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Many employers are understandably concerned about how to navigate the difficult business environment created by the Covid-19 Pandemic and resulting state and federal mitigation measures.
Below is a guide on the types of relief provided in the CARES Act and available to employers with up to 500 employees who are impacted by the Covid-19 Pandemic. Generally, the relief provided under the CARES Act for businesses is broken into four categories: (1) loan programs, (2) tax programs, and (3) bankruptcy eligibility.
1. Loan & Grant Programs:
Payment Protection Program (PPP) loans (CARES Act §§1102 and 1106):
Creation of a new potentially forgivable loan program to incentivize small business, sole-proprietors, non-profit organizations, independent contractors to keep employees for the period covered period between February 15, 2020 to June 2020. This pool of up to $349 billion is available to employers who meet certain eligibility requirements.
• Employer must have been operating as of February 15, 2020.
• Employer must have had employees for whom the business paid wages and payroll taxes.
For eligible employers the loan amount will be based on payroll costs. Payroll costs include all applicable wages for individual US based employees, capped at $100,000 in compensation for each individual employee per annum prorated for the loan period, paid leave, severance, insurance premiums, retirement benefits, as well as state payroll taxes.
The maximum loan amount shall be 2.5 the average total monthly payroll costs during the 1-year period before the date on which the loan is made with a $10,000,000 cap.
The loan will be forgivable (CARES Act §1106) up to the original principal value as long as the employer does not reduce the average monthly number of employees during the loan period from the numbers recorded over the prior year, and does not reduce the salary of an individual employee more than 25% over what was paid prior to the covered period. There is an exemption to this calculation for employers who terminated employees after February 15, 2020 and up to 30 days after the enactment of the act but rehired on or before June 30, 2020.
Note: Make sure that you maintain your documentation during the loan period as forgiveness will not be granted without proper documentation confirming eligibility.
Emergency Economic Injury Disaster Loan (EIDL) Grants (CARES Act §1110):
Expands the eligibility and reduces the requirements for a loan under the EIDL program of Small Business Act and provides for an advance grant. A total of $10 billion was allocated to the advance grant program.
Eligibility is expanded to include a business with up to 500 employees, a sole proprietorship or an independent contractor. Processing requirements for access to small business loans under the act are loosened.
Allows for an advance grant payment under the loan program of up to $10,000 to cover Covid-19 related expenses including payroll expenses, mortgage and rent expenses, costs that arise under interrupted supply chains or other Covid-19 related revenue losses.
PPP vs. EIDL. In most situations a business cannot double dip and get a loan through both programs, although (1) a business can refinance their EIDL loan as a PPP, and (2) certain Employers with qualifying EIDL loans made for other purposes than payroll costs are still eligible for PPP loans.
Note: A Business is not required to pay back the advance grant, although the amount will be deducted from any future loan amount forgivable under CARES Act §1106.
Subsidies for Existing and New Loans under the Small Business Act (CARES Act §1112):
The Small Business Administration will make all payments on qualifying existing SBA loans granted under 7(a) of the SBA Act for up to six months. Borrowers who obtain new loans within six months from March 27, 2020 are also entitled to six months of payments as are those who are currently on deferment, when the deferment period ends.
Note: PPP loans do not qualify for this program.
2. Tax Programs:
Refundable Payroll Tax Credit (CARE Act §2301):
Allows a business to take a tax credit against payroll and other employment related taxes for each calendar quarter equal to 50% of the qualified wages with respect to each employee to a maximum of $10,000. Qualified wages include amounts paid to provide and maintain a group health plan.
Credit is limited to the maximum of the employment taxes actually paid and credits granted under Internal Revenue Code (IRC) §3111 (e) and (f). The program is available to all employers with a trade or business that was operational during the 2020 year and (1) was fully or partially suspended from operations during the quarter due to Covid-19 related government orders limiting commerce, travel, or group meetings, (2) or whose gross receipts declined by more than 50% compared with the same quarter in 2019.
Note: this program is not available to employers who take advantage of the PPP loan or other Covid-19 special loan programs.
Payroll Tax Payment Deferral (CARES Act §2302):
Allows employers affected by the Covid-19 Pandemic to defer payments of qualified payroll taxes without penalty. Payroll taxes that qualify are taxes due under IRC §3211(a) and §3221(a) from the date of the enactment through the end of 2020. The Act allows for payment of 50% of the taxes due from the qualified period on or before December 31, 2021 and the remaining 50% on or before December 31, 2022.
Note: this program is not available to employers who take advantage of the PPP loan or other Covid-19 special loan programs.
Net Operating Loss Modification (CARES Act §2303):
A modification of IRC §172 to allow taxpayers to carry back net operating losses occurring in 2018, 2019 or 2020, up to five years. The provision also removes the taxable income limitation through the 2020 tax year. This will allow a net operating loss to fully offset taxable income for the applicable years.
Note: this change does not apply to REITs.
Non-Corporate Entity Excess Business Losses (CARES Act §2304):
The Tax Cuts and Jobs Act (TCJA) had enacted IRC §461(1) which limited the ability of non-corporate business entities to claim excess business losses through 2026. This provision modifies IRC §461 to allow non-corporate entities to claim those excess business losses for certain tax years. The excess business loss limitation was removed through 2020 except that farm loss limitation was removed through 2026.
Modification of Credits for Corporate Prior Year Minimum Tax Liability (CARES Act §2305):
The TCJA eliminated the corporate minimum tax but allowed unused credits to offset tax or be refunded through 2021. The CARES Act accelerates the usability of those credits so they all may be taken or refunded in 2018 and 2019.
Modification of Limitation on Business Interest (CARES Act §2306):
Raises the limitation placed on the business interest expense deduction by the TCJA from 30% to 50% of adjusted taxable income. This provision does not apply to partnerships except under certain circumstances at the partners’ election.
3. Bankruptcy Relief:
Expands eligibility and reduces the cost associated with filing a Chapter 11 reorganization. Amends qualification to file as a small business debtor for a business with a debt up to $7.5 million instead of the current limit of $2,725,625. In addition to the increased eligibility threshold the process has been streamlined and certain fees, such as the United States Trustee, have been eliminated.
