On Friday, March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. This extensive act provides much needed assistance to those struggling due to the impact of coronavirus/COVID-19 shutdowns. There are numerous provisions that both businesses and individuals should be aware of to fully benefit from the CARES Act. This blog focuses on those provisions in the CARES Act that apply to businesses.
The provisions of the CARES Act relevant to businesses generally are (1) loan programs which provide for the possibility of forgivable loans; (2) favorable tax modifications; and (3) increased eligibility for bankruptcy under the Small Business Reorganization Act. Some specific industries and businesses are also addressed in the CARES Act, including distilleries, health care providers and medical suppliers, lenders and landlords, and airlines.
The CARES Act (A) creates the “Paycheck Protection Program,” (B) expands availability of economic injury disaster loans (“EIDLs”), (C) defers payments of some pre-existing small business loans and Microloans, (D) increases the maximum amount available as Express Loans, and (E) provides for additional business loans more widely available under Federal Reserve programs.
A. The Paycheck Protection Program
i. What is the Paycheck Protection Program?
The CARES Act creates the Paycheck Protection Program (“PPP”) by expanding the Small Business Act to provide covered loans to any businesses or nonprofits, including self-employed individuals, with 500 or fewer employees (or the number of employees the Small Business Administration (“SBA”) has designated as a small business for that industry, if more than 500). The PPP allows approved lenders to provide loans to businesses that are guaranteed by the SBA and that may be, in whole or in part, eligible for forgiveness.
ii. How are the number of employees calculated for PPP eligibility?
The calculation of employees for PPP eligibility includes all employees, whether full-time, part-time, or otherwise, but it does not include independent contractors.
Employers must include the employees of all affiliated entities in their calculation as well. Entities are affiliated when one can control the other or a third party can control both. Control is based on either (a) equity ownership, (b) agreement, (c) management, or (d) familial relation. Under (a), control is owning 50% of the voting equity in the entity, being able to prevent a quorum, or otherwise prevent an action by the shareholders or board of directors. Under (b), stock options, convertible securities, and merger agreements are considered to have a present effect on ability to control an entity under (a). Under (c), CEO’s, Presidents, other officers or managing members/partners, Boards of Directors, and individuals managing an entity under a management agreement are considered to control an entity. Under (d), control also includes spouses, parents, children, or siblings, or the spouse of any such person with substantially identical economic interests.
These affiliation rules do not apply to employers with a North American Industry Classification System code starting with 72 (accommodation and food services), with a franchise identifier code issued by the SBA, or receiving financing from a small business investment company licensed under Section 301 of the Small Business Investment Act of 1958.
iii. How much can businesses borrow under the PPP?
The maximum amount of any PPP loan is the lesser of (i) 2.5 multiplied by the applicant’s average total monthly payroll costs for the 1-year period before the date the loan is made (with special rules for seasonal employers, employers in business for less than a year when the loan is made, and employers with a pre-existing economic injury disaster loan) and (ii) $10 million. “Payroll costs” is defined to include employee salaries, wages, commission, cash tips or other compensation; payment for family or medical leave; insurance premiums and other costs of providing group health care benefits; retirement benefits; allowances for dismissal or separation; and state or local (but not federal) taxes assessed on employee compensation. Payroll costs cannot include compensation for employees primarily living outside of the U.S. or an employee’s compensation in excess of the equivalent of an annual $100,000 salary prorated for the relevant period (a maximum of approximately $8,333 per employee each month).
iv. What are the terms and requirements of PPP loans?
PPP loans may be used to cover payroll costs, rent, utilities, or payments on mortgages or any other debt incurred before February 15, 2020. The SBA has no recourse against owners for non-payment of PPP loans used exclusively for these purposes.
To receive a PPP loan, applicants must certify that current economic conditions make the loan necessary to support ongoing operations; the loan will be used to retain workers, maintain payroll, or make mortgage payments, lease payments, or utility payments; and the applicant has not received another PPP loan, or have an application pending, for the same purpose with a duplicative amount.
Lenders that provide PPP loans are required to defer payments of all principal, interest, and fees for at least 6 months, and the Department of the Treasury has set the current interest rate at 1% (with interest accruing during the deferment period), and any amount remaining after forgiveness will have a maturity of 2 years after disbursement, according to the Department of the Treasury.
