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Astoria Strategic Wealth

C.A.R.E.S. - Part IV - Small Business Provisions

Small businesses have been one of the most affected entities in the wake of the Coronavirus, and business owners have faced many difficult choices in the past few weeks. One of the most impactful components of C.A.R.E.S. is its small business component. A summary of the enactments follow – we fully expect further details to come forward particularly on these provisions. As always, please work directly with your tax preparer to discuss your specific situation. We are also happy to discuss these options with you and your tax preparer. This is new for everyone – businesses, lenders, CPAs and financial advisors are all working together to learn about and leverage these opportunities.

There are two basic options - Loans and Credits. If you receive a Loan under the Payroll Protection Plan (PPP), you are NOT eligible for the Employee Retention Credit. There is also a provision for Payroll Tax Deferral which stands on its own regardless of whether the business opts for a credit, loan or neither.

Small Business Loans

The C.A.R.E.S. Act has granted small business loans to qualified businesses. These loans are fully guaranteed by the Small Business Administration (SBA) and offer small businesses a lifeline in these difficult times. The maximum loan amount is the lesser of $10 million or 2 ½ times the average monthly payroll cost of previous years (not including wages for employees making more than $100,000 per year). These loans have a maximum term of 10 years, a maximum interest rate of 4%, and an initial deferral of payments for 6 to 12 months making them very attractive loans for most business owners.

The most attractive feature of these loans is not their term or their rates though - it is their eligibility for forgiveness. If these loans are used to cover certain qualifying expenses such as payroll costs (which includes prorated amounts for employees making more than $100,000), utilities, rent, and group health insurance premiums, then 100% of the loan amount used on these costs during the eight weeks after the loan is issued are forgivable. Specifically note that Federal Payroll Taxes are NOT included in the forgiven calculation. Further, the debt that is forgiven for qualified uses is not added to income and is therefore not taxable.

There are eligibility requirements to receive these loans:

  • Business must have less than 500 employees or be of the standard size as deemed by the administration for that industry.
  • There must be a good-faith certification that the loan is necessary due to COVID-19 related conditions. (There is currently not a sample statement for this certification).
  • The business employs the same number of employees from February 15, 2020 to June 30, 2020 as they did in either:
    • The same four-month stretch in 2019 or,
    • The period from January 1, 2020 to February 15, 2020
  • Employees with compensation under $100,000 cannot have that compensation cut by more than 25%.

Employee Retention Credit

The Employee Retention Credit is a measure designed to help businesses avoid laying off workers in the wake of the Coronavirus. It is ultimately a credit against payroll taxes that is worth 50% of wages paid to each employee up to a maximum of $10,000 in wages per person.

A business can qualify for the credit in two ways. It qualifies if the business is suspended – partially or fully – by the government, and it qualifies by having more than a 50% decrease in revenue in a quarter. The business will qualify for the credit until the suspension ends, or when the revenue of the business for a quarter exceeds 80% of the revenue from that same quarter in 2019. If neither of these are met, then the business will qualify until the end of 2020.

The eligibility requirements for the wages used in this credit vary based on the size of the business. For businesses with more than 100 employees, only the wages paid to those employees who are retained but are not currently working for Coronavirus related reasons are eligible. For businesses with less than 100 employees, all wages are eligible.

Payroll Tax Deferral

The C.A.R.E.S. Act allows employers to defer their 2020 payroll taxes to help them retain viability in 2020. Employers will owe 50% of payroll taxes on December 31, 2021 and the remaining 50% of payroll taxes December 31, 2022. This does apply to self-employed taxpayers as well, but only to half of their self-employment tax (the employer half).

Net Operating Loss Changes

The C.A.R.E.S. Act made changes regarding treatment of net operating losses. Generally, net operating losses can only be carried forward as of the end of 2017. However, the C.A.R.E.S. Act allows net operating losses to be carried back (once again) for up to five years.

Also of note, the C.A.R.E.S. allows net operating losses to offset 100% of taxable income whereas previously the losses could only offset 80% of taxable income. This is another way to increase cash flow and liquidity to businesses in this difficult and extraordinary time.