What the CARES Act Means for Small Business Owners
The $2 trillion, 900-page Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 is a historic package that seeks to provide support to individuals, families and businesses during this “social distancing” recession.
If you’re a small business owner, you may qualify for a chunk of this change, which includes $500 billion for support to industries hurt by the crisis, and $400 billion in tax credits for wages and payroll tax relief.
This small business support will come in several forms:
• Paycheck Protection Program
• Employee Retention Credit
• Deferral of Payment of Payroll Taxes
• Amendment of Net Operating Loss Rules (NOLs)
Paycheck Protection Program
Certain small businesses can qualify for loans (through the Small Business Administration, or SBA) up to a maximum of the lesser of $10 million or 2.5 times their average payroll costs to cover payroll, rent, utilities, mortgage interest, group insurance premiums, and so on.
If you receive a loan, it must be spent within eight weeks of receipt, and you must keep the same number of employees.
Under the provisions of the act, your business may qualify if you meet the following requirements:
• If you have fewer than 500 employees (this includes in affiliated businesses) OR, if you meet the employee size standard under the NAICS Code.
• If you own a food service business and employ fewer than 500 employees at each physical location.
• If you certify in good-faith that you need the loan due to the economic hardship caused by COVID-19.
What is the application deadline?
You must apply for a loan by June 30, 2020.
What about paying back the loan?
The biggest potential benefit of loans issued under the Paycheck Protection Program is that they are partially or fully forgivable. Another benefit: These loans have a maximum interest rate of 4%. Lastly, payments will be deferred for no less than six months and no longer than one year (lenders will be receiving additional guidance about deferment periods).
Eligibility for loan forgiveness is contingent upon the amount spent during the first eight weeks after the loan is made on qualifying expenses. For loan amounts to be forgiven, you must keep the same number of equivalent employees through June 30 of this year as you did during the same period in 2019, or from January 1 to February 15, 2020.
Employee Retention Credit
This is a new payroll tax credit designed to incentivize employers to maintain employees rather than laying them off. Businesses who do not receive a loan under the Paycheck Protection Program may receive this benefit.
Who is eligible?
A business may be eligible for this payroll tax credit if company operations have been suspended in part or in full during a single quarter. There are two eligible reasons for suspension: First, if it’s caused by a government order (such as a shelter-in-place or stay-at-home order). And second, if it’s caused by significant revenue losses (specifically, if 2020 revenue was less than 50% of revenue during the same quarter in 2019).
Beyond that, there are a few factors that can render a business ineligible, and it’s important to note that what matters is revenue, not profit. A business will not be eligible if it is not at least partially suspended due to government order, and doesn’t see YOY quarterly revenues drop below 50%.
Similarly, a business may not qualify if at least one quarter’s revenue is more than 50% less than the revenue for the same quarter in 2019. Meaning, even if your business experiences sustained decreases in revenue, if they aren’t substantial enough to dip below that 50% threshold, your business likely won’t qualify.
Deferral of Payment of Payroll Taxes
Employers are able to defer payment of payroll taxes that would otherwise be due from the date of enactment through the end of 2020. Likewise for the self-employed: They can defer the employer equivalent of their self-employment taxes. The exception is employers who have debt forgiven under the CARES Act for certain SBA loans.
When is payment due?
Rather than paying payroll taxes during this period, you will be responsible for paying 50% by December 31, 2021, and the remaining 50% by December 31, 2022.
Amendment of NOLs
The CARES Act effectively loosens the rules for corporations (except REITs) with net operating losses. With the amended rules, any NOL from 2018, 2019 or 2020 can be carried back up to five years. This adjustment follows on the heels of another recent change enacted for 2018 by the Tax Cuts and Jobs Act (TCJA), which made it so losses could only be carried forward indefinitely.
Why is this helpful?
The idea is to generate much-needed cash flow to businesses by reducing tax bills from prior years, enabling them to claim refunds on taxes previously paid. In addition, 100% of taxable income can be offset for 2018, 2019 and 2020 (as opposed to 80% allowed by the TCJA).
Non-corporations also get relief. The CARES Act repeals limits for cumulative losses set in place by the TCJA on claims attributable to businesses. This temporary repeal is for 2018, 2019, and 2020. If you had losses suspended in 2018 or 2019 because of this, you should talk to your tax professional about filing an amended return.
Do you have additional questions about the CARES Act and how it impacts your small business? Our financial advisors and tax pros at Ironwood Wealth Management can help.