I am writing this post on March 28th, the morning after the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. I hope to provide you with a quick perspective on how this legislation might benefit your business.
Several provisions of this law will provide economic relief for small businesses, non-profits, and other business owners. There are two basic types of benefit: small loan programs guaranteed by the Small Business Administration (SBA), and changes to tax law to reduce taxation and improve cash flow. Broadly speaking, they are crafted to prevent employees being laid off, and to provide direct financial assistance to business owners, including an immediate cash grant of up to $10,000 for businesses operating within declared disaster areas.
For some of you, time is likely of the essence, so I’ll tackle these items roughly in order of how soon you could obtain financial relief.
Please note my usual caveat: I am not a CPA, tax attorney, or authorized tax preparer. You should consult with your financial advisor if you decide to take advantage of these benefits. What follows is my interpretation of the law based on sources publicly available as of this morning. Your mileage may vary.
1. Economic Injury Disaster Loans (EIDLs). This is an extension of the SBA’s existing disaster loan program, with relaxation of many eligibility requirements. All small businesses, non-profits, sole proprietors and independent contractors operating within a declared disaster area can apply for loans of up to $2 million, with an interest rate of 3.75% and a maximum term of 30 years. Loans under $200,000 do not require any personal guarantee. In addition, applicants can request emergency cash grants of up to $10,000, payable within three days, to cover business costs such as providing paid leave, maintaining payroll, increased supply costs, mortgage or lease payments, or repaying debts that cannot be met due to revenue losses. These advances must be used for authorized costs, but do not need to be repaid, whether the EIDL loan is approved or not. Existing EIDLs can be refinanced under these new provisions. Business owners can apply for EIDLs directly with the SBA. See the SBA website for more information (https://www.sba.gov/disaster/apply-for-disaster-loan/index.html)
2. Paycheck Protection Loans (PPLs). This is a new type of loan guaranteed by the SBA, providing emergency non-recourse loans of up to 2.5 times your monthly average payroll expenses, up to a maximum of $10 million with an interest rate of 4%. No personal guarantee or collateral is required. Fees, principal, and interest will be deferred for 6 to 12 months. Loan amounts used to cover 8 weeks’ worth of payroll costs, mortgage interest, rent, or utility payments will be forgiven, so long as the business continues paying employees at normal levels for eight weeks. (Funds cannot be used to cover individual employee compensation above $100,000, or compensation of employees outside the US.) PPLs are available to small businesses and nonprofits with fewer than 500 employees, as well as sole proprietors and freelance/gig economy workers. The law now waives eligibility rules that previously excluded some businesses in the hospitality and restaurant industries, franchises, and recipients of SBIC financing. These loans will be offered and administered through an expanded set of SBA approved lenders. As this is a new program, no information is available yet from the SBA, which has up to 30 days to issue regulations and provide guidance.
Note: Business owners can apply for both an EIDL and a PPL, so long as the costs covered by each loan do not overlap (i.e. no “double-dipping”).
3. Increased limit for SBA Express Loans. This is a type of loan under the existing 7(a) program that offers an accelerated turnaround time of 36 hours for SBA review. The maximum amount for these loans has been increased from $350,000 to $1,000,000.
4. Deferral of existing SBA loans. Businesses with existing SBA loans will be allowed to defer payments for six months.
5. Tax provisions. Here we are getting well outside my area of expertise, but I will summarize key changes that may benefit your business. Please consult with a tax advisor to determine if these are applicable to your situation.
- Net operating loss carrybacks. If your company has unused net operating losses from 2018, 2019 or 2020, and paid taxes in one of the five preceding tax years, you may be able to file immediate amended returns seeking refunds in the amount of those losses.
- Deferral of payroll taxes. The employer’s share of Social Security payroll taxes (6.2%) for the remainder of 2020 can be deferred, with 50% due to be paid by the end of 2021, and the other half by the end of 2022. Companies that apply for a PPL (see #2 above) are NOT eligible for this deferral.
- Employee retention payroll tax credit. Employers whose businesses were ordered to fully or partially close down due to COVID-19, or whose gross receipts declined by 50% or more, may receive a payroll tax credit of up to $5,000 per employee.
- Increase in interest expense deduction. For 2019 and 2020, companies can now deduct the costs of borrowing up to 50% of their earnings, versus the prior limit of 30%. They may also use their 2019 earnings as the basis to determine the limit for 2020 deductions.
- Accelerated refunds of alternative minimum tax. This provision speeds up the refunding of prior AMT payments by corporations, which are no longer subject to AMT under the 2017 tax cut bill. Corporations with outstanding credits for AMT refunds may now apply to recoup those funds immediately rather than spreading them out over a number of years.
- Accelerated depreciation of commercial property improvements. This provision corrects a technical error in the 2017 tax cut legislation, allowing businesses that made interior improvements to non-residential buildings since 2018 to enjoy 100% bonus depreciation on those costs. This could be particularly beneficial to retail companies, including restaurants and hospitality businesses that made these kinds of improvements.
- Automatic income tax extension. This one is not part of the CARES Act, but rather was announced by the IRS on March 20th. In case you had not heard, the IRS has provided an automatic postponement of the deadline to file or pay personal income taxes until July 15, 2020.
So there you have it. I know this is a lot of information to digest, and I hope you found it helpful. If you’d like to discuss further, I’d be happy to set up time to chat. You can use the calendar link below to book time on my calendar.
For more information:
https://www.uschamber.com/co/start/strategy/cares-act-small-business-guide
https://www.steptoe.com/en/news-publications/president-trump-signs-cares-act-into-law.html
To read the full text of the CARES Act: