After some short deliberation in Congress, the Coronavirus Aid, Relief, and Economic Security Act (CARES) was signed into law on March 27. At TaxAct, we spend countless hours reading the law, viewing informative webinars, digging through analysis, and making direct contact with the IRS to understand the ins and outs of the plan. While there will be continued clarification around the law, including IRS news releases and notices, let’s break down what we know so far about how this law impacts small businesses.
Paycheck Protection Program
Let’s start with business loans.
If your client has a small business – meaning they have 500 employees or less – they may qualify for a Paycheck Protection Program Loan. Sole proprietorships, independent contractors, and other self-employed individuals all qualify as a small business. The business must have paid salaries and payroll taxes for employees or contractors. Additional qualifications for this loan include:
- The loan is necessary for the business because of the economic uncertainty caused by COVID-19.
- The loan will be used for allowable purposes (described below) for the business.
- Your client is not receiving duplicate funds for the same uses from another Small Business Administration program.
What are the allowable purposes? That means eligible payroll (such as employee salaries, paid sick or medical leave, etc.), mortgage interest, rent, pre-existing debt, and utility payments.
This is intended to be a low-interest loan, and the best part is that some of the loan is forgivable. If your client uses the loan proceeds for any of the allowable purposes (with at least 75% used for payroll) within the first eight weeks, the loan balance will reduce, and they won’t be taxed on the forgiven amount. The maximum amount of this loan is $10 million, subject to other limitations.
At the time this article was last updated, Congress passed legislation known as the Paycheck Protection Program Flexibility Act of 2020, which is retroactive to March 27. The eight-week period to use the loan was extended to 24 weeks. That legislation includes a change to the 75/25 ratio rule for payroll by reducing the ratio to 60% for payroll expenses and 40% for other expenses. This means if at least 60% of the loan proceeds are used for payroll, the entire loan amount may be forgiven.
Congress authorized up to $349 billion dollars for this loan program – but that amount was used up in a matter of days. In response to the quick utilization of the original authorized amount, Congress passed the Paycheck Protection Program and Health Enhancement Act in late April. That provided an additional $310 billion dollars for the loan program. There was a fair amount of criticism that only larger and wealthier companies could access the first round of PPP loans. With the second round of funding, the data shows many more small businesses have accessed the funds. As of the current date, there is still over $100 billion left in funding. As states continue to open back up, more and more businesses may not see the need for the PPP loans.
For more information, please refer to the U.S. Department of Treasury Paycheck Protection Program website, which includes more details on how to apply.
SBA Economic Injury Disaster Loans
Small Business Association (SBA) Economic Injury Disaster Loans are an option for some small businesses. At this time, however, only agricultural business applications are accepted by the SBA.
The SBA works with states to provide low-interest federal disaster loans for businesses that are experiencing a substantial economic injury from the COVID-19 outbreak.
The maximum amount of the loan is $2 million and can be used to pay off debt, payroll, and other bills that cannot be paid due to COVID-19. Some borrowers can get an advance on the loan, with up to $10,000 of the loan considered a grant that does not have to be paid back.
See the U.S. Small Business Administration Disaster Assistance website for more information.
Unemployment and Small Businesses
Traditionally, if your client is self-employed or consider themselves an independent contractor, they can’t claim unemployment compensation. The CARES Act now allows them to claim federal unemployment compensation for up to 39 weeks, which takes them through the end of 2020.
There are a few stipulations. For example, if your client can telework, they are ineligible. But if they are forced to close their business, they likely will qualify for this benefit. The three benefit components are:
- $600 of supplemental state-paid unemployment compensation for those who already qualify
- $600 plus the regular state unemployment rate provided by a pandemic unemployment program for those who are not normally eligible for unemployment compensation
- An extension of unemployment compensation by 13 weeks on top of the regular state timeline
For example, if your client is self-employed but unable to work due to COVID-19, components two and three apply to them. Normally, your client couldn’t claim traditional unemployment, so component one would not apply to them. Instead, they would only receive $600 plus their state’s regular unemployment rate provided by a pandemic unemployment program. The length of the benefits would also extend 13 weeks. Currently, the extra $600 of unemployment benefits provided by components one and two are scheduled to end on July 31, 2020.
All states vary on the length of offered unemployment benefits. Check out your client’s state’s unemployment website for more information.
Employee Retention Credit
What about the businesses that are trying to retain their employees during the crisis, but would prefer not to take out a loan? There’s some help for that too.
If your client pays their employees from 3/12/2020 through 12/31/2020, and their business operations are impacted by COVID-19, they may claim a refundable tax credit on their 2020 tax return. Many eligible employers can receive this credit in advance, which means your client’s business can receive the money today instead of waiting to file a 2020 tax return. Your client must meet one of the following two qualifications:
- Their business operations are fully or partially suspended due to COVID-19, or
- Their gross receipts decreased by more than 50 percent when compared to the same quarter in the prior year.
The credit serves as an incentive to keep paying their employees through the crisis. There are a few stipulations to the credit, however.
Your client’s business can’t participate in any of the loan programs previously mentioned, and the credit amount may be limited if their business took a credit for paid family and medical leave provided in the Tax Cuts and Jobs Act. The credit amount is 50 percent of qualified wages they paid to their employees while they were unable to work due to COVID-19. The maximum credit amount is $5,000 per employee If your client’s business employs 100 or less full-time employees, all wages qualify regardless of whether or not the employee’s ability to work is impacted by COVID-19.
Payroll Taxes Delayed
Another benefit of the CARES Act that small businesses may consider is delaying the payment of employer payroll taxes and self-employment payroll taxes. Under the new law, employers and self-employed individuals can defer payment of the employer’s share (which is 6.2%) of social security tax that they are responsible for paying in 2020. One-half of these taxes can be deferred to 2021, and the other half to 2022.
Other Provisions
There are several other provisions in the CARES Act that may apply to small businesses, but we’ll keep those details light. Those include:
- Net operating losses (NOLs) generated in 2018 through 2020 can offset 100 percent of taxable income for tax years before 2021 and are allowed a 5-year carry-back and indefinite carry-forward
- Non-corporate taxpayers can deduct excess business losses until tax year 2021
- A technical correction that allows qualified improvement property to have a 15-year asset life and qualify for bonus deprecation
- Interest expense limitations that were imposed by the Tax Cuts and Jobs Act are suspended