To help ease burdens associated with the Coronavirus (COVID-19) pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Below you will find a summary of major points of interest for small businesses, including the Paycheck Protection Program, forgivable loans, employee retention credits, and payroll tax deferrals. Should you have any questions or wish to discuss the information presented below further, please reach out to us.
Paycheck Protection Program and Forgivable Loans
The Paycheck Protection Program assists small business owners impacted by the pandemic by providing forgivable loans to assist with making payroll and covering other expenses from February 15th to June 30th. You must apply for the loan by June 30, 2020 and no personal guarantees or collateral are required.
The Small Business Administration (SBA) is offering this forgivable loan program and will be guaranteeing the loans. The loans will be provided by existing SBA lenders and other lenders certified to offer such loans.
Qualifying for the Paycheck Protection Program
Eligible borrowers are required to make a good-faith certification that the loan is necessary due to uncertainty in current economic conditions caused by COVID-19.
Businesses, including sole proprietorships, will be eligible if they have fewer than 500 employees (including affiliated businesses), or if they meet the employee size standard under NAICS Code. Food service businesses may also apply if they employ fewer than 500 people per physical location.
Using Proceeds from the Small Business Loan
Under this program, lenders will generally be able to issue SBA 7(a) small business loans up to the lesser of $10 million, or 2.5x their average monthly payroll costs from the previous year (excluding annual compensation amounts over $100,000 per person).
The proceeds of such loans may be used to pay a variety of costs, including:
• Payroll costs, such as:
• Salary, wage, commissions
• Cash tips
• Vacation, parental, family, medical or sick leave
• Allowance for dismissal or separation
• Group healthcare benefits, including insurance premiums
• Retirement benefits
• State or local tax assessed on the employees’ compensation
• Mortgage interest (excluding amounts pre-paid)
• Other business interest incurred prior to February 15, 2020
Benefits of Loans Issued Under the Payment Protection Program
The possibility of having all or a portion of the loan forgiven
The amount spent during the first eight weeks after the loan is funded on basic operating expenses is eligible to be forgiven. These expenses include:
• Payroll costs, excluding prorated amounts for individuals with compensation greater than $100,000
• Rent pursuant to a lease in force before February 15, 2020
• Electricity, gas, water, transportation, telephone, or internet access expenses for services which began before February 15, 2020
• Group health insurance premiums and other healthcare costs
For the above amounts to be forgiven, the business must maintain the same number of employees from February 15, 2020 through June 30, 2020, as it had done during either the same period in 2019 or from January 1, 2020 until February 15, 2020. To the extent this requirement is not met, the amount eligible for forgiveness will be reduced proportionately. Additionally, if employees making less than $100,000 have their compensation reduced by more than 25%, as compared to the most recent quarter, then the loan amount eligible for forgiveness will decrease. Any debt forgiven pursuant to this provision is not included in taxable income for the year.
1% Fixed Interest Rate
All payments are deferred for 6 months, but interest continues to accrue over this period. Any unforgiven portion of the loan is due in 2 years.
Employee Retention Credit for Employers Subject to Closure Due to COVID-19
So long as the employer is not already receiving a Payment Protection Program loan, employers who had to close due to COVID-19 may be eligible for Employee Retention Credit. The Employee Retention Credit introduces a new refundable payroll credit and is meant to encourage businesses who have been impacted by the pandemic and economic downturn from making future layoffs.
Qualifying for the Credit
A company’s operations must have been fully or partially suspended during a quarter either as a result of government direction or due to a decrease of 50% or more in revenue (not profit), compared to the same quarter in 2019. Businesses that never have a year-over-year drop in quarterly revenue below 50% and that are not suspended or partially suspended because of government restriction will not be eligible for the credit.
Qualifying businesses will continue to obtain the credit until the earlier of:
• The end of 2020, or
• The sooner of either a quarter without a government-required suspension of operations, or the current quarter’s gross revenue exceeding 80% of gross revenue from the same quarter in 2019. The determinant quarter is dependent upon the method of qualification used to obtain the credit.
Calculating the Credit
This payroll tax credit is equal to the employer’s share of the 6.2% Social Security tax based on 50% of the first $10,000 in qualified wages (including health plan expenses) paid to each employee beginning on March 13, 2020, but note the following:
Businesses with 100 or fewer employees count all wages (up to the $10,000 maximum limit per employee) towards the credit.
For businesses with more than 100 employees, only wages paid to individuals (up to $10,000 per employee) who are not working during a government shutdown, or because business revenues have declined as outlined above, are eligible to count towards the credit. In both cases, wages include qualified health care expenses allocable to those wages.
Deferral of Payment of Payroll Taxes
In addition to potentially receiving the Employee Retention Credit above, the CARES Act allows employers to defer payment of the employer’s share of the 6.2% Social Security tax on wages. The deferral of payment occurs for wages paid beginning on March 27, 2020 and ending on December 31, 2020.
Employers who have debt forgiven by a Payment Protection Program loan described above are not eligible.
50% of the payroll taxes that would otherwise be due during this period may be deferred until 12/31/2021, and the remaining 50% is due by 12/31/2022. Self-employed persons may also defer this payment, at least with respect to the “employer equivalent” portion of their self-employment taxes.
Parkside will revise this post as more information becomes available.