BHBM Tax Law Alert | CARES Act: Small Business Loans and Tax Relief
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FEDERAL TAX LAW UPDATE
CARES Act: Small Business Loans and Tax Relief
In response to the economic turmoil created by the COVID-19 pandemic, on March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act into law. The $2 trillion relief package, dubbed the “CARES Act,” covers significant ground by ordering direct payments to middle and lower income households, raising the maximum unemployment insurance benefit by $600 and expanding the ranks of those who can apply for unemployment benefits. It also provides $150 billion in funding for the healthcare system and $150 billion in funding for state and local governments, making $350 billion available in the form of loans for small businesses, and granting significant tax relief for businesses. This alert focuses on the provisions of the CARES Act regarding small business loans and tax relief for businesses.
(1) Business Loans
Guarantee and Deferral
- Pursuant to the Act, the government’s guarantee of loans made through the Paycheck Protection Program (“PPP Loans”) during the covered period (February 15, 2020 – June 30, 2020) under section 7(a) of the Small Business Act is increased to one hundred percent (100%) through December 31, 2020; at which point guarantee percentages will return to seventy-five percent (75%) for loans exceeding $150,000 and eighty-five percent (85%) for loans equal to or less than $150,000.
- The Act waives collateral and personal guarantee requirements under the Paycheck Protection Program.
- The Act allows for deferral of PPP Loan payments for a period of at least six (6) months not to exceed one (1) year.
- The Act allows for loan proceeds received through an Economic Injury Disaster Loan (“EIDL”) to be rolled into a PPP Loan.
The following types of businesses/entities that were in business as of February 15, 2020 are eligible to receive PPP Loans:
- Small business concerns, as well as any business concern, 501(c)(3) nonprofit organizations, 501(c)(19) veterans organizations, or Tribal business concern described in section 31(b)(2)(C) that has fewer than five hundred (500) employees, or the applicable size standard in number of employees for the North American Industry Classification System (NAICS) industry as provided by the U.S. Small Business Administration (the “SBA”), if higher; and
- Individuals who operate a sole proprietorship or as an independent contractor and eligible self-employed individuals.
Please note that the SBA affiliation rules must be considered to determine whether a business concern has five hundred (500) or fewer employees. Generally, affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses.
For purposes of the Act, the affiliation rules are waived in the following situations:
- For any business concern that employs not more than five hundred (500) employees per physical location of the business concern and that is assigned a NAICS code beginning with 72 (which generally consists of business concerns in the accommodation and food service industries); and
- For any business concern operating as a franchise that is assigned a franchise identifier code by the SBA, and companies that receives funding through a Small Business Investment Company (“SBIC”).
Maximum Loan Amount
For eligible borrowers that have been in business as of February 15, 2019 – June 30, 2019, the maximum amount of a PPP Loan that the borrower can receive is the lesser of:
- The sum of (i) 2.5 times the eligible average monthly payroll costs incurred by borrower during the 1-year period ending on the date the PPP Loan was made, and (ii) the amount of any EIDL received between January 31, 2020 and June 30, 2020, that has been refinanced into the PPP Loan; and
For eligible borrowers that were not in business as of February 15, 2019 – June 30, 2019, the maximum amount of a PPP Loan that the borrower can receive is the lesser of:
- The sum of (i) 2.5 times the eligible average monthly payroll costs incurred by borrower between January 1, 2020 and February 29, 2020, and (ii) the amount of any EIDL received between January 31, 2020 and June 30, 2020, that has been refinanced into the PPP Loan; and
Please note that in the event an eligible borrower is a seasonal employer (as determined by the SBA), the average eligible total monthly payments for payroll shall be for the 12-week period beginning February 15, 2019, or at the election of the eligible borrower, March 1, 2019, and ending June 30, 2019.
Please note that borrowers may apply for PPP Loans and other SBA financial assistance, including EIDLs, 7(a) loans, 504 loans, and microloans (collectively, “Alternative SBA Loans“), and also receive investment capital from SBICs. However, borrowers may not use the Alternative SBA Loans for the same purpose as the PPP Loan. For instance, if a borrower uses the PPP Loan proceeds to cover payroll for the 8-week covered period, they may not use an Alternative SBA Loan for payroll for those same costs in that period.
