By Raffi Yousefian | Published 03/26/2020; Updated 05/14/2020 8:59:18 PM

There’s no feeling like waking up in the early morning and learning that the biggest tax code overhaul (aka Tax Cuts and Jobs Act of 2017, or “TCJA”) since 1986 that you think you just mastered, is once again about to be reconstructed. This time with a one week notice. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law on Friday March 27th, 2020. We’ve summarized the key provisions of this legislation below so you can understand, at a very high level, the stimulus and relief options that will be available for your business during this crazy time. If you have any questions or need help navigating this legislation then please feel free to reach out

We will update this post as we learn more about the legislation. 

Paycheck Protection Program (PPP) Loans

This is by far the most favorable piece of small business relief legislation in our opinion. The federal government will issue nearly $660 billion in collateral free Paycheck Protection Loans to small business employers between February 15, 2020 and June 30, 2020. The application was posted on 4/2/20 and can be found here, along with additional resources for borrowers and lenders from the Treasury. A small business employer includes:

  • For profit business with less than 500 employees
  • 501(c)(3) and 501(c)(19) nonprofit organizations with less than 500 employees
  • Sole proprietors, self-employed individuals, and independent contractors with less than 500 employees

Restaurants, caterers, hotels, or other businesses operating under NAICS code 72, will be subject to the <500 employee limit by location. This is obviously very favorable for restaurant groups and hotel chains. 

The loan amount will be limited to the lesser of:

  •  The sum of:
    • average monthly payroll costs for 2019 or the 1-year period up to the date of the loan application times 2.5**, and;
    • any disaster loan that has been refinanced into a paycheck protection loan
  • $10 million.

It’s very important to understand the definition of payroll costs in this context. Payroll costs include:

  • For Employers:
    • Gross wages to employees
      • wages for employees in excess of $100k (annualized) must be excluded
      • wages for employees not living in US must be excluded
    • Self-employment income (including guaranteed payments) of partners in a partnership or LLC taxed as partnership
    • Tips paid
    • Paid time off
    • Severance
    • Medical benefits
    • Retirement benefits
    • State and local taxes assessed on employee compensation (aka SUI)
  • For Sole Proprietors, Independent Contractors, and Self-Employed Individuals:
    • Self-employment earnings not more than $100,000 annualized, plus payroll costs from above if the individual has employees.  

*Payroll taxes are not included in payroll costs. This doesn’t mean you back out employee tax withholding from gross payroll, it simply means you don’t add employer portion of Social Security and Medicare to the total of wages. 

*We haven’t read anything in the bill that excludes officer’s compensation from the calculation of payroll costs as long as the $100k is not exceeded. 

**If you are seasonal, then average monthly payroll cost is the average amount you paid from February 15, 2019 to June 30,2019, or at your election March 1, 2019 to June 30, 2019. Under the interim final rule released on 4/28/20, seasonal employers may also elect to use any consecutive 12-week period between May 1, 2019 and September 15, 2019. 

The loans will be administered through the SBA’s 7(a) loan program and will have a maturity of 2 years, an interest rate of 1%, and will allow for deferred payments up to 6 months from the date of the loan. The “credit available elsewhere” test that is normally applicable to SBA loans will be waived. 75% of the loan proceeds must be used to cover payroll costs (as defined above), the remainder can be used to cover mortgage interest, rent, utilities, interest on any other debt that was incurred before Feb 15, 2020, and refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. 

To qualify, you must certify that (1) you were in operation during February 15, 2020; (2) the uncertainty of current economic conditions makes necessary the loan request to support ongoing operations; (3) acknowledge funds will be used to cover the expenses mentioned in the previous paragraph; (4) you can provide payroll tax documentation to support your payroll calculations; and (5) you do not have another substantially similar loan application pending during Feb 15-Dec 31; Businesses that are ordinarily not eligible for SBA loans, are also not eligible for payroll protection loans. This includes real estate investment firms, firms involved in speculative activities, firms involved in lending activities, pyramid sales plans, foreign businesses, gambling businesses, private clubs, and other passive investment companies.

The lender must make a one-time, full disbursement of the PPP loan within ten calendar days of loan approval; for the purposes of this rule, a loan is considered approved when the loan is assigned a loan number by SBA. You will not have to make any payments towards principal or interest for six months following the date of the disbursement of the loan, although 1% interest will accrue during this time. The lender is authorized to defer payments for up to one year depending on how the pandemic unfolds. There will be no prepayment penalties, guarantee fees, or yearly fees. Now, that’s all great, 100% federal guaranteed loans at a very reasonable interest rate with a payment deferral of 6 months. 

On May 13, 2020 the SBA clarified a few ambiguities. First, if a partnership received a PPP loan that only covered employee payroll costs and eligible operating expenses, and NOT partner compensation, the lender may increase the PPP loan amount to include appropriate partner compensation even if the loan has already been disbursed, assuming form 1502 has not been submitted to the SBA. Second, they extended the safe harbor repayment date (the date you can give the loan back if you decide you shouldn’t have taken it) from 5/14 to 5/18. Third, any borrower+affiliates receiving PPP loans with $2m or less in principal will be deemed to have made the required certification of loan necessity in good faith.

But wait, it gets better!

These loans will be forgiven, thus classifying it as a grant, to the extent that payments from the proceeds of the loan are expended on the following, during an 8-week period beginning on the date of the loan:

  • Payroll costs (must account for 75% of the amount forgiven) 
  • Mortgage interest on mortgage obligations incurred before 2/15/20
  • Rent on leases dated before 2/15/20
  • Utility payments under service agreements dated before 2/15/20

What will impact the amount that is forgiven?

  • If you reduce your workforce during the 8 week period.
    • This is calculated by comparing the number of average full-time equivalent (FTE) employees for each pay period during the 8-week period to the average number of FTE employees between either January 1, 2020 – February 29, 2020, or February 15, 2019 – June 30, 2019.
    • The reduction in loan forgiveness for reducing your workforce will not apply if you laid off your workers between February 15, 2020 and April 27, 2020 (30 days after the enactment of the CARES act), then made a good faith effort to restore your workforce by June 30, 2020. You can restore your full workforce at any point before June 30th.
  • If you reduce the salaries/wages to employees making less than $100k annually by more than 25% during the 8 week period.
    • How this will be calculated is to be determined.  
    • The reduction in loan forgiveness for reducing your employee’s wages beyond 25% will not apply if you reduced the wages between February 15, 2020 and April 27, 2020 (30 days after the enactment of the CARES act), then eliminated the reduction in wages at any point before June 30th.

With that said, as long as you maintain your monthly average payroll, and spend the remainder of the funds on additional payroll, utilities, mortgage interest, or rent in the 8 week period, then you shouldn’t have a problem getting the entire loan forgiven, assuming you provide sufficient documentation.

If you laid off or furloughed your staff, there’s nothing in the bill that states you’re required to rehire the same workforce or for the same purpose (pending confirmation from SBA guidance). You can hire employees who would be more suited for your current operations. For example, if you need delivery drivers instead of bartenders, then you could either hire delivery drivers or repurpose your bartenders as delivery drivers in order to meet forgiveness requirements.

The provision that limits the forgivable amounts to expenses during the 8-week period from the loan disbursement date may seem to render the entire program useless for restaurants because most restaurants are either not open, or are operating at a fractional capacity. We take a deeper look at strategic plans and scenarios for restaurants in another post.

To qualify for forgiveness, the borrower must submit an application to the lender providing proof of expenditures. The borrower will find out within 60 days of applying for forgiveness if their debt will be forgiven. The loan forgiveness will trigger cancellation of debt income, which will not be subject to income tax. The expenses attributable to the forgiveness amount will be deemed nondeductible so taxpayers are not receiving a double benefit.

The following documents need to be submitted to substantiate the request for loan forgiveness:

  • Documentation verifying the number of FTEs on payroll and pay rates for the following periods:
    • 8 week period after loan was disbursed
    • 2/15/2019 – 6/30/2019
    • 1/1/2020 – 2/29/2020
    • 2/15/2019 – 6/30/2019 (for a seasonal employer)
    • 2/15/2020 through 4/26/2020 
  • Quarterly Form 941 and state unemployment reports or payroll processing records will satisfy these requirements 
  • Evidence of any retirement and/or health insurance contributions such as cleared checks, payment confirmations, or bills for the 8-week period. 
  • Evidence of business rent, business mortgage interest payments on real or personal property, or utility payments for the 8-week period.

We’ve published a separate post that digs into the details and mechanics of the PPP loan forgiveness. We will keep you updated with new developments. We suggest following our blog for daily updates on taxes and relief available for small businesses and nonprofits. We hope that this information has been helpful, please don’t hesitate to contact us if you have questions or need guidance.

