A $2 trillion+ stimulus package has been signed into law, aimed at combating the economic consequences of the coronavirus pandemic. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides sweeping financial relief for individuals and businesses. It includes $377 billion earmarked to help small businesses retain their employees and stay afloat through this challenging period.
Here is a brief summary of the small business relief elements of the CARES Act, including:
- Loans for Small Businesses
- Loan Forgiveness
- Employer Tax Credit for Employee Retention
- Employer Social Security Tax Deferment
Loans for Small Businesses: The CARES Act increases the availability of loans under the Small Business Act (“SBA”) through the Paycheck Protection Program (PPP). The covered loan period is February 15, 2020 to June 30, 2020. Complete deferment available on both principle and interest for six months, which may extend to one full year.
How to apply: The SBA has directed businesses to this website for information.
- Businesses with no more than 500 employees (“Small Business Concerns” and “Other Business Concerns” as defined by the SBA)
- Hospitality or food service companies [with no more than 500 employees at each separate physical location]
- Franchises – all sectors - with no more than 500 employees
- Sole-proprietors, independent contractors and other self-employed individuals
- Non-profits [(501(c)(3); 501(c)(19) Veterans Organizations, Tribal business concerns]
Loans can be used for the following purposes during the 8-week period that begins on the date of the origination of the loan:
- Rent or lease costs, mortgage interest payments (not prepayments), utility charges;
- “Payroll costs” which include: Employee salary, wages, commissions or similar compensation (generally capped at $100,000/employee); cash tips or equivalents; costs related to continuation of group health care benefits during periods of paid sick, medical or family leave, “and “insurance premiums;” allowance for dismissal or separation; retirement benefits; state or local tax assessed on the compensation of employees; and certain sole proprietor and independent contractor compensation.
The Treasury added to its website an updated Q&A that includes a specific reference to PEO clients to clarify that lenders do not need 941s or other tax documents from a PEO client in order to qualify for a PPP loan. Payroll records are accepted.
- Though lenders may not request it, a letter that explains a company's PEO relationship is available here. It states that the Interim Final Rules (IFR) issued by the Small Business Administration (SBA) do not require tax documents, including Forms 941, to verify payroll amounts for PPP loan purposes.
- The CARES Act allows for some forgiveness of the SBA loans used to pay qualifying expenses.
- Qualifying expenses, as outlined above, include payroll costs, covered mortgage payments, covered utility payments, and rent payments. Mortgage, utility and rent payments must be for obligations and debts in effect prior to February 15, 2020.
- Forgiven loan amounts are not taxable.
- Reduction of Forgiven Loan Amounts: Forgiven loan amounts will be proportionately reduced by any reduction in employees retained compared to the prior year and/or any reduction in pay of an employee exceeding 25% of his or her compensation during the most recent full quarter during which the employee was employed before the covered period.
Employer Tax Credit for Employee Retention: This tax credit is available for employers who experience full or partial operation suspension due to a COVID-19 government shut down order, or employers whose gross receipts decline more than 50% when compared to the same quarter in the prior year. This tax credit is not available to employers that receive a small business “paycheck protection” loan. (See below).
- Tax credit based upon qualified wages paid to employees or incurred between March 13, 2020 and December 31, 2020.
- Employers with 100 or fewer full-time employees: All employee wages will qualify for credit regardless of whether employer is open or subject to a COVID-19 shut-down order.
- Employers with greater than 100 full-time employees: Wages paid to employees will qualify for credit only if employees were not providing services due to COVID-19 related circumstances.
- Maximum credit per employee: The maximum credit is $5,000 per employee. It is based upon the first $10,000 of compensation, which includes health benefits paid to an eligible employee.
Employer Social Security Tax Deferment: Employers may defer their share of Social Security tax deposits (i.e., the 6.2% tax paid on employee wages) for 2020 over the next two years. 50% of employers’ Social Security tax will be due on December 31, 2021, and 50% of employers’ Social Security tax will be due on December 31, 2022. Employers remain solely liable for their payment. Deferral is not available if the employer has had loan forgiveness under the CARES Act’s new SBA loan forgiveness provisions described below.
Employers will not be able to take both the CARES Act tax credit and an SBA loan. Companies should consult with their tax advisers regarding whether the CARES Act Employer Tax Credit for Employee Retention or the SBA loan will be more advantageous for their business.
The COVID-19 crisis is extremely dynamic. Employers should closely monitor information provided by the SBA, the Treasury, the IRS, and other federal and state agencies as they define their procedures and processes.