(Intended for law firms, but will be useful to small businesses)
My emails have been blowing up with clients asking about the various provisions of the CARE Act. I hope this helps to streamline your reading, especially those who are solos or have small firms.
Emergency Government Disaster Loan and Grant (I would start with this first).
For loans made under this program before December 31, 2020, no personal guarantee will be required on loans below $200,000. This loan is available for reasons “other than paying payroll costs.” Theoretically, this would be for items other than payroll and rent. However, there is an Emergency Grant to allow a business that has applied for a disaster loan to get an immediate advance of up to $10,000. The advance can be used to maintain payroll, and is not required to be repaid, even if the borrower’s request for a 7(b) loan is denied.
You can file for a disaster loan here.
Paycheck Protection Loans (this is the one everyone is talking about, next section will talk about the forgiveness portion)
Starting April 3, 2020, small businesses and sole proprietorships can apply. Starting April 10, 2020, independent contractors and self-employed individuals can apply for this loan. The program is expected to run until June 30, 2020. The loan is limited to the LESSER OF:
the sum of 1) average monthly “payroll costs” for the 1 year period ending on the date the loan was made (an alternative calculation is available for seasonal employers) multiplied by 2.5, and 2) any disaster loan (discussed below) taken out after January 31, 2020 that has been refinanced into a paycheck protection loan, or
Proceeds may be used to cover payroll, mortgage payments, rent, utilities, and any other debt service requirements. The standard fees imposed under Section 7 of the Small Business Act are waived, and like the disaster loan, no personal guarantee is required by the business owner.
Payroll costs, in turn, are the sum of the following:
wages, commissions, salary, or similar compensation to an employee or independent contractor,
payment of a cash tip or equivalent,
payment for vacation, parental, family, medical or sick leave,
allowance for dismissal or separation,
payment for group health care benefits, including premiums, payment of any retirement benefits, and
payment of state or local tax assessed on the compensation of employees,
Payroll costs do not include, however:
the compensation of any individual employee in excess of an annual salary of $100,000,
any compensation of an employee whose principal place of residence is outside the U.S., or
any qualified sick leave or family medical leave for which a credit is allowed under the new Coronavirus Relief Act passed last week.
You can find out more here.
Loan Forgiveness of Paycheck Protection Loans
A percentage of the paycheck protection loan can be forgiven on a tax-free basis. The amount of the possible loan forgiveness is the sum of the following payments made by the borrower during the 8-week period beginning on the date of the loan:
payroll costs (as defined above)
certain utility payments.
To seek forgiveness, a borrower must submit to the lender an application that includes documentation verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, or utility payments.
The amount forgiven will be reduced if the employer either:
Reduces its workforce during the 8-week covered period when compared to other periods in either 2019 or 2020, or
Reduces the salary or wages paid to an employee who had earned less than $100,000 in annualized salary by more than 25% during the covered period.
This reduction can be avoided if the employer rehires or increases the employee’s pay within an allotted time period.
Subsidy for Certain Loan Payments
The CARES Act also provides benefits to those with loans under Section 7(a) of the Small Business Act OTHER THAN the new paycheck protection loans, in the form of a government subsidy whereby the SBA will pay six months of principal, interest and fees on qualifying loans. I am still looking for more information on this.
Employee Retention Credit
The credit is a one-year credit against the employer’s 6.2% share of Social Security payroll taxes for businesses that were forced to suspend or close its operations due to COVID-19, but that continues to pay its employees during the shut-down. You can find more here:
Exception: If an employer takes out a payroll protection loan under Section 7(a) of the Small Business Act as discussed above, no employee retention credit will be available.
Delay of Payment of Employer Payroll Tax and Self-Employment Tax
You can delay paying employer’s share of the 6.2% Social Security tax that would otherwise be due from the date of enactment through December 31, 2020, to be paid on December 31, 2021 (50%) and December 31, 2022 (50%).
Similarly, a self-employed taxpayer can defer paying 50% of his or her self- employment tax that would be due from the date of enactment through the end of 2020 until the end of 2021 (25%) and 2022 (25%).
Exception: Again, this deferral is not available to any business that takes out a payroll protection loan forgiveness.
Changes to the Interest Limitation Rules
Previously, under the TCJA, large businesses can only deduct their interest expense up to 30% of their “adjusted taxable income.” If there are any excess, that amount is carried forward. The CARES Act increased that limit to 50% of adjusted taxable income for 2019 and 2020. If the business does not have taxable income in 2020, the business can elect to use its 2019 adjusted taxable income in computing its 2020 limitation. This however does not apply to partnerships.
Special Rules for Using Retirement Funds for Coronavirus Costs
72(t) penalty is waived and spread the recognition of income over 3 years if:
To an individual who is diagnosed with SRS-COV-2 or COVID-19 by a test approved by the CDC,
whose spouse or dependent is diagnosed with one of the two diseases, or
who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of child care.
Changes to Charitable Contributions (I thought I add this in since many people out there needs help)
Above the line for standard deduction taxpayers up to $300.