Finally, if you received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you can still apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

Existing SBA Loans

Small Business Debt Relief Program

Under this program, the SBA will cover all loan payments including principal, interest, and fees for 6 months on existing non-disaster SBA loans. This includes current 7(a) not made under the PPP, 504, and microloans. 

Other Loan Modifications 

The CARES Act will modify existing SBA loan requirements with the following: 

  • The maximum loan amount for an SBA express loan will increase from $350k to $1 million through December 31, 2020. 
  • Expansion of SBA economic disaster loans (apply here) for the following:
    • Sole proprietors will qualify
    • If you are a private non-profit with an effective ruling letter from the IRS, granting tax exemption under sections 501(c), (d), or (e) of the Internal Revenue Code of 1954, or if you can provide satisfactory evidence from the State that the non-revenue producing organization or entity is a non-profit one organized or doing business under State law. However, a recipient that is principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs, whether in a religious or secular setting, or primarily engaged in political or lobbying activities is not eligible to receive an EIDL
    • No personal guarantee on loans below $200k required through December 31, 2020
    • Businesses which have applied for disaster loans can receive an immediate advanced Emergency Grant of $10k, even if the disaster loan was denied. If the disaster loan is denied and the business receives a Payroll Protection loan, then the $10k advance will be reduced from the amount of payroll protection debt forgiven. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments. The $10k advance is further limited to $1k per employee on payroll at the time which the advance is awarded. 

Unemployment Benefits for Employees

The CARES act offers two additional types of unemployment – Pandemic Unemployment Assistance (PUA), and Federal Pandemic Unemployment Compensation (FPUC). The PUA guarantees $600 to those who are not eligible to receive state unemployment benefits for up to 39 weeks. The FPUC provides an additional $600 a week in addition to state benefits for up to 13 weeks. The Department of Labor has specifically clarified that if an employee was furloughed, but their employer has reopened and asked them to return to work, then they cannot collect the additional $600. States are being pushed to waive any waiting period for receiving benefits. Details on this program can be accessed here

2020 Recovery Rebate for Individuals

The CARES Act also provides relief for all individuals in the form of a rebate check to taxpayers. The rebate will be based on adjusted gross income (AGI) reported on your 2019 tax returns. If the 2019 tax returns were not filed, then the Treasury will refer to your 2018 tax returns. If you haven’t filed either year then the Treasury will determine whether you are eligible by referring to your 2019 SSA-1099, or Social Security Benefit Statement. Only taxpayers with a valid social security number will receive a rebate. If you didn’t file returns in 2018, 2019 and didn’t receive social security benefits, then you can register to receive the payments here. You will not receive a check if you’re claimed as a dependent.

The rebate amount depends on your adjusted gross income (AGI) and your filing status: 

  • If your AGI is less than $75k for single filers or $150k for joint filers, then you will receive $1200 if single ($2400 if married filing jointly) plus $500 for each child under age 17. 
  • If your AGI is between $75k and $99k for single filers or $150k and $198k for joint filers, then your rebate will be reduced by $5 for every $100 of income over the threshold.
  • If your AGI is greater than $99k for single filers or $198k for joint filers, then you will receive no rebate. 

The 2018/2019 returns and 2019 social security statements are used to determine how much you will receive; however, the amount you are actually entitled to will depend on your 2020 AGI. So when you file your 2020 returns, you will determine how much you should have received. If the amount you received is less than what you’re supposed to receive based on your 2020 income then you will receive a dollar for dollar tax credit for the excess on your 2020 tax return. On the contrary, if you received more than you were supposed to receive based on your 2020 income, you will NOT have to pay back the excess.

The amount will be paid via direct deposit if you provided direct deposit information when filing your most recent tax return, otherwise you will receive a check without doing anything.

