8 weeks after the loan origination as they had during a look-back period. They can choose between:

• February 15, 2019 through June 30, 2019 OR
• January 1, 2020 through February 29, 2020.

Forgiveness will be reduced if employees making under $100,000 have their pay cut by more than 25%.

The loan terms include a maximum interest rate of 4% with a repayment period of up to 10 years, and payments are deferred for 6-12 months. Additionally, any forgiven loan amount will not be treated as taxable income.

How to Apply

These loans will be treated as first come, first serve and are likely to be exhausted quickly. The first date to apply will be April 3rd (for small businesses and sole proprietors) and April 10th (for independent contractors). The SBA will not be able to handle the loan volume directly, so reach out to the bank that handles your business banking relationship to apply. To prepare for the application you should gather:

• The date you started your business
• Detailed information in order to calculate the average monthly payroll costs for your employees for the past 12 months, as outlined by the SBA
• Your annual revenue
• Your business mailing address

***Update: As of April 15th, the allotted funds have been used up. Government officials have indicated they are planning another round of stimulus, but nothing is confirmed.

Employee Retention Credit

The second “big” resource for businesses will be the Employee Retention tax credit. This benefit serves as a tax break for businesses that “hunker down” and weather the storm while also keeping on their employees.

Qualification

In order to be eligible for the tax credit, a business’ revenue must drop by at least 50% from the corresponding quarter in the prior year.

For example, if a business made $500,000 in revenue during Q2 of 2019 but only made $300,000 in the second quarter of 2020 they would not qualify for the credit (even though that is a big drop!). The reduction of revenue by more than 50% “triggers” the clock for the credit and it continues to run until either:

• The end of 2020 OR
• Revenue increases to more than 80% of the prior year’s corresponding quarter

Calculation

It will be vital to business operations and projections to work closely with your CPA to determine eligibility but also to determine the amount of the credit. Put simply, the credit will be equal to 50% of wages paid to each employee, up to a maximum of $10,000 of wages per employee.

There will be some nuance to this as businesses with 100 or less employees count wages differently than larger businesses (for purposes of this credit). Again, work closely with your tax professional or accountant to calculate your own tax credit.

Payroll Tax Deferment

Businesses also have the ability to defer their payroll taxes that occur through the end of 2020 until the end of 2021 and 2022. Any business that receives debt forgiveness through an SBA loan will not be eligible. Half of all payroll taxes during this time period (CARES Act enactment through the rest of 2020) will not be due until December 2021 (50% due) and December 2022 (50% due).

The same rules apply to self-employed persons, though they are applied slightly differently. In traditional, W-2 employment the worker pays half of the payroll tax, but for self-employed persons they pay 100%, both the employer and employee portion.

They are only eligible to defer the “employer equivalent” amount of the tax. They will owe the deferred taxes on the same schedule with half of the differed balance due in 2021 and the remainder due in 2022.

NOL Rules

The CARES Act has also loosed the rules surrounding Net Operating Losses. Previously, (with the advent of the Tax Cuts and Jobs Act) NOLs (Net Operating Losses) could only be carried forward.

The CARES Act changes those provisions and allows for a carry back of any NOL from 2018, 2019, or 2020 for 5 years. This means that companies with losses will be able to amend prior years’ tax returns to apply for a refund and garner some much needed cash in the wake of the coronavirus economic slowdown.

Additionally, such losses could only offset up to 80% of taxable income. Under the CARES Act, losses can go against 100% of taxable income.

Unemployment

For some employers, unemployment (for themselves and/or employees) may be the best option. For a detailed explanation of this benefit, refer to this ().

Economic Injury Disaster Loan

The SBA offers provisions that are particularly beneficial for sole proprietors, though not part of the CARES Act, they deserve attention. If your business has been severely impacted by COVID-19 and the resulting shutdowns, a streamlined application process is available here: SBA Relief Portal.

These SBA loans potentially offer lower interest rates, up to 3.75% lower than the Paycheck Protection Program, and longer repayment terms—up to 30 years. While these loans are not eligible for forgiveness, they offer valuable benefits:

• The application includes a $10,000 immediate cash grant (which doesn’t need to be repaid) for qualifying businesses.
• Loans can go up to $2 million, but loans under $200,000 do not require a personal guarantee.
• Loan payments are deferred for 12 months.

The full economic impact of the pandemic is still unknown, and its effects will continue to be felt for some time. While the CARES Act provides critical support, it won’t fully shield many businesses and families from hardship. If you have more questions or need assistance, feel free to contact us at 248-385-3737 or [email protected]. We’re here to help.

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