Congress has passed a monumental economic stimulus package, the Coronavirus Aid, Relief and Economic Security (CARES) Act, created in response to the coronavirus pandemic. The $2 trillion stimulus package was designed to provide much needed aid to individuals and businesses who have been impacted by the ongoing health and economic crisis. Included in the CARES Act are several provisions that will help businesses retain their employees and increase liquidity. Here we highlight some of the key business provisions of the CARES Act.
Paycheck Protection Program and Loan Forgiveness
A program that offers 100% federally backed loans to small businesses with an interest rate of 1% over a 2 year term. There are no fees or collateral requirement and there is also a deferment of payment of 6 months. This program will be available to small businesses and 501(c)(3) organizations with fewer than 500 employees as well as to sole proprietors and independent contractors. Maximum loan amount is the lesser of [2.5 x monthly average payroll costs during prior 1 year period] or $10 million. Proceeds can be used for:
-cost related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
-interest payments on any mortgage;
-rent and utility payments; and
-interest payments on any other debt obligations that were incurred before February 15, 2020.
Loan forgiveness is available equal to amounts paid for payroll costs, mortgage interest, rent and utilities during the 8 week period after the loan origination date. However, loan forgiveness will be reduced accordingly if there is a reduction in the number of employees or reduction in wages. To find out more about this program, visit the Paycheck Protection Program FAQs for Small Businesses document from the U.S. Senate Committee on Small Business & Entrepreneurship. An updated FAQ page on the Paycheck Protection Program is also available on the U.S. Department of the Treasury website.
Employee Retention Credit
A refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose:
1. operations were fully or partially suspended, due to a COVID-19-related shut-down order, or
2. gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
Delay of Payment of Employer Payroll Taxes
Employers and self-employed individuals can defer payment of their employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.
Technical Amendment Regarding Qualified Improvement Property
Enables businesses to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. The provision, which corrects an error in the Tax Cuts and Jobs Act, not only increases companies’ access to cash flow by allowing them to amend a prior year return, but also incentivizes them to continue to invest in improvements as the country recovers from the COVID-19 emergency.
Modifications of Net Operating Losses/Modification of Limitation on Losses for Taxpayers Other Than Corporations
The provision relaxes the limitations on a company’s use of losses. Net operating losses (NOL) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.
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As always, Lanigan, Ryan, Malcolm & Doyle will continue to monitor this evolving situation and add updates to our new COVID-19 resource center as they become available. As an “essential” business in the state of Maryland, we will continue to work for clients to meet upcoming deadlines, while emphasizing the safety of both our clients and our team. Please know that your Lanigan, Ryan team members are always available for questions.