The SBA guarantees 100% of each PPP loan. In addition, PPP loans do not require a personal guarantee or collateral, the guarantee fee and yearly fees are waived, the requirement that other sources of credit be unavailable is waived, and all prepayment penalties are waived.
v. How much of a Paycheck Protection loan can be forgiven?
Recipients of PPP loans are eligible for forgiveness of the loans in an amount equal to the amount of the loan spent within 8 weeks of its disbursement on payroll costs (excluding any paid leave given tax credits under the Families First Coronavirus Response Act) and payments for rent, utilities, and mortgage interest under agreements beginning prior to February 15, 2020 (not including any prepayments). This forgivable amount is subject to reduction, however, by multiplying such amount by a fraction, the numerator of which is the average number of full-time equivalent employees employed during these 8 weeks, and the denominator of which is the average number of full-time equivalent employees during either February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020 (at the recipient’s choice). The amount is also reduced by the amount of any employee’s reduction in wages or salary during the 8 weeks if the reduction is greater than 25% of the employee’s previous wages or salary and the employee was not compensated at an annualized rate of more than $100,000 during any pay period in 2019. The Department of the Treasury is expecting to require that at least 75% of the loan forgiveness amount come from payroll costs due to high participation rates.
vi. How does the PPP relate to other CARES Act provisions?
Several provisions of the CARES Act are mutually exclusive. PPP loan recipients are ineligible for the payroll tax credits provided by the CARES Act, and those receiving any loan forgiveness are also ineligible for the payroll tax deferrals provided by the CARES Act. Only recipients of EIDLs after January 31, 2020 and prior to April 3, 2020 may refinance EIDLs as part of a Paycheck Protection loan.
vii. How do I apply for a Paycheck Protection loan?
Applicants must fill out this form, attach payroll documentation, and send the completed application with documentation to an approved lender by June 30, 2020. Each lender may also have its own underwriting and documentation requirements for processing PPP loan applications. Applications from small businesses and sole proprietors have been accepted since April 3, 2020, and applications from independent contractors and self-employed individuals will be accepted starting April 10, 2020. PPP loans will be distributed on a “first-come, first-served” basis. President Trump has indicated that if the current amount of PPP loans available under the CARES Act is exhausted (which is approximately $350 million), then he will request that Congress approve additional funds to be made available for providing PPP loans to eligible businesses and individuals.
B. Expanded EIDL Availability
i. What are the new eligibility requirements for EIDLs?
Many of the eligibility requirements for EIDLs have been eliminated until December 31, 2020. All businesses with 500 or fewer employees are now eligible for EIDLs if they have suffered substantial economic injury because of COVID-19. No personal guarantees are required for loans under $200,000. A business only needs to have been in operation since January 31, 2020, rather than the typical 1-year requirement. Businesses also do not need to be unable to find credit elsewhere to be eligible for EIDLs. The CARES Act allows the SBA to issue EIDLs based on just credit scores (or other appropriate method to determine ability to repay) and may not require a tax return or tax transcript.
ii. What are the terms of EIDLs?
The maximum loan amount is $2 million and the current interest rate is 3.75% for small businesses (or 2.75% for nonprofits).
iii. Are EIDLs eligible for loan forgiveness.
EIDLs are not eligible for loan forgiveness the same way PPP loans are, but businesses may receive an advance of up to $10,000 on an EIDL by certifying that it is eligible for the loan. This advance does not need to be paid back, even if the EIDL is later denied. In addition to the typical allowable uses for EIDLs, this advance may be used for providing paid sick leave due to COVID-19, maintaining payroll during business disruptions or slowdowns, paying increased costs due to interrupted supply chains, paying rent or a mortgage, and repaying other obligations that cannot be met due to revenue losses.
If a business also later receives a PPP loan, however, the amount of the PPP loan that is forgiven is reduced by the amount of the advance.
iv. How do I apply for an EIDL?
Unlike PPP loans, the SBA receives applications for EIDLs directly, which can be accessed here.
