May 15 Update: The SBA has released clarifying guidance on good-faith certification for the PPP.
May 11 Update: The IRS has released new guidance concerning employers’ eligibility for the Employee Retention Credit and furloughed employees.
April 30 Update: Additional guidance regarding the denial of tax deduction for expenses paid with forgiven PPP loan proceeds. Update on timing of PPP loan forgiveness.
April 23 Update: Additional guidance issued for the $300 charitable deduction.
April 15 Update: Added more information on charitable deductions.
April 3 Update: The SBA has issued new information on PPP loan rates.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020, providing much needed relief for individuals and businesses affected by the COVID-19 pandemic.
The $2 trillion bill includes rebates for individuals, loans and funding for businesses, and tax provisions.
Following are key points related to the CARES Act (information compiled from the U.S. Senate Committee on Small Business & Entrepreneurship, the SBA’s Owner’s Guide to the CARES Act, and the section-by-section document via help.senate.gov). The information provided here will be updated as clarifying guidance is issued, so please check back often.
Help for Businesses, Nonprofits, & Self-Employed Individuals
Paycheck Protection Program (PPP)
The PPP was created for small employers, self-employed individuals, and gig workers to help prevent workers from losing their jobs, as well as to help sustain small businesses who are seeing significant economic losses due to COVID-19. The government guarantee of these loans has been increased to 100% through December 31, 2020.
According to the U.S. Senate Committee on Small Business & Entrepreneurship, eligibility is as follows:
- Businesses and entities must have been in operation on February 15, 2020.
- Small business concerns, as well as any business concern, a 501(c)(3) nonprofit organization, a 501(c)(19) veterans organization, or Tribal business concern described in section 31(b)(2)(C) that has fewer than 500 employees, or the applicable size standard in number of employees for the North American Industry Classification System (NAICS) industry as provided by SBA, if higher.
- Individuals who operate a sole proprietorship or as an independent contractor and eligible self-employed individuals.
- Any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a NAICS code beginning with 72, for which the affiliation rules are waived.
- Affiliation rules are also waived for any business concern operating as a franchise that is assigned a franchise identifier code by the Administration, and company that receives funding through a Small Business Investment Company.
There are limitations on borrowers from receiving benefits under the PPP and an Economic Injury Disaster Loan (EIDL) related to COVID-19 through the SBA. There can be no duplication of funds. If a borrower took out an EIDL between February 15, 2020 and June 30, 2020 and wants to refinance that loan into a PPP loan, the outstanding loan amount would be added to the payroll sum.
Highlights of the PPP
- Loans are available through June 30, 2020. The covered loan period would be beginning on February 15, 2020 and ending on June 30, 2020.
- Only one PPP loan per entity.
- Eligible lenders for PPP include all current SBA 7(a) lenders.
- The maximum loan amount is $10 million. There is a formula to determine the size of the loan as it relates to payroll costs incurred.
- On May 13, the SBA released guidance clarifying that good-faith certification is deemed met if the original PPP loan is below $2 million.
- Loan forgiveness of up to 8 weeks of payroll and other eligible expenses based on employee retention and salary levels.
- Deferment of 7(a) loan payments are allowed for at least six months and not more than a year.
- Borrower and lender fees, collateral and personal guarantee requirements, and the credit elsewhere test for funds are all waived.
- For any amounts not forgiven, the maximum term is 10 years and the maximum interest rate is 4%. (These rates have subsequently been set by the SBA as a term of two years and an interest rate of 1%.) However, there will be zero loan fees and zero prepayment fee (SBA will establish application fees caps for lenders that charge).
- You must apply through your PPP lender for forgiveness on your loan within 90 days after the end of the eight-week “covered” period for qualified expenses to be eligible for loan forgiveness.
- Per IRS guidance issued on April 30, 2020, Notice 2020-32: “…no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.”
Coordination with Existing 7(a) Loans
Borrowers may apply for PPP loans and other SBA financial assistance, including Economic Injury Disaster Loans (EIDLs), 7(a) loans, as well as receive investment capital from Small Business Investment Corporations (SBICs). However, you cannot use your PPP loan for the same purpose as your other SBA loan(s). In other words, there can be no duplication of funds.
Economic Injury Disaster Loans (EIDLs) as Expanded by the CARES Act
The purpose of EIDL is to provide small businesses with working capital loans up to $2 million as a result of a presidential-declared emergency. The period of coverage is January 1 –December 31, 2020.
The use of these funds is limited to working capital needs or normal operating expenses through the recovery period. The loan is determined by the amount equal to the economic damage incurred to the business as a result of COVID-19.
Regarding loan forgiveness, $10,000 of the loan is eligible to be forgiven. The interest rate for small businesses is 3.75% and the interest rate for nonprofits is 2.75%.
Eligibility for EIDL
The following with 500 or fewer employees:
- Sole proprietorships, with or without employees
- Independent contractors
- Cooperatives and employee owned businesses
- Tribal small businesses
Emergency Economic Injury Grants After Applying for EIDL
The purpose of the grant is to provide an emergency advance, not to exceed $10,000, to small businesses and private nonprofits harmed by COVID-19. The grant is to be distributed within three days of applying for an EIDL.
The first step is to apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance, but it must be used for payroll and other operational expenses, including pay for sick leave, increased production costs due to supply chain disruptions, or business obligations, including debts, rent, and mortgage payments.
Small business concerns and small agricultural cooperatives that meet the applicable size standard for SBA are also eligible, as well as most nongovernmental nonprofits (under IRC Sec. 501(c), (d), or (e)), other than religious organizations, of any size.
