The Cares Act, passed March 27, 2020, provides payroll and rent relief to small businesses. The Act includes a loan forgiveness provision for funds used to pay employees, rent, utilities or a mortgage. There is also a provision to defer payment of employer social security taxes with payment permitted over two years.
Here is a summary of the provisions, with more to come as details unfold.
Provions for Businesses
The bill provides funds to pay for employee salaries under $100,000, paid sick or medical leave, insurance premiums; and mortgage, rent, and utility payments.
Available to businesses and 501(c)(3) nonprofits with less than 500 employees, including sole proprietors, independent contractors, and other self-employed individuals.
Paycheck Protection Program, including Loan Forgiveness
Providing $349 billion in SBA 7(a) loans through December 31, 2020 for businesses with less than 500 employees, including sole-proprietors, independent contractors, self-employed individuals and certain not-for-profit entities. Key elements include:
Loan Calculation. Loans are equal to 250% of an employer’s average monthly payroll, capped at $10 million. Payroll includes salary, wages, cash tips, employee group health care benefits, insurance premiums, retirement contributions, and covered leave. Wages per person up to $ 100,000 qualify.
Allowable Uses. Loans shall be used for payroll support, such as salaries, paid sick or medical leave, insurance premiums, retirement contributions, and mortgage, rent, and utility payments (for expenses that existed prior to February 15, 2020 and continue through June 30, 2020)
Loan Foregiveness. The loan is eligible for 100% forgiveness if used for the stated purposes and in conjunction with guidelines related to staff retention. Loans that are used for payroll costs less than an annual rate of $100,000 in compensation per person, interest payments on any mortgage costs, rent, or utilities, may be forgiven. The amount of loan forgiven is proportionally reduced by any reduction in employees or payroll compared to the prior year.
Re-Hiring. To encourage employers to rehire any employees who have been already laid off, those who rehire workers will not be penalized for having a reduced payroll at the beginning of the loan period.
Employers must make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19.
Instead of determining repayment ability, lenders will determine whether a business was operational on 2/15/2020, and paid employees a salary subject to payroll taxes, or a paid an independent contractor.
The loan forgiveness under this Act is TAX FREE!
Employee Retention Tax Credit – Businesses receive a refundable credit for retaining employees.
Eligible employers receive a credit against employment taxes equal to 50% of qualified wages paid up to $10,000 for each employee during the crisis. It would be available to businesses that were disrupted due to virus-related shutdowns and firms experiencing a decrease in gross receipts of 50% or more when compared to the same quarter last year. Once eligible, employers remain eligible until gross receipts exceed 80% of gross receipts for the same calendar quarter in the prior year.
For employers with 100 or fewer employees, all wages paid qualify for the credit.
Credit is available for employees retained but not currently working due to the crisis for firms with more than 100 employees, and for all employee wages for firms with 100 or fewer employees.
Deferred Payment of Employment Taxes
Social security taxes for both employers AND Self-employed individuals can be paid over two years, half by 12/31/2021 and half by 12/31/2022.
As yet unclear how payroll processors like ADP and Paychex will deal with this provision. They generally impound taxes up front.
Qualified Improvement Property
Provides 100% bonus depreciation for costs associated with interior improvement of non-residential property.
Net Operating Loss (NOL) Carryback Allowed
NOLS generated in 2018, 2019, or 2020 can be carried back 5 years.
The 80% limit on use of NOLS is suspended to allow an NOL to fully offset income.
If applicable, taxpayers can apply for a refund using Form 3315, change in accounting method.
Pass-through businesses and sole proprietors can now benefit from the NOL carryback rules described above.