CARES Act Client Alert
The U.S. Senate passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), designed to respond to the economic fallout from the COVID-19 outbreak. The House passed the bill on Friday, March 27th, with President Trump expected to sign it very shortly. Senator Schumer described this as a “Marshall Plan” for the country’s healthcare system. Small businesses can take advantage of the Act’s Paycheck Protection Program.
The Act allocates $349 billion for small businesses to obtain forgivable loans of up to $10 million for use with payroll, rent, utilities, and mortgage interest expenses; loans can be taken for these purposes if the business does not lay off its employees (forgiveness is scaled down as layoffs rise). In order to be eligible for a loan, your business must maintain an average monthly number of employees during the covered period that is no less than the number it had before the crisis began.
Some key details include:
- Loans are non-recourse, do not require personal guaranty or collateral, and interest rates will not exceed 4%;
- Small businesses are typically those with less than 500 employees;
- The loans are capped at $10 million;
- The permissible loan amount is calculated as 2.5 times average total monthly payroll costs;
- Very few borrower requirements exist and those requirements include a good-faith certification that:
- The loan is needed to continue operations during the COVID-19 emergency;
- Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments;
- The applicant does not have any other application pending under this program for the same purpose; and
- From February 15, 2020, until December 31, 2020, the applicant has not received duplicative amounts under this program.
- Loans are forgiven and excluded from gross income in an amount that equals the payments towards payroll costs, interest payments on mortgages, rent, and utility payments. Employers will have to provide documents demonstrating the funds were properly used;
- Forgiveness amounts will be reduced for any employee cuts or wage reductions; and
- There is relief from forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020.
The CARES Act also includes various tax provisions aimed at softening the blow to employers and their employees. A few of the most prominent tax provisions included in the Act are listed below.
- Recovery Rebate Checks:
- Individual taxpayers will receive a recovery rebate check in the amount of $1,200 ($2,400 for married couples filing jointly), plus $500 for each qualifying dependent child.
- This rebate is phased out for taxpayers whose adjusted gross income exceeds $75,000 per year, $112,500 for heads of household, and $150,000 for joint returns.
- The amounts received are not taxable income.
- Tax Deadlines Extended:
- The 2019 income tax filing and payment deadlines for all taxpayers who file and pay their Federal income taxes on April 15, 2020, are automatically extended until July 15, 2020.
- This extension applies to all individual returns, trusts, and corporations.
- Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16, 2020. You will automatically avoid interest and penalties on taxes paid by July 15.
- Employee Retention Credit:
- Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee.
- Eligible employers are employers who were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended as a result of orders from an appropriate governmental authority related to the COVID-19 outbreak.
- For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit.
- Delay of Employer Payroll Taxes:
- Allows employers to delay payment of the employer’s share of Social Security payroll tax (6.2% up to the $137,700 wage base).
- Deferred 2020 payroll tax is to be paid over the next two years. Half of the amount due by Dec. 31, 2021, and the other half due by Dec. 31, 2022.
- Modification to Net Operating Loss Rules:
- Delay of TCJA changes to NOL carryback and carryforward rules.
- TCJA 80% taxable income limitation is delayed until 2021.
- Includes a five-year carryback for NOLs incurred in 2018, 2019, or 2020.
We are all experiencing these difficult times and the stimulus package is designed to help keep your whole team intact. If you would like any further information or would like to obtain one of these loans, please contact Dustin H. Devore, Nicole J. Harrell, L. Scott Seymour, or Jake L. Glasser.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.