Other Tax Law Incentives and Benefits

  • 100% Deduction for Qualified Improvement Property
    • The CARES Act provides a technical correction to the TCJA by giving qualified improvement property a useful life of 15 years, instead of 39 years, thus making it eligible for 100% bonus depreciation deduction for the year it is placed in service. If you were previously limited by this deduction, then you know who you are. You should be able to retroactively apply the deduction to 2018 moving forward.
  • Charitable Contributions Expansion
    • Although this is not a tax benefit designed for small business, there have been changes in charitable contribution limits that will impact almost everyone beginning in tax year 2020, including those receiving charitable contributions from a pass-through entity via K-1:
      • An individual will be able take a charitable deduction up to $300 towards AGI, even if they don’t itemize.
      • If the individual does itemize, then charitable contributions can be deducted up to 100% of AGI. That means they’re no longer limited to 60% of AGI.
      • For corporations, the limit increases from 10% of AGI to 25% of AGI.
  • Employer Student debt payments
    • Employers can now pay up to $5,250 of student loans for employees without triggering taxable income for the employees. Previously, the entire amount would have been taxable to the employees.
  • Unleash the Losses
    • Guess who’s back? Back again? The Net Operating Loss (NOL) carryback options! They are back after they were eliminated by the TCJA. 
      • Net operating losses can now be carried back 5 years for losses incurred in 2018, 2019, and 2020. Losses can offset 100% of taxable income for all carry-back years, and 2019/2020, instead of the 80% limited by the TCJA for all post 2017 losses.
      • An individual’s business loss deduction against other sources of income is no longer capped at $250k (single) / $500k (MFJ). This provision can be retroactively applied to 2018, but will expire after 2020.
  • Business Interest Limitation
    • The limitation of interest expense deduction to 30% of adjusted taxable income has been increased to 50% of adjusted taxable income for 2019 and 2020. Consult your tax adviser to see if this affects you. 
  • Penalty Free IRA Withdrawal
    • A provision in the relief bill allows Americans to take penalty-free distributions from IRAs and qualified retirement plans up to $100,000. The standard 10% penalty for withdrawals under age 59.5 (except in the event of death or disability) is waived. The no-penalty allowance applies to “coronavirus-related distributions” — i.e. people who are diagnosed with COVID-19 or have experienced financial hardship from quarantine, layoffs, reduced hours, or furlough between now and December 31, 2020. Income attributable to such distributions would be subject to tax over three years, and can be recontributed to an eligible retirement plan within three years without regard to that year’s cap on contributions.

Employee Retention Credit

Who is eligible? 

If a business (or nonprofit organization described under 501(c) of IRC and exempt from tax under 501(A)) is:

  • fully or partially suspended by government order due to COVID-19 during the calendar quarter; or
  • the employer’s gross receipts are below 50% of the comparable quarter in 2019 (once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter);

and continues to pay its workers, then the business can receive a credit against the payroll taxes it pays on wages equal to 50% of qualified wages paid to each employee for that quarter. The amount of qualified wages for each employee across all quarters cannot exceed $10k. So basically, you can receive up to $5k back from the Federal government for each employee during each of the qualified quarters mentioned above.  

Employers can immediately see the benefit of this by reducing their required payroll tax deposits that have been withheld from employees wages. The employer will report their total qualified wages and the related health insurance costs for each quarter on their quarterly Form 941 beginning with Q2 2020 through Q4 2020. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive a refund from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. Employers will need to ask their payroll processor how they’re going to administer this process. 

What are qualified wages?

The business’s qualified wages depend on whether it has less than or more than 100 employees.

  • If < 100 employees, then the the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit. 
  • If > 100 employees, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.

Limitation

Finally, no double dipping is allowed. If you take advantage of this credit, then you can’t use those wages to claim the sick and paid leave credit under the Families First Coronavirus Response Act, and vice versa. Also, the payroll retention credit is not available if you leverage a payroll protection loan through the SBA as mentioned above. Contact us or your tax adviser for determining qualified wages and detailed eligibility requirements.

Payroll and Self-Employment Tax Deferral

You may think we’ve covered it all, but wait… there’s more! 

Employers can defer payments of social security tax on wages paid between March 27, 2020 through December 31,2020, for about two years. Of the total Social Security tax deferred, 50% needs to be paid by December 31, 2021, and the remaining 50% by December 31, 2022. This also applies for self-employment taxes that would be due between March 27 and December 31, 2020. 

You may have been told that you can’t have your cake and eat it too, but that was a lie all along. This legislation will allow employers to defer Social Security taxes, but still be able to claim the newly enacted family leave credit, sick leave credit, and employee retention credit towards those taxes. But here is a catch, if you received the PPP loan, then the deferral of tax payments need to stop as soon as the lender issues a decision to forgive the loan. Once you receive a decision from the lender that the PPP loan is forgiven, you’re no longer eligible to defer deposit and payment of the employer’s share of Social Security tax due after that date. However, the amount of the deposit and payment of the employer’s share of Social Security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the extended due dates shown above. 

God bless the payroll companies who need to re-code their systems to be able to process all of these nuances.