C. Deferment of Small Business Loans and Microloans
Loans guaranteed by the SBA as small business loans under Section 7(a) of the Small Business Act, not including PPP loans; under title V of the Small Business Investment Act of 1958; and Microloans under Section 7(m) of the Small Business Act, are deferred for 6 months. The SBA will pay the principal, interest, and any fees on these loans during this period.
This 6-month deferment is also available for eligible loans made within 6 months after the signing of the CARES Act (September 27, 2020). The deferment starts with the next payment due on the loan, whether the loan is already in deferment, or when the first payment is due for new loans.
D. Increased SBA Express Loan Maximum
The maximum amount available under a SBA Express Loan is increased from $350,000 to $1 million.
E. Additional Business Loans
i. What additional loans are available to businesses?
The Secretary of the Treasury is authorized to contribute at least $454 billion toward programs established by the Board of Governors of the Federal Reserve to issue loans and purchase debt obligations of eligible businesses (with any amount remaining from $46 billion set aside for loans to air passenger and cargo carriers and businesses critical to national security added to this program). Loans made under these programs are not eligible for forgiveness of any sort, and all requirements generally applicable to loans made under the Federal Reserve Act are applicable, including collateral, taxpayer protection, and borrower solvency requirements.
ii. What businesses are eligible for these additional loans?
Businesses are only eligible if they are organized as a U.S. entity, have significant operations in the U.S., and have a majority of their employees based in the U.S. In addition, the business must agree to not perform any stock buybacks or pay any dividends or other capital distributions until at least a year after the loan is paid back, and the company must agree to limit employee salaries according to the following guidelines until at least a year after the loan is paid back: employees who made over $425,000 in 2019 cannot receive more than their total 2019 compensation in any 1-year period or a severance that is twice their 2019 compensation; employees who made over $3 million in 2019 cannot receive more than the sum of $1.5 million plus half of their total 2019 compensation in any 1-year period.
iii. Are there any provisions specifically for mid-sized companies?
The Secretary of the Treasury is instructed to pursue implementing a program to provide these loans to mid-size companies with between 500 and 10,000 employees. This program is to have a maximum interest rate of 2%, with at least a 6-month deferment of payments of principal and interest. Applicants for this program are required to make additional certifications, however:
The CARES Act provides 7 favorable tax modifications for businesses (subject to eligibility requirements summarized below): (A) an “Employee Retention” credit against payroll taxes for particularly impacted businesses, (B) deferment of payroll taxes, (C) increased availability of net operating losses, (D) reduced limitations on losses for taxpayers other than corporations, (E) increased availability of minimum tax credits (“MTCs”) remaining from the alternative minimum tax credit, (F) increased deductions for business interest, (G) increased deductibility of property depreciation.
A. Employee Retention Credits
i. How much can employers receive for Employee Retention credits?
Eligible employers can receive an Employee Retention credit against payroll taxes for 50% of each employee’s wages each quarter. The maximum amount of wages for which this credit is available is $10,000 for the year (making the maximum credit equal to $310 per employee).
ii. What employers are eligible for Employee Retention credits?
The credit is only available to employers either (a) in quarters in which their business is at least partially suspended due to a governmental shut down order because of COVID-19 OR (b) starting in a quarter in which their gross receipts for the quarter are less than 50% of gross receipts in the same quarter in 2019 and continuing until their gross receipts rise back to above 80% of the gross receipts of a corresponding 2019 quarter.
Paid leave under the Families First Coronavirus Response Act is excluded from eligibility for Employee Retention credits. Also, recipients of PPP loans are ineligible for Employee Retention credits. As a result, businesses will want to determine whether it is more advantageous to receive a PPP loan or pursue Employee Retention credits.
iii. Are there any differences between large and small employers?
Employers with more than 100 employees can only include wages paid to employees who are not providing services in a quarter due to either A or B. Employers with 100 employees or fewer may include wages paid to employees, even if still providing services, for a period of shut down described in A or during a quarter described in B.
B. Deferment of Payroll Taxes
i. How are payroll taxes deferred under the CARES Act?
Employers may defer payment of payroll taxes attributable to wages earned after March 27, 2020 and before January 1, 2021. Half of the taxes are due on December 31, 2021 and the other half on December 31, 2022. Self-employed individuals may similarly defer 50% of their self-employment taxes under 26 U.S.C. 1401(a).
ii. What taxpayers are ineligible for deferment?
