COVID-19 Updates for Small Businesses and Non-Profits, Part II

This second COVID-19 update is to provide information about the recently passed Coronavirus Aid, Relief & Economic Security (CARES) Act.  This $2 trillion economic stimulus act was signed into law last Friday, 3/27.  The bill is unprecedented in scope and size.  Additional guidance and regulations on this will be forthcoming.

Small Business Relief

There are several aspects of the bill aimed at helping small businesses that are struggling due to the COVID-19 epidemic.  Below, I have highlighted some of the features.

Paycheck Protection Program (PPP)

This is one of the most buzzed about items of the CARES Act, mainly because it is unlike other loans or government programs.  Borrowers will be able to self-certify that they qualify, and there are no personal guarantees required in order to receive funding.  Additionally, a portion of the balance may be eligible for loan forgiveness (thereby converting part of the loan into a grant).

Lenders of the funds are approved SBA lenders.  However, it is anticipated that most banks will likely be participating.  Below are some more specifics on how this may work.

Borrowers are eligible if they have less than 500 employees.  Certain industries may also be eligible, even if they have more than 500 employees.  Non-profit organizations are also eligible.  Self-employed individuals and independent contractors are also eligible to apply.

Eligible borrowers can be loaned up to 2.5x their average monthly payroll costs for the prior year (not to exceed $10 million).  Payroll costs will be capped at $100,000 annualized for each employee.

Payroll costs include not only gross salaries and wages, but also paid leave (sick pay, paid vacation), health insurance expenses paid by the employer, retirement expenses, and state or local employer payroll taxes.

Excluded from payroll costs are compensation over $100,000 per individual (annually), compensation for employees not living in the United States, and qualified sick or expanded FMLA leave paid under the Families First Coronavirus Response Act.

For a sole proprietor or independent contractor, payroll costs include wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis.  Independent contractors will likely file for their own PPP, but more guidance on this is coming.

The biggest part of this program comes from the loan forgiveness aspect.  Borrowers may be eligible for the loan to be forgiven for qualified expenses in the 8-week period starting on the loan origination date, from 2/15/20 – 6/30/20.

Expenses that are eligible for the loan forgiveness include payroll costs (as defined above), mortgage interest payments, rent, or utility payments.  Note – all items must have been in effect prior to 2/15/20.  It is anticipated that due to high demand, at least 75% of the forgiven amount must have been used for payroll.

In order to qualify for the loan forgiveness, the number of employees must be retained, and generally at the same pay rates.  So, the amount of the loan that will be forgiven will be reduced by any reduction in the number of employees compared to the same time frame from 2019.  The borrower may elect to compare the number of employees during the 8-week period to the first two months of 2020 (1/1 – 2/29/20).  The amount of the loan forgiveness will also be reduced if any employee’s pay is reduced more than 25% of their compensation.  In short, in order to qualify for loan forgiveness, payroll and staff must be maintained.

If the borrower had previously laid off employees, they will not be penalized provided the laid-off employees are rehired before June 30, 2020.

Loan payments will be deferred for 6 months.  The amount of the loan that is not forgiven will have a 2-year term and be at 1% fixed rate.

Loan applications will be accepted starting April 3 for small businesses and sole proprietors.  Loan applications will be accepted starting April 10 for independent contractors and self-employed individuals.  Applications may be made through any existing SBA lender or through most banks.  Due to expected high demand, I would recommend gathering documentation and applying earlier to ensure funds are available.

As a part of the application, borrowers must certify that the economic uncertainty makes the loan necessary to support ongoing operations; that the funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments; and the borrower has not received another loan under the program.  Borrowers may also need to include the anticipated uses of the funds (between the eligible expense categories).

Emergency Economic Injury Disaster Loans (EIDL)

Eligibility is expanded to sole proprietors and independent contractors.  In addition to small businesses, non-profit organizations and cooperatives are also eligible.

These grants provide an option for a $10,000 cash advance that does not have to be paid back if used for the below items.

• Providing sick leave to employees unable to work as a result of COVID-19
• Maintaining payroll to keep employees
• Increased materials cost due to supply chain interruptions as a result of COVID-19
• Rent or mortgage payments
• Repayment of obligations that cannot be met due to a loss of revenue from COVID-19

Note that if participating in the Paycheck Protection Program a business cannot also double dip with the Emergency EIDL Grants.

Employee Retention Credit

A credit is allowed against applicable employment taxes for each calendar quarter, for 50% of qualified wages up to $10,000.  So, the maximum credit for each employee is $5,000.

In order to qualify for the credit, a 2020 trade or business must have:

1. Fully or partially suspended business due to government orders limiting commerce, travel, or group meetings due to COVID-19 or
2. Received gross receipts for at least one calendar quarter that are less than 50% of gross receipts received during the same calendar quarter of the prior year. This decline in gross receipts test continues until gross receipts are greater than 80% of the prior year quarter.

If the business had more than 100 employees in 2019, an employee must be unable to provide services due to the above criteria.

If the business had 100 or less employees in 2019, the credit is allowed regardless of whether or not the employee is able to provide the services, as long as the business meets one of the above criteria.

Note that wages used for this credit cannot be double dipped and used for other tax credits, or if receiving other small business interruption loan relief.

Delayed Payment of Employer Payroll Taxes

The employer portion of social security tax from 3/27/20 to 12/31/20 can be delayed.

50% of the delayed amount must be deposited by 12/31/21, with the remaining 50% due by 12/31/22.

There is similar relief available for the employer share (50%) of self-employment tax.

Note that this provision is not available for businesses that have debt forgiven under the PPP SBA loan act.

Net Operating Losses

Net operating losses generating in 2018, 2019, or 2020 are temporarily eligible to be carried back five years.

Additionally, the limitation on the net operating loss deduction to 80% of taxable income is suspended for 2020.

Qualified Improvement Property

Improvements that are made to buildings can be immediately written off (instead of depreciating over 39 years).

In addition to the above provisions, the act provides additional provisions to large corporations, health care provisions, education provisions (including a deferment of student loan payments for 6 months through 9/30/20), and other funding provisions and clarifications.  A separate post with more details on the individual provisions of this act will be released shortly.

This was a massive piece of legislation.  Be on the lookout for more guidance.  If you need any assistance in navigating any of this, including the Paychecks Protection Provision Act, please let me know.