We communicated with you on the proposed Federal CARES Act legislation on March 26, 2020. As expected, Congress and the President signed the CARES Act into law on March 27, 2020. The CARES Act is over 800 pages. We are doing our best to analyze and understand its benefits for small business.
The following is an important update to our previous post.
FEDERAL AID TO SMALL BUSINESSES
Paycheck Protection Program and Fixed Expense Protection
$349 billion is allocated to small business relief under the final CARES Act. The Act provides loans for small business, which if the loans are to later be forgiven, can only be used for certain fixed expenses. We now have a clearer understanding of what costs can be included in the SBA loan:
- Salaries, wages, commissions, tips, and other forms of compensation;
- Vacation pay, leave of absence pay, medical and sick leave pay, payment of retirement benefit;
- Separation pay; and
- Health care plan expense
- Amounts paid to independent contractors and self-employed individuals
- Mortgage interest payments on real estate used in the business
- Rent on real estate used in the business
- The interest portion of debt payments on other loans to the business.
The CARES Act provides that loans will be eligible for payment deferment for at least six (6) months and no more than one year.
Payroll expense qualifying for CARES Act loan is capped at $100,000 per employee.
The eligibility requirements for small business loans as described in our March 26 email did not change in the final version of the law. In addition, the maximum loan amount did not change.
Personal guarantees of shareholders, members, or partners will not be required for a CARES Act loan, and loans will be nonrecourse as to individual shareholders, members, or partners of a business who apply for and receive a CARES Act loan.
The above payroll costs exclude leave payments made pursuant to the new Families First Coronavirus Response Act. Reimbursement for those leave payments is made through the tax credit process enacted as part of that legislation.
Loan Forgiveness Under the CARES Act
The final version of the law retains the eligibility for loan forgiveness in an amount equal to the amount spent by a small business on the above-listed items between February 15 and June 30, 2020.
Loan forgiveness is reduced for businesses that reduce their workforce during this time period.
Loan amounts not used for the above-listed items are not forgiven and must be repaid over a ten-year period.
An important provision included in the final law is that the loan forgiveness is not taxable for Federal Income Tax purposes. Loan forgiveness is ordinarily taxable.
Deferral of Social Security Tax
The CARES Act allows businesses to delay the payment of the 6.2% Social Security Tax on employee salaries and wages paid through December 31, 2020. One-half of the deferred Social Security Tax is due on December 31, 2021, and the other half is due not later than December 31, 2022.
If a business elects the deferral, it cannot participate in the Paycheck Protection Program and Fixed Expense Protection Loan Forgiveness program discussed above.
Employee Retention Payroll Tax Credit
A business may receive a refundable tax credit for 50% of wages and health care coverage paid to or for employees from March 13, 2020 to December 31, 2020. The credit is 50% of the first $10,000 in wages and healthcare coverage.
This tax credit is available to businesses whose operations were either fully or partially suspended due to a COVID-19 related “shut-down order” or gross receipts declined by more than 50% when compared to the same quarter in the previous year.
A business that participates in the Paycheck Protection Program and Fixed Expense Protection Loan Forgiveness Program is not eligible for the Employee Retention Payroll Tax Credit.
Remember, once the funds allocated by Congress for the Paycheck Protection Program and Fixed Expense Protection are completely loaned out, the program will end. Therefore, there is a high sense of urgency to apply now.
The SBA loan application is submitted online. For more information, go to: https://covid19relief.sba.gov/#/.
Please contact us for any assistance you need to understand the small business benefits and if you need help applying for the SBA benefits.
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