What provisions in the CARES Act affect my business?
In regard to businesses matters, the CARES Act (the “Act”) has three primary groups of provisions that are relevant to consider for most businesses. First, the paycheck protection program allows business to take out loans from lenders that are backed by the small business administration. These loans can be secured with more relaxed requirements than standard SBA loans and loan amounts used for certain costs are subject to forgiveness. Second, the Act provides for deferral of payroll taxes and allows a refundable credit on payroll taxes for companies that retain their employee through the crisis. Finally, the Act allows businesses more favorable income tax provisions for the 2020 tax year, expanding several areas of deductions and carrybacks.
Paycheck Protection Program
What businesses are eligible for the paycheck protection program?
Generally, any business with fewer than 500 employees is eligible for the paycheck protection program. However, there are additional provisions that can allow some businesses with greater than 500 employees to participate as well. The Act waives or removes many of the more rigorous requirements for standard SBA loans.
What if I already fired employees or reduced pay?
The paycheck protection program reduces (but does not eliminate) the amount of forgivable debt for employers who fire employees or reduce their pay. However, employers have a grace period to rehire or readjust compensation to avoid this reduction in loan forgiveness.
What amounts can be forgiven?
Loan amounts through the paycheck protection program that are used by businesses to cover payroll costs, pay interest on certain mortgages, pay certain rent obligations, and/or pay utility costs are subject to forgiveness. However, only amounts expended in the first 8 weeks of the loan can be forgiven.
Is my business disqualified from the paycheck protection program if we already have an economic injury disaster loan?
Not necessarily. The answer to this question depends on the purpose for which the economic injury disaster loan was secured. The two loans are not per se mutually exclusive.
Can I still take advantage of the payroll tax benefits of the Act if I get a paycheck protection loan?
Yes and No. The deferral of payroll taxes under the Act is only allowed for businesses that do not have any debt forgiven under the paycheck protection program. Thus, a business can still defer payroll taxes if the business takes a loan but does not take advantage of the loan forgiveness option. The employee retention credit, on the other hand, is not available to any business that receives a loan – regardless of whether any loan amounts are forgiven.
Are there any other relevant changes to the SBA loan programs?
Yes. Under the Act, for companies that qualify for 504 or 7(a) loans, the SBA will pay six months of principal and interest on those loans. These loans are subject to the traditional SBA requirements but the benefits may have significant advantages to eligible businesses.
Payroll Tax Credits And Deferral
What businesses are eligible for the employee retention tax credits?
Generally, the employee retention credit is available for any business that has been operating in the 2020 calendar year and has either been required to fully or partially suspend its operations due to government orders or has suffered a loss of 50 percent of its gross receipts during the COVID-19 outbreak.
What does the employee retention tax credit entail?
The employee retention credit allows businesses a refundable tax credit amounting to 50 percent of the “qualified wages” paid by the business to its employees during the relevant period. However, this credit is capped to the first $10,000 of wages per employee and only applies to certain specified wages. Further, whether a business is currently taking other tax credits can have an impact on this tax credit program.
What businesses are eligible for deferral of payroll taxes?
The Act does create any general restrictions on which businesses are eligible for the deferral of payroll taxes under the Act. However, as noted above, a business that has received debt forgiveness under the under the paycheck protection program cannot defer payroll taxes.
When will deferred payroll taxes be paid?
Under the Act, payroll taxes are deferred such that 50 percent of the payroll taxes from 2020 will be paid in 2021 and the other half will be paid in 2022. As such, businesses should be aware that deferring payroll taxes in 2020 will substantially increase their payroll tax burdens in the two following tax years.
Can I still apply for a paycheck protection program loan if I defer payroll taxes or take an employee retention credit?
Maybe. The Act does not specifically prohibit businesses who have deferred payroll taxes or taken a payroll retention credit from applying for the paycheck protection program. However, the Act does indicate that the employee retention credit does not apply to a businesses that receives a loan and that payroll deferral is not applicable to businesses who receive loan forgiveness. A likely result is that businesses who initially take advantage of the employee retention credit and payroll deferral will be subjected to back pay those amounts if and when they receive a loan or forgiveness, respectively. Our firm is hopeful that the pending regulations from the Internal Revenue Service and other agencies will clarify the answer to this question.
Your attorneys at Mika Meyers are up-to-date on the recent legislation and are following the situation closely. If you believe that this legislation will aid or affect your business, our attorneys are standing by to assist.