The following provisions of the CARES Act may be of particular interest.
Paycheck protection program
The Act increases eligibility for certain small businesses and nonprofit organizations. During the covered period of February 15, 2020 and ending on June 30, 2020, any business or nonprofit, generally, which employs not more than 500 employees shall be eligible to receive a loan under section 7(a) of the Small Business Act (SBA). For businesses whose industry has an SBA standard size limit in excess of 500 employees, that higher standard number is used as the employee limit. The term business for this provision includes self‐employed individuals, independent contractors, and sole proprietors. The maximum loan amount under this Act is limited to the lesser of $10,000,000 or a calculation utilizing the borrower’s payroll costs as factors for the size of the loan. Loan proceeds may, in addition to the allowable uses currently in place for 7(a) loans, be used for payroll support, employee salaries, payments of interest on any mortgage obligation, rent, utilities, and interest on any other debt obligations that were incurred before the covered period. Proceeds may not be used to make principal payments or prepayments on mortgages or other debt obligations. Authority to make these loans are delegated to current 7(a) lenders with instructions to only consider for approval whether the borrow was in operation on February 15, 2020 and either had employees for whom the borrower paid salaries and payroll taxes or had paid independent contractor as reported on Form 1099‐MISC. The government guarantee of 7(a) loans is increased to 100 percent through December 31, 2020. Effective January 1, 2021, the guarantee returns to 75 percent for loans exceeding $150,000 and 85 percent for loans equal to or less than $150,000. Borrowers may defer payments for not less than 6 months and not more than one year. The personal guarantee requirements are waived and no collateral will be required. The interest rate for these loans shall not exceed 4 percent.
This provision establishes that a 7(a) borrower shall be eligible for loan forgiveness for an amount equal to the cost of maintaining payroll continuity during the covered period, which is the period beginning on February 15, 2020 and ending on June 30, 2020. Amounts forgiven under this provision are treated as a default and shall not exceed the sum of the total payroll costs incurred during the covered period, the amount of payments made during the covered period on interest payments on debt obligations that were incurred before the covered period, payments on rent obligations, and utility payments. Amounts eligible for forgiveness may be further limited, proportionally, by any reduction in employees retained compared to the prior year and by the reduction in pay of employees beyond 25 percent of their prior year compensation. Cancelled indebtedness under this section of the Act shall be excluded from gross income for federal income tax purposes.
Emergency EIDL Grants
The Act expands eligibility for access to Economic Injury Disaster Loans (EIDL) to include Tribal businesses, cooperatives, ESOPs with fewer than 500 employees, or any individual operating as a sole proprietor or an independent contractor during the covered period of January 31, 2020 to December 31, 2020. For any EIDL loan made in response to COVID‐19 before December 31, 2020, the SBA shall waive any personal guarantee on advances and loans below $200,000. This provision also establishes an Emergency Grant which allows an entity who has applied for an EIDL loan due to COVID‐19 to request an advance on that loan, not to exceed $10,000, which the SBA must distribute within 3 days.
Special Rules for Retirement Funds
Tax‐Favored Withdrawals from Retirement Plans
The Act waives the 10 percent early withdrawal penalty under Internal Revenue Code (IRC) Sec. 72(t) for any coronavirus‐related distribution. The amount of distributions qualifying for this relief is limited to $100,000. A coronavirus‐related distribution means any distribution from an eligible retirement plan to an individual who is diagnosed with COVID‐19, whose spouse or dependent is diagnosed with such virus or disease, or who has experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced due to the virus, being unable to work due to lack of child care due to the virus, closing or reducing hours of a business owned or operated by the individual due to the virus, or other factors as determined by the Secretary of Treasury. The coronavirus‐related distributions may be repaid up to an amount equal to the distribution within three years and it shall be treated as having been made within 60 days of the distribution. In the case of any coronavirus‐related distribution, unless the taxpayer elects otherwise, any amount required to be included in gross income of the taxpayer shall be so included ratably over the three‐year period beginning with the year of distribution.
Loans from Qualified Plans
The limit on loans from qualified plans has been increased to $100,000 from $50,000 for loans made during the 180‐day period from the Act’s passing. The due date of the loan shall be delayed for 1 year. Individuals meeting the qualifications of relief for coronavirus‐related distributions are eligible for the increase in plan loan limits and delayed payments.
Employee Retention Credit for Employers Subject to Closure due to COVID‐19
The provision provides 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 calculated on 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
This provision allows employers and self‐employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. This deferment applies to taxes on compensation paid from the date of enactment through December 31, 2020. The deferred taxes must 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.
Emergency Paid Sick Leave Act Limitation
This provision amends the recently enacted Emergency Paid Sick Leave Act to limit the compensation required to be paid by the employer to an employee on leave for qualified reasons to $511 per day and $5,110 in the aggregate, or $200 per day and $2,000 in the aggregate, depending upon the reason for leave.
Contact your H2R CPA liaison or reach out to us at 412-391-2920 or email@example.com if you would like to discuss business strategy during these challenging times.