As a small business owner and bookkeeper for clients that are being affected by the current pandemic, we're watching legislation coming out of DC in response to COVID-19 and gaining a little more information every day. In these unprecedented times, we still don't know how things will be interpreted because the rules to apply the bills are still being written. The CARES (Coronavirus Aid, Relief, and Economic Security) Act was enacted Friday, March 27th, 2020.
What Should Small Businesses and Nonprofits Look At?
Amendments to portions of the Families First Coronavirus Response Act (FFCRA)
Payment Protection Program - SBA (Small Business Administration) 7(a) Loans
Emergency EIDL (Economic Injury Disaster Loan) Grants
Charitable Contributions Deduction Modifications
Pandemic Unemployment Assistance
Employee Retention Credit for Employers Subject to Closure due to COVID-19
Delayed Payment of both Employer Payroll and Self-Employment Taxes
Modification for Net Operating Losses
But First: There is so much in this bill and, as we mentioned before, they are still writing the rules. The intent of this article is not to provide an overview of the entire bill nor to provide legal or tax advice but rather bring attention to and provide a quick synopsis of items of particular interest to small business and nonprofits in the CARES Act as we understand them. The information provided currently is open to interpretation and is subject to change as the bill is more defined. We highly encourage you to discuss with your CPA, lawyer, or bookkeeper and look to the the SBA and IRS for more information and to determine what the right option is for your business or nonprofit.
Amendments to portions of the Families First Coronavirus Response Act
The CARES Act amends portions of the FFCRA to provide clarification, including:
Emergency Paid Sick Leave Act Limitations - It's important to note the adding of pay limitations for reasons described in the original bill and expiration of requirements.
Paid Leave for Rehired Employees - The CARES Act expands to employees who were laid off by employers after February 29th and worked for the employer for no less than 30 days during the last 60 days of their employment.
Advance Refunding of Credits - The Secretary of the Treasury will be releasing forms and instructions as necessary to allow the advance payment of the credit and to provide reconciliation of such advance payment at the time of filing the return for the taxable year.
Paycheck Protection Program - SBA 7(a) Loan
Who can apply? - Small businesses, nonprofits, sole proprietor, and independent contractor, self-employed. Information provided below is meant for small businesses and nonprofits. Sole proprietors, independent contractors, and self-employed should visit our blog post written specifically for self-employed that includes new information released from the Treasury on how the PPP applies to this group.
Use of funds - a) payroll costs, b) interest on mortgage, c) rent obligations, and/or d) utilities.
Amount - Loans can be for up to two months of your average monthly payroll costs for the 12 months prior to applying for the loan plus an additional 25% of that amount (Example: $10,000 avg. monthly payroll costs x 2.5 = $25,000 Loan amount request)
What qualifies as payroll costs? - a) Salary, wages, commissions, or tips b) employee benefits including: vacation, parental, family, medical, or sick leave, payments for group health care benefits, payments of retirement benefits, c) state and local taxes assessed on compensation. Despite conflicting information, the US Treasury said on Thursday, April 2nd that independent contractor costs are not to be included because they can apply for a PPP loan on their own.
Repayment - Recipients should be eligible for loan forgiveness on funds used the 8 weeks after the loan is made for qualifying expenses . Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness reduces if the number of employees and/or salaries and wages decrease. At least 75% of the amount must be used on payroll costs to be forgiven. Recipients will be responsible to requesting the loan forgiveness at the end of the 8 weeks and providing documentation proving the loan was used for qualifying expenses. Note is for 2 years at 1.0% fixed rate.
Who's in charge here? - This is and will be administered by the Small Business Administration (SBA) but banks will be the origination for these loans.
Where do I apply? - Any existing SBA 7(a) lender or through any FDIC Bank and Credit Union will be able to issue a PPP loan. All loans will have the same terms regardless of lender or borrower. Currently, many lenders are starting with their current customers so check with your bank. In addition to the application, you will need your payroll documentation.
When can I apply? - Starting April 3, small businesses and sole proprietors could apply. Starting April 10, 2020, independent contractors and self-employed individuals could apply. Click here to learn more and download the application on the U.S. Treasury. The SBA has stated that you should be able to apply and be approved on the same day. Note: Even though the opening day for applications was April 3rd, some banks are still be scrambling to pull together their processes. Keep an eye on your bank for directions.
Anything else? - Yes! a) Loan payments will be deferred for six months, however, interest will accrue during this period. b) No collateral or personal guarantees are required. c) The government nor the lenders can charge fees. d) There is also relief for existing loans. There is $17 billion to cover 6 months of loan payments for eligible small businesses who already have SBA loans.
Emergency EIDL (Economic Injury Disaster Loan) Grants
Who can apply? -Small business, sole proprietors, and private nonprofits
Amount - As part of the application and submission, the business or nonprofit may request a grant of up to $10,000*. Under the full EIDL Loan, a business can apply for up to $2 million. *SBA recently released an email to those interested in the EIDL grant stating that to ensure the greatest number of applicants can receive assistance, the amount of the advance will be determined by the number of pre-disaster employees. The advance will provide $1,000 per employee up to a maximum of $10,000.
