The Coronavirus Aid, Relief, and Economic Security (CARES) Act has officially been signed into law. This unprecedented $2 trillion dollar stimulus and incentive package is part of a bipartisan effort to curb the growing economic crisis caused by the coronavirus pandemic. Within this, the direct stimulus to individuals has been widely discussed and is pretty easily understood, but the components geared toward small business owners have not been so well laid out.
A large portion of these approved funds are purposed for large businesses. In fact, more than $650 billion is intended for large corporations: but nearly $350 billion (plus $50 billion previously allotted to the SBA) has been appropriated to support small business. Supporting small business has been deemed an essential element to jump starting the economic recovery.
Here are some of the provisions the new Act provides for helping small businesses and their employees:
Business Interruption Loans
Under the Phase 2 aid package, congress authorized loans of up to $2 million. These loans are still available to any small-business owner.
The CARES Act, however, expanded available aid with a Phase 3 loan for businesses with 500 or fewer employees. These funds are intended help businesses cover payroll and prevent layoffs. Individual loans will be issued at an interest rate of not more than 4% in amounts to cover six weeks of payroll with a maximum of $1,540/week per employee. The maximum amount a business can borrow is the lesser of $10 million or 2.5x the average total monthly payroll cost for the previous year. Payroll costs from January 1 to February 29, 2020 are used to calculate the total amount for businesses that were not in operation in early 2019. The principal of these loans will be forgiven if the funds are used for certain approved purposes such as payroll, mortgage interest payments, rent, and utilities, but only if employers maintain the average size their full-tine workforce from the time they received the funds. This means that business owners who use the funds in the intended manner would only have to pay back the accrued interest on the loan. Any reduction in employee headcount, or a 25% or greater reduction in employee compensation, will reduce the amount of principal forgiven.
Applications and distribution of funds will be processed through banks to increase the speed of deploying capital and to limit stressing the resources of the SBA, Additional government lending agencies, including Main Street Business Lending Program created by the Federal REserve, will be established to meet the needs of borrowers as well. Applicants will need to verify payroll amounts from the previous six weeks and verify that payments to employees had taken place for eight weeks after receiving the funds.
For businesses with existing SBA loans, interest and principal payments will be waived for six months.
Delay of Estimated Tax Payments for Corporations
Estimated tax payments that come due after the legislation was enacted may be postponed until October 15th, 2020.
Employee Retention Credit
Employers may receive a refundable payroll tax credit equal to the lesser of 50% of qualified wages or $5,000 per employee for wages paid to employees after March 12th, 2020 and before January 1, 2021 if business activities were disrupted or suspended due to any government-imposed restrictions related to containing the spread of the virus.
If the business' operations were not disrupted but a decline in revenue was experienced due to the virus, the business can be eligible for the same credit. Gross receipts would need to have fallen 50% as compared to the same quarter in the previous calendar year. Credits will continue until gross receipts exceed 80% of the same quarter's gross receipts in the previous year.
Eligibility is further contingent based on the level of disruption relative to the number of employees.
Social Security Payroll Tax Relief
For self-employed individuals and business owners who continue to employ workers through this crisis, the Act includes provisions to provide a deferral of employer-paid 6.2% social security payroll tax until January 1, 2021.
Default on unpaid payroll tax liabilities can carry stiff penalties, including jail time, so business owners should exercise extreme discipline if taking advantage of this provision.
Modification for Net Operating Losses (NOL) and Alternative Minimum Tax (AMT) Credits
Certain provisions of the Act reduce limitations on how a company can deduct operating losses from prior tax years. It temporarily eliminates taxable income limitations and allows 2018, 2019, or 2020 losses to be carried back five years to reduce income in a prior tax year. This enables companies to generate additional cash flow from a refund of previous tax payments by using losses to amend prior years' tax returns. This provision has been extended to also apply to pass-through businesses and sole proprietors.
Increased Interest Expense Deduction
Interest expense for business owners has been increased from a limit of 30% of earnings to 50% for 2019 and 2020. This will help reduce the burden of carrying or taking on additional debt needed to weather the crisis.
How to Move Forward
The government is taking significant steps to curb the growing economic crisis and keep businesses operating and employees employed. Between loans, credits, and deferments the hope is to overcome any negative short-term effects of the crisis until normal business activities and growth can resume. Business owners should remain in close contact with their lenders and tax professional to identify the options and solutions that provide the best outcome for both their company and their employees.