Corporate Alert: 3 Actions Your Small Business Can Take Immediately and Other Key Updates to the CARES Act
By Shelby L. Ranier & Terry W. Vincent on March 31, 2020
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act), providing $2 trillion in stimulus funding. The CARES Act includes several measures to help small businesses including forgivable loans. Below is a breakdown of ways your business can use the CARES Act for COVID-19 relief:
Paycheck Protection Loan: Small businesses (companies with 500 or fewer employees) can apply for the loan through banks that make the loans on behalf of the Small Business Administration (SBA), which administers the Paycheck Protection Loans program. Certain businesses with larger headcounts also qualify. Significant features of the loan program include:
- The loan amount cannot exceed $10 million and is the lesser of: (i) 2.5 multiplied by the trailing 12-month average monthly payroll PLUS the amount outstanding under the SBA’s disaster loan program, or (ii) for businesses not in existence during the period February 15, 2019, through June 30, 2019, 2.5 multiplied by the average monthly payroll for the period January 1 through February 29, 2020, PLUS the amount outstanding under the SBA’s disaster loan program.
- SBA has no recourse against any business owner and there are no personal guarantees.
- No debt service payments for at least six months and not more than one year.
- Payroll costs include: (i) employee compensation that is salary, wage, commission, or similar compensation; (ii) payment of cash tips or equivalent; (iii) payment for vacation, parental, family, medical, or sick leave; (iv) payment required for the provisions of group health care benefits, including insurance premiums; (v) payment of any retirement benefit; or (vi) payment of state or local tax assessed on the compensation of employees.
- Amounts forgiven by the lender are not taxable to the borrower or business owner.
- The amount of loan forgiveness will be reduced if the business reduces headcount or salaries and wages.
Delay in Payment of Employer Payroll Taxes: Payroll taxes due to the IRS through the end of 2020 can be deferred.
- 50% of those deferred payments due by December 31, 2021, and the remaining 50% due by December 31, 2022.
- Taxpayers that had indebtedness forgiven under the CARES Act are excluded from this benefit.
Delay of Estimated Tax Payments for Corporations: This delay will provide critical cash flow to help businesses maintain operations and continue paying employees during the COVID-19 emergency.
- The provision allows corporations to postpone estimated tax payments due after the date of enactment until October 15, 2020.
- There is no cap on the amount of tax payments postponed.
Tax Relief for Large Corporations:
In the event your business doesn’t qualify for relief as a “small business”, there are other tax credits and benefits your business may be able to avail itself of:
- Relaxation of limitations on net operating losses (NOLs): This Act relaxes NOL carryforward/carryback limits by providing that a loss from 2018, 2019, or 2020 can be carried back five years. The Act also temporarily removes the taxable income limitation to allow a NOL carryforward to fully offset income.
- Relaxation of limitations on excess business losses of noncorporate taxpayers: The Act relaxes the excess business loss limitations applicable to losses from pass-through businesses and sole proprietorships so that their owners can benefit from the NOL carryback rules noted above.
- Relaxation of limitation on business interest: The Act temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns by increasing the 30% limitation to 50% of the taxable income for 2019 and 2020. However, entities taxed as partnerships do not use the 50% limit for 2019. Instead, interest disallowed at the partnership level is allocated to the partners and suspended. For 2020, 50% of the partner’s suspended interest becomes deductible, and the remaining 50% remains suspended until the partnership allocates excess taxable income or excess interest income to the partner.
- Modification of credit for prior year minimum tax liability of corporations: The Act accelerates the ability of companies to recover those corporate AMT credits that were made available as refundable credits over several years, ending in 2021 as part of the 2017 Tax Cuts and Jobs Act.
- Immediate expensing of qualified improvement property: The Act enables businesses, especially 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. This change is retroactive to January 1, 2018.
For more information about the programs and initiatives available from the SBA and tax provisions outside the scope of SBA, please see the Small Business Owner’s Guide to the CARES Act.