NOTE: This article is current as of April 17, 2020. We expect the specifics of the CARES Act programs to continue to evolve as they are implemented. Watch this article for updates!
by Kyle McAllister
One of the biggest questions we are receiving from our business clients is how the Coronavirus Aid, Relief & Economic Security Act (CARES Act) can help their business. A large portion of the Act is aimed at helping small and mid-sized businesses weather the uncertainty brought on by the coronavirus through new and modified loan programs. The following is a summary of the portions of the Act that may be beneficial to small and mid-sized businesses.
Paycheck Protection Loans (PPL)
The largest new program for small and mid-sized businesses under the CARES Act is the Paycheck Protect Loan program. The PPL program is a short-term program designed to assist businesses meet payroll and other expenses between February 15, 2020 and June 30, 2020. It is possible that Congress extends that time period at a later date, but for now, business owners should only expect a PPL to assist them with expenses accruing during that period.
What types of entities qualify for a PPL?
Businesses and nonprofits with fewer than 500 employees that were in operation before February 15, 2020 are eligible to apply a PPL. Sole proprietorships, self-employed individuals, and independent contractors are also all eligible to receive a PPL. When applying for a PPL, the business owner must certify that the business has been affected by the coronavirus.
What is the maximum amount my business can borrow under the PPL?
Businesses are eligible for a PPL up to 2.5 times the business’s average monthly payroll costs up to a maximum amount of $10 million. Payroll costs include salary, wages, and tips paid, sick and family leave, paid time off, severance payments, group health benefits (including insurance premiums), retirement benefits, and state and local taxes assessed on employee compensation. However, it is important to note that for any employee who is paid more than $100,000 salary, only $100,000 of that salary (prorated for the covered period) is calculated into the average monthly payroll amount.
Is my business required to pay back the PPL?
Perhaps the most beneficial aspect of the PPL program for many small business is that the portion of the PPL that a business spends on qualifying business expenses in the eight weeks after receiving the loan is completely forgivable as long as certain requirements are met. Qualifying business expenses include payroll, mortgage, rent, and utilities, and businesses must submit an application for forgiveness along with receipts showing each of the qualifying expenses. However, only 25% of the forgivable amount may be spent on non-payroll expenses. The forgivable amount may be further reduced if the business receiving the PPL lays off employees and fails to return to the previous levels of employment by June 30, 2020 and/or if the business reduces wages paid by more than 25%.
What are the loan terms for the amount of the PPL that does not qualify for forgiveness?
The interest rate for the amount of the PPL that does not qualify for forgiveness will be 1%. The first payment on that remaining amount will be deferred for at least 6 months.
How do I apply for a PPL?
PPL applications are handled through banks that offered Small Business Administration loans prior to the CARES Act. The government is also working to expand the loan programs to additional lending institutions. Many banks are only accepting applications for a PPL online, so we recommend checking the website of the bank your business currently uses to determine if that bank plans to offer PPLs.
Economic Injury Disaster Loans (EIDLs)
While the PPL program is a new program created by the CARES Act, the Economic Injury Disaster Loan program is a Small Business Administration program that existed long before the CARES Act. Traditionally, EIDLs were made available in specific areas that were significantly affected by a natural disaster like a tornado, hurricane, or wildfire. For the first time in the history of the program, the CARES Act made EIDLs available to the entire country due to the coronavirus “natural disaster.”
Whereas the PPLs are specifically intended to provide short-term assistance for affected businesses, EIDLs can provide much longer-term assistance to affected businesses. I will answer some of the most common questions we have received regarding EIDLs below.
What types of entities qualify for an EIDL?
The qualification requirements for an EIDL related to coronavirus are nearly identical to the requirements for a PPL. Businesses with fewer than 500 employees that were in operation before February 15, 2020 are eligible to apply an EIDL. Sole proprietorships, self-employed individuals, and independent contractors are also all eligible to receive an EIDL. When applying for an EIDL, the business owner must certify that the business has been negatively affected by the coronavirus.
What is the maximum amount my business can borrow through an EIDL?
The maximum amount available under the program is $2 million, but the specific amounts your business qualifies for will depend upon various factors related to the size and needs of your business.
What are the emergency grants under the EIDL program?
The emergency grant is an amount of up to $10,000 that a business can receive within three days of submitting its application for an EIDL and while its application for an EIDL is pending.
Is my business required to pay back the EIDL?
Only the amount a business receives as an emergency grant does not have to be repaid.
What are the loan terms for the EIDL?
For for-profit businesses receiving an EIDL, the interest rate is 3.75%. The term of the loan is variable and may be for up to 30 years. One of the changes to the EIDL program that was instituted through the CARES Act is that business owners are no longer required to personally guarantee the loan if the loan amount is under $200,000.
Tax Provisions
In addition to the loan programs discussed above, the CARES Act also attempts to help businesses by making certain changes to the way certain business expenses and income are taxed. The following subpoints are intended to give a brief overview of some of the major tax provisions in the CARES Act. We recommend discussing these changes in detail with your tax advisors to determine if they may be beneficial to your business.
Payroll Tax Deferral
For employers that do not receive loan forgiveness under the PPL program, the Act allows the employer’s portion of the 6.20% Social Security payroll tax to be deferred over two years. This deferral applies to employee wages paid between March 27, 2020 and December 31, 2020. Self-employed individuals also qualify for this payroll tax deferral. The most important thing to note regarding this tax provision is that this deferral is only available to employers that do not benefit from the loan forgiveness portion of the PPL program.
Temporary Reinstatement of Net Operating Losses Carryback
The net operating losses carryback was eliminated in the 2017 Tax Cut and Jobs Act but was temporarily reinstated and expanded in the CARES Act. Net operating losses incurred in 2018, 2019, and 2020 can now be carried back five years for a refund of previously paid taxes. The CARES Act also temporarily removes the 80% of taxable income limitation on the use of net operating losses incurred, allowing net operating losses to fully offset taxable income.
Excess Business Loss Rule
The CARES Act suspended the excess business loss thresholds of $250,000 for single filers and $500,000 for joint filers.
Qualified Improvement Property Correction
This change is not coronavirus-specific but is a tax change that will affect some of our commercial real estate investor clients. The CARES Act corrects an error in the 2017 Tax Cut and Jobs Act that required Qualified Improvement Property to be depreciated over 39-years. The CARES Act corrected this by reclassifying Qualified Improvement Property as 15-year depreciable property eligible for 100% bonus depreciation.
Conclusion
The CARES Act is a sweeping piece of legislation that has the power to benefit nearly every small and mid-sized business. Our attorneys are closely tracking the implementation of the Act’s programs and tax provisions as well as additional pending coronavirus-related legislation that may prove beneficial to the businesses we serve. Please let us know if you have any questions about the CARES Act or can be of assistance in helping your business navigate this treacherous time.