A taxpayer is ineligible for deferment if it has had any amount of a PPP loan forgiven under the CARES Act.
C. Net Operating Loss Changes
i. What are the changes to net operating losses for 2020 and previous tax years?
Businesses can use net operating losses to deduct 100% of taxable income for all tax years prior to 2021, instead of the previous 80% limit. All net operating losses in tax years beginning in 2018, 2019, and 2020 may also now carryback to the previous 5 years. Special rules are applicable to real estate investment trusts, life insurance companies, and deferred foreign income corporations, however.
ii. How will net operating losses work in 2021?
For tax years beginning in 2021, losses will generally be ineligible for carryback again. Also, deductions for net operating losses will then be capped at 80% of taxable income, but taxable income will be calculated after accounting for net operating loss carryforwards from tax years beginning in 2017 or earlier but not deductions for qualified business income, foreign-derived intangible income, or global intangible low-taxed income.
D. Reduced Limits on Losses for Taxpayers Other Than Corporations
The prohibition on allowing excess business losses for noncorporate entities from 2018 until January 1, 2026 is shifted to only apply to tax years starting after December 31, 2020 and before January 1, 2026.
C. Accelerated Availability of MTCs
i. How does the CARES Act accelerate MTCs?
Instead of limiting corporations to taking a refund of 50% of their excess MTCs, the CARES Act allows corporations to take a refund of either 50% of their excess MTCs in 2018 and 100% of their excess MTCs in 2019 or 100% of their excess MTCs in 2018.
ii. How do I elect to use all of my MTCs in 2018?
If the corporation elects to use all of its MTCs in 2018, the corporation can file an application for a tentative refund instead of submitting an amended return.
F. Increased Business Interest Deductions
i. What is the new limit on the business interest deductions?
The limit on the deduction for business interest is increased from 30% of a business’s income to 50%.
ii. How does this increase affect partnerships?
For partnerships, this increase does not apply to 2019. Instead, any excess business interest allocated to a partner in 2019 can be deducted in 2020, 50% of which is deductible regardless of adjusted taxable income or allocations of excess taxable income from the partnership and 50% of which may only be deducted from allocations of excess taxable income from the partnership. Taxpayers may also choose to use their adjusted taxable income from 2019 instead of 2020 for calculations of the limits on these deductions.
G. Increased Deductibility of Property Depreciation
Any improvement made by a taxpayer to an interior portion of a nonresidential building which is now “qualified property” eligible for immediate depreciation deductions under the Tax Cuts and Jobs Act until January 1, 2027.
H. Deductions of Certain Student Loans from Employee Income
i. What student loan payments are exempted from employee income?
The exemption for employer educational assistance programs is temporarily expanded to include payments that go towards student loans. Payments by employers before January 1, 2021, either directly to a lender or to the employee, for principal or interest on most student loans (incurred for the employee’s education, not spouses or children) do not constitute gross income of the employee. The maximum amount of this exemption is $5,250.
ii. What are the requirements for exempting student loan payments?
The other requirements for educational assistance programs are still applicable, however. The payments must be made under a separate written plan, therefore, and no more than 5% of the payments under the educational assistance program can go to owners with more than a 5% share of the company. Also, the program must not require recipients to choose between participating in the program and receiving other compensation that would be includible in gross income.
The cap on the maximum indebtedness for a company to file under the Small Business Reorganization act is raised from $2.725 million to $7.5 million. Payments made under federal law because of COVID-19 are expressly excluded from monthly income as well. Pre-existing bankruptcy plans may also be amended for businesses experiencing hardship due to COVID-19 to expand payments for a maximum of 7 years after the first payment due on the original plan.
These changes expire 1 year after the enactment of the CARES Act (March 27, 2021).
Where can I find answers to other questions?
There are resources available from the Department of the Treasury, the SBA, and the IRS that may be able to answer other questions regarding the CARES Act. In addition, the experienced attorneys at Gielow, Groom, Terpstra & McEvoy in Muskegon are closely following the CARES Act and related legislation, regulations, and guidance as they are updated, so we are well-equipped to answer any questions you may have.
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