In response to the coronavirus and the economic damage it has inflicted on our nation’s businesses, Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The following is a summary of the small business provisions in the legislation, designed to help business owners financially navigate these tough times.

SMALL BUSINESS – CARES ACT – SBA LOAN PROVISIONS

1. Paycheck Protection Program (PPP) by the SBA – Overview

The Small Business Administration (SBA) has offered loans that are designed to provide incentive to small businesses to continue to employ their workers during the stay at home requirements. On April 23, Congress and the Trump administration agreed to allocate $310 billion in additional funds for the Paycheck Protection Program. Key components of the PPP include:

  • A maximum loan amount of $10mm based on 2.5 times average monthly payroll.
  • No collateral, personal guarantees, prepayment penalties, credit elsewhere test or personal liquidity test.
  • Automatic deferment of payments for six months.
  • 2-year term.
  • 1% interest rate.
  • No customer origination fees or pre-payment penalty.

2. Loan Forgiveness under the PPP

  • The SBA will forgive the borrower’s obligation to repay principal and interest on PPP loans if the borrower maintains the same number of employees at the beginning of the loan, as they did for the 8-week period of February 15, 2019 to June 30, 2019.
  • Forgiveness is reduced proportionally if there is a reduction in number of employees or a reduction in salaries and wages.
  • Forgiveness is also reduced if the use of proceeds is for a purpose other than eligible payroll, payroll taxes, supply chain disruption, salaries, mortgage payments (interest only), utilities, rent, costs related to the continuation of health care benefits and interest on other debt obligations.
  • Employees laid off or furloughed between February 15, 2020 and April 27, 2020 are not considered when determining forgiveness amount if rehires bring the number of full-time equivalent hours on June 20, 2020 to the same number on February 15, 2020.

3. Economic Injury Disaster Loans & Emergency Economic Injury Grants

The SBA is also providing long-term loans for small businesses that have sustained economic injury and are located in a disaster-declared county or contiguous county.

  • An emergency advance of up to $10,000 to small businesses and private nonprofits harmed by COVID-19 after applying for an SBA Economic Injury Disaster Loan (EIDL) may be granted by the SBA.
  • To access the advance, you must first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, pay for sick leave, meet increased production costs due to supply chain disruptions or pay business obligations, including debts, rent and mortgage payments.
  • These funds may not be used for the same obligations as used under the PPP loan.
  • Interest rate for the loan portion is 3.75%.
  • Maximum loan amount is $2 million.
  • Repayment term is up to 30 years.

OTHER PROVISIONS OF THE CARES ACT

1. Small Business Debt Relief Program

This program will provide immediate relief to small businesses with non-disaster SBA loans and microloans. Under this program, the SBA will cover all loan payments on these loans, including principal, interest and fees, for six months. This relief will also be available to new borrowers who take out loans within six months of March 27, 2020, the day the CARES Act was signed into law by President Trump.

  • Borrowers may also apply for the PPP loan although this provision will not apply to the PPP loan received.

2. Loss Carryback Provision of CARES Act

5-year carryback of net operating losses (NOLs) are generally permitted for 2018, 2019 and 2020.

  • Provides a 5-year carryback for losses earned in 2018, 2019 or 2020, which allows firms to modify tax returns up to five years prior to offset taxable income from those tax years.
  • Suspends the NOL limit of 80 percent of taxable income. This means companies may deduct their NOLs to eliminate all of their taxable income in a given year, instead of having to carry forward any NOL beyond 80 percent of taxable income.
  • Pass-through business owners may use NOLs to offset their non-business income above the previous limit of $250,000 (single) or $500,000 (married filing jointly) for 2018, 2019 and 2020.
  • Elections to forgo the carryback must be made by the due date of filing the return for the first tax year ending after March 27, 2020.

3. Business Net Interest Deduction

The net interest deduction, which limits the amount of interest a business may deduct, has been increased for 2019 and 2020.

  • Deduction increased from 30% to 50% of earnings before interest, taxes, depreciation and amortization.

Payroll Tax Deferrals and Credits Available for Most Businesses

1. Payroll Tax Deferral

Employers and self-employed individuals may defer payment of the employer’s share of the social security tax (6.2%), which may be due in 2020 for payment due after the date of enactment.

  • This is an interest free loan.
  • Repayment of 50% of the deferred payroll taxes is due on December 31, 2021 with the balance due on December 31, 2022.
  • There is no cap.
  • This may not be deferred if already forgiven.

2. Employee Retention Payroll Tax Credit for Certain Businesses

The legislation allows for a refundable payroll tax credit of 50% of wages.

  • This applies to companies with operations fully or partially suspended due to COVID-19 or whose gross receipts decline by more than 50% compared to the same quarter of the previous year.
  • The credit is capped at $10,000 of compensation, including health benefits.
  • Credit is refundable to the extent it exceeds employers’ portion of social security taxes.
  • It is effective for payroll paid or incurred from March 13, 2020 through December 31, 2020.
  • Businesses should file form 7200 for Advance Payment of Employer Credits if credits are more than taxes are due.
  • The employer cannot receive credit for the same wages that they receive credits for under Families First Coronavirus Response Act.
  • Employers may not receive this credit if they received a loan under the PPP loan provisions.