Eligible Payroll Costs
For purposes of the Act, the following costs shall be used to calculate payroll:
- Compensation (salary, wage, commission, or similar compensation, payment of cash tip or equivalent);
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation
- Payment required for the provisions of group health care benefits, including insurance premiums;
- Payment of any retirement benefit, and
- Payment of State or local tax assessed on the compensation of employees.
Items Excluded from Payroll Calculation
For purposes of the Act, the following costs shall be excluded in the calculation of payroll:
- The amount of compensation of any employee that exceeds $100,000;
- Taxes imposed or withheld under chapters 21, 22, and 24 of the Internal Revenue Code;
- Compensation of employees whose principal place of residence is outside of the U.S., and
- Qualified sick and family leave for which a credit is allowed under the Families First Coronavirus Response Act.
Allowable Uses of PPP Loan Proceeds
The Act provides the following approved uses for PPP loan proceeds:
- Eligible payroll costs (as provided above);
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- Employee salaries, commissions, or similar compensations (see exclusions above);
- Payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
- Rent (including rent under a lease agreement);
- Utilities, and
- Interest on any other debt obligations that were incurred before the covered period.
The amount of the PPP Loan that will be forgiven is the sum of the following payments made by the eligible business during the 8-week period beginning on the date the loan was made:
- Eligible payroll costs (as provided above);
- Any payment of interest on any covered mortgage obligation (not including any prepayment or payment of principal on a covered mortgage obligation);
- Any payment on any covered rent obligation (including rent owed under a lease), and
- Any covered utility payment.
Employers that are forgiven indebtedness from a PPP Loan will not be eligible for the payroll tax deferral (discussed below) provided under the Act.
PPP Loan Proceeds Not Forgiven
- Any PPP Loan proceeds not forgiven will be carried forward as a continuing loan with maximum terms of ten (10) years, at a maximum interest rate of four percent (4%). Please note that principal and interest will continue to be deferred for a total of six (6) months to one (1) year after disbursement of the loan. In other words, the deferral period does not restart once the amount of the loan which is not forgiven is converted to a ten (10) year loan.
(2) Tax Relief for Businesses
Modification of Net Operating Losses (“NOLs”)
- The Tax Cuts and Jobs Act (the “TCJA”), which was enacted in 2017, eliminated net operating loss carrybacks for certain years (which generally included NOLs arising after 2017). Further, under the TCJA, NOLs arising after 2017 could be carried forward indefinitely, but were limited to eighty percent (80%) of taxable income in the relevant period. Under the Act, NOLs from 2018, 2019, and 2020 may be carried back five (5) years and the eighty percent (80%) limitation has been removed for tax years beginning before January 1, 2021.
Modification of Business Interest Limitation
- The TCJA previously limited the deduction for business interest for taxpayers with average gross receipts of $25,000,000 or more to thirty percent (30%) of the taxpayer’s adjusted taxable income for tax years beginning in 2018. Under the Act, interest expense limited under section 163(j) is now subject to fifty percent (50%) of adjusted taxable income in 2019 and 2020. In addition, taxpayers may elect to use 2019 adjusted taxable income for purposes of computing their 2020 limitation.
Qualified Improvement Property
- The Act includes a technical correction to the TCJA, allowing Qualified Improvement Property (e.g., real estate/leasehold improvements) to be treated as 15-year property and eligible for one hundred percent (100%) bonus depreciation for tax years 2017 through 2022 and phasing down thereafter.
Payroll Tax Deferral
- The Act allows for the deferral of the employer portion of social security (6.2% on employee wages) for the remainder of 2020. The deferred amounts is to be paid by employers over the following two (2) years with fifty percent (50%) of the amount required to be paid by December 31, 2021 and the remaining fifty percent (50%) due by December 31, 2022.
- As discussed above, a taxpayer may not defer the employer portion of social security (6.2% on employee wages) if said taxpayer had indebtedness forgiven under the Paycheck Protection Program of the Act.
Employee Retention Credit
- The Act provides that a tax credit will be available for fifty percent (50%) of the wages paid to employees who are not performing services due to a partial or full suspension in operations caused by COVID-19. The credit is also available if there is a greater than fifty percent (50%) decline in revenue in a 2020 quarter compared to the same quarter in 2019. The credit is applied against employment taxes and capped at $5,000 per employee (50% credit on $10,000 max of wages). The credit is effective for wages paid during the period of March 12, 2020 through December 31, 2020.
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