Dear Clients and Friends,
The passing of the CARES Act on Friday provides relief to small businesses through programs administered by the Small Business Administration (SBA) and other important provisions for relief to individual taxpayers.
Because each business is different, each should consider the various assistance programs available to determine which fit it best, including other programs and benefits. In addition, some states may have their own loan, grant and incentive programs.
The CARES Act establishes The Paycheck Protection Program providing up to $10 million available to businesses with less than 500 employees. These loans are intended to be forgivable if the borrower maintains employees and otherwise complies with the CARES Act.
The maximum loan amount available is 2.5 times eligible monthly costs. Payroll costs are average monthly payroll costs based on February 15, 2019 to June 30, 2019 and include:
- Salaries, wages, commissions, or other compensation, up to $100,000 annually per employee;
- Vacation, parental, family, medical or sick leave (excluding sick or family leave credits allowed by the Families First Coronavirus Response Act);
- Separation or termination pay;
- Group health care benefits, including insurance premiums;
- Retirement benefits; and
- Compensation for self-employed individuals or independent contractors, up to $100,000 annually).
Loans can be used to pay the payroll costs defined above, as well as mortgage interest, rent, utilities and interest on debts incurred before February 15, 2020.
Other key loan provisions include:
- Maximum interest rate of 4 percent per annum;
- Loans are made by SBA approved lenders;
- In reviewing the application, a lender must evaluate whether the borrower was in business on February 15, 2020, and had employees and paid salaries and taxes, or had independent contractors and filed a 1099-MISC for them;
- Guarantee fees are waived;
- Loans are non-recourse to the borrower. The CARES Act specifically provides each loan is non-recourse to the shareholders, members and partners of the borrower;
- The borrower does not have to demonstrate it was unable to secure financing elsewhere before qualifying for SBA financing;
- No collateral requirement or prepayment penalties; and payments are deferred for six to twelve months.
The CARES Act provides for loan forgiveness of the loan amount used to make those payments during the ten weeks after receiving a loan. However, the loan forgiveness is reduced proportionately for any reduction in the average number of full-time employees or
in total compensation for any employee by more than 25%. A temporary reduction in workforce or salaries made between February 15th and April 26th (30 days from enactment) would not reduce loan forgiveness if the employer returns to prior workforce and salary levels by June 30, 2020.
The amount forgiven is not considered taxable income to the borrower.
Any amount outstanding after considering the amount forgiven will be repayable over a term not to exceed 10 years. The borrower must apply to the lender for loan forgiveness with supporting documentation.
The CARES Act also includes other tax provisions. Some highlights include:
- Direct payments to taxpayers up to $1,200 for individuals, $2,400 for married couples, and $500 per dependent child, subject to limitations;
- Waiver of Required Minimum Distributions during 2020;
- Penalty free early withdrawal of retirement funds up to $100,000 for any 2020 withdrawals;
- Net operating losses arising in 2018, 2019 or 2020 can be carried back five years; and
- Payroll tax relief for employers to delay payment of 2020 payroll taxes.
The CARES Act is large at almost 900 pages of legislation. We continue to review and analyze the detail and will keep you updated on developments. Please continue to stay safe and healthy. Contact us with your questions and how we may provide help.