Use of funds - a) Provide paid sick leave to employees unable to work due to the direct effect of COVID-19; b) Maintaining Payroll to retain employees; c) Increased costs due to interrupted supply chains; d) rent or mortgage payments; e) repaying loans that cannot be met due to revenue losses. Covered period will be January 31, 2020 - December 31, 2020.
Repayment - Even if the business' EIDL is denied, applicant will be able to keep the grant money. This grant money will not have to be repaid. More information may be coming to clarify this provision. Funds not used on items above will continue to be a loan with terms up to 30 years and an interest rate not to exceed 4%.
Who's in charge here? - This is and will be administered by the Small Business Administration (SBA). Here is the page with information and application for the COVID-19 EIDL: https://covid19relief.sba.gov/#/.
Anything else? - Yes, there is also relief for existing loans. There is $17 billion to cover 6 months of loan payments for eligible small businesses who already have SBA loans.
Charitable Contributions Deduction Modifications
Individuals - In the case of taxable years beginning with 2020, individuals can deduct up to $300 in donations to qualified charitable organizations. All taxpayers will be eligible, even if they choose the standard deduction over itemizing. The CARES Act identifies a qualified charitable organization as described in section 170(b)(1)(A), which includes 501(c)3 public charities, schools, hospitals, some private foundations, and medical research. For those that do itemize their taxes, limitations are suspended for 2020, but unfortunately excludes donor-advised funds.
Corporations - Increases the 10% limitation on charitable contributions to 25% of taxable income during 2020.
Food donations - In cases of food donation, during 2020, the 15% limitation will increase to 25% of taxable income.
Excess contributions - May be carried forward to future years based on existing charitable contribution carry-forward rules.
Pandemic Unemployment Assistance
This temporary assistance program will help people who lose work as a direct result of the public health emergency.
The CARES Act expands the unemployment insurance benefits for individuals (including gig economy workers, independent contractors, and those who are self-employed). As I interpret this, for small business that are service oriented, if you lose clients as a result of COVID-19, you can be compensated.
Nonprofits do not pay unemployment taxes, federal funding will be provided for organizations for an amount equal 50% of the benefits paid to workers of these organizations from March 13 through the end of the year.
Self-employed, Independent contractors, and sole proprietors seeking assistance will most likely need to provide 2019 IRS Form 1040 Schedule C. This may be up to each state to determine what documentation they will require of these individuals.
$600 per week will be added to normal state benefits for up to four months. Coverage will be effective as of January 27, 2020 and will include up to 39 weeks of regular unemployment insurance through the end of 2020.
Employee Retention Credit for Employers Subject to Closure due to COVID-19
What is it? - A credit based on the strain COVID-19 puts on the business or nonprofit.
Amount - For wages paid after March 12, 2020 through the end of the year, businesses and nonprofits would be eligible for a payroll tax credit of 50% on qualified wages with respect to each employee for each calendar quarter. Total qualified wages for each employee shall not exceed $10,000 (a max credit of $5,000 per employee).
Eligibility - a) must have been carrying on business during the 2020 calendar year. b) with respect to any quarter in 2020 - operations were fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 OR c) the gross receipts for the calendar quarter in 2020 are less than 50% of gross receipts for the same calendar quarter in 2019.
How long? - This credit ends when gross receipts are greater than 80% of gross receipts for the same calendar quarter in 2019.
Qualified Wages - For businesses with more than 100 full-time employees in 2019, an employee must not be able to provide services due to the eligibility criteria mentioned above. For businesses with 100 or less full-time employees, the credit isn't dependent on whether services were provided as long as they met the eligibility outlined above.
Limitations - Qualified wages paid or incurred by an eligible employer may not exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period.
Exclusion - Businesses receiving SBA interruption loans are not eligible.
Delayed Payment of both Employer Payroll and Self-Employment Taxes
Businesses - Can defer payments of their 2020 payroll taxes, with 50% due by the end of 2021 and the remaining amounts due at the end of 2022.
Self-Employed Individuals - Must continue to pay 50% or their estimated self-employment taxes during 2020. As I understand it, the remaining 50% can be deferred similarly as businesses, with 25% of the remaining balance due by the end of 2021 and the final 25% due at the end of 2022.
Estimated Self-Employment Taxes - Earlier this month, it was announced by the IRS that the 1st and 2nd Quarter estimated self-employment tax deadline was extended from April 15th and June 15th (respectively) to July 15th.
Exclusion - The above does not apply to any taxpayer who has had indebtedness forgiven.
Modifications for Net Operating Losses
Corporations - Businesses can carry back losses (NOL) from 2018, 2019, and 2020 by suspending the 80% taxable income limitation to allow a taxpayer to fully offset taxable income and access to immediate tax refunds.
Non-corporate Businesses - The TCJA (Tax Cuts and Jobs Act) implemented a new rule that disallowed the deduction of excess business losses for non-corporate businesses for tax years between 2018 and 2025 and forced them to carry forward losses. The CARES Act allows businesses to carry back losses for 2018 and amend their tax return and receive a refund.
There is much in this bill not covered above so be sure to review additional resources. The information provided at the time of this article is open to interpretation and is subject to change as the bill becomes more defined. We highly encourage you to discuss with your CPA, lawyer, or bookkeeper and look to the the SBA and IRS for more information and to determine what the right option is for your business or nonprofit.
Updated 04.15.2020