Eligibility for Economic Injury Disaster Grant
Those entities eligible for an EIDL and who have been in operation since January 31, 2020, when the public health crisis was announced.
Tax-Related Provisions for Businesses and Nonprofits
Employee Retention Credit (ERC)
The ERC is a refundable payroll tax credit for 50 percent of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in wages and compensation paid by the employer to an eligible employee.
Wages do not include those considered for payroll credits for required paid sick leave or required paid family leave, nor for wages considered for the employer credit for paid family and medical leave (IRC sec. 45S).
On May 7, the IRS said they will allow employers to remain eligible to claim the tax credit if the company is continuing to provide health insurance to their furloughed employees.
The credit is not available to employers receiving assistance through the Paycheck Protection Program.
The credit is provided through December 31, 2020.
- Employers, including nonprofits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings.
- Employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
- Wages of employees who are furloughed or face reduced hours as a result of their employer’s closure or economic hardship.
- For employers with 100 or fewer full-time employees, all employee wages are eligible, regardless of whether an employee is furloughed.
For more in-depth coverage of the ERC, see our full article here.
Delay of Employer Payroll Tax Payments
This provision allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments: one at the end of 2021, the other at the end of 2022. Deferral is not provided to employers that receive loan forgiveness under the Paycheck Protection Program.
Payroll taxes that can be deferred include the employer portion of FICA taxes, the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer FICA rate), and half of SECA tax liability.
Modification of Net Operating Losses (NOL)
The provision relaxes the limitations on a company’s use of losses. An NOL from tax years beginning in 2018, 2019, or 2020 can be carried back for five years. This new law will also temporarily remove the taxable income limitation on the use of the NOL and allow the 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.
Corporate Alternative Minimum Tax (AMT) Credit Refunds
Corporate AMT was repealed as part of the Tax Cuts and Jobs Act; however, corporate AMT credits were available as refundable credits over several years, ending in 2021. The provision accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.
Modification of Limitation on Business Interest
Tax reform in 2017 introduced a new limitation on the ability to deduct business interest expense. The limitation was 30% of “adjusted taxable income” (ATI) plus business interest income plus floor plan financing interest expense. ATI is taxable income adjusted for business interest expense, net operating loss deduction and several other income and expense items.
The CARES Act temporarily increases the amount of business interest expense taxpayers are allowed to deduct from the 30% limitation discussed above to a new 50% limitation for both 2019 and 2020.
For 2019, this does not apply to partnerships in the same manner. Rather, the increased deduction is captured on a partner’s 2020 tax return.
Qualified Improvement Property Amendment
The provision enables businesses, especially those in the hospitality industry, to immediately write off costs associated with improving facilities, instead of having to depreciate those improvements over the 39-year life of the building. The rule change, 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.
Tax-Related and Other Information for Individuals
U.S. residents will receive a $1,200 rebate ($2,400 married filing jointly) if they have an adjusted gross income up to $75,000 ($150,000 married filing jointly), a social security number, and are not dependents. Additionally, eligible individuals will receive up to $500 per child.
The IRS will be using 2019 tax returns, if filed, or 2018 tax returns, if 2019 is not filed. For many, no action will be required in order to receive their rebate check.
The rebate will be reduced by $5 for every $100 that exceeds the maximum ($75,000 individual or $150,000 married filing jointly). Individuals are not eligible for the rebate if their income exceeds $99,500 ($146, 500 for head of household filers with one child or $198,000 for joint filers with no children).
Waivers Related to Retirement Funds & Plans
The 10% early withdrawal penalty is waived for distributions up to $100,000 made on or after January 1, 2020 from qualified retirement accounts for coronavirus-related purposes. Additionally, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. The provision also provides flexibility for loans from certain retirement plans for coronavirus-related relief.
The CARES Act incentivizes making cash and certain food inventory charitable contributions during 2020. Cash contributions made to governmental units, private operating foundations, conduit private foundations, and most public charities, including churches, will be eligible for increased tax deductions, also known as qualified contributions. Cash contributions made to donor-advised funds, supporting organizations, and private non-operating foundations will not be eligible for the provisions. For non-qualified donations, such as noncash gifts or gifts made to ineligible charities, the pre-CARES Act provisions still apply.
Here is a summary of the changes:
- Up to $300 Cash Contributions Treated as Above-the-Line Deduction – Individuals who do not itemize their deductions will be able to take a direct deduction up to $300 for qualified contributions as an offset to taxable income. The $300 deduction is per tax-filing unit. Thus, the deduction is limited to $300, even for taxpayers filing as married filing jointly.
- Adjusted Limitations on Charitable Contributions – Individuals who itemize their deductions will not have an adjusted gross income (AGI) limitation for qualified contributions during 2020. The deduction is capped at the individual’s charitable base, and the excess contributions may be carried forward to up to five years. Thus, this will lift the otherwise applicable 50% or 60% AGI limitation for qualified contributions. Corporations benefit from an increase of 10 to 25% in the charitable contribution limitation for qualified contributions. For all taxpayers with qualified contributions, an election will be required to apply the preferential treatment. Elections related to contributions from S corporations or partnerships will be made at the shareholder or partner level. Lastly, for trade or businesses who contribute food inventory to charities, the contribution limit is increased from 15% to 25% for both non-corporate and corporate taxpayers.
Please contact us if you need assistance in assessing any impact on your particular situation.
© Clark Nuber PS, 2020. All Rights Reserved