CARES Act

CARES Act

We hope you and your families are staying healthy. As you have likely heard, The CARES Act was signed into law last Friday, and there are many provisions that pertain to business owners that we have summarized for you below. We also wanted to communicate a few key recommendations as the details on these programs unfold:
  • If your business is being impacted by the current economic conditions and you are interested in exploring either the Paycheck Protection Program or the Economic Injury Disaster Loan, we recommend that you reach out to your bank now to 1) confirm they are an SBA approved bank and 2) start the process as it is expected that demand may exceed available funds.
  • If you receive funds under the Paycheck Protection Program, we recommend that you open a new bank account to deposit the loan into. This will help to document distributions and provide a clean audit trail when you apply for forgiveness on the loan.

President Trump has signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Act provides approximately $2.2 trillion of fiscal stimulus including a $350 billion bank loan program for businesses, commonly called the “Paycheck Protection Program.”

Paycheck Protection Program - The program is administered by the Small Business Administration (SBA) under its Section 7(a) lending program and generally targets businesses, nonprofits, tribal businesses, and veterans organizations with 500 employees or less. While the specifics regarding the administration of the program are under development, the program provides federally insured, partially forgivable loans that can be used to cover short-term operating expenses during the economic crisis. The maximum loan size is equivalent to 250 percent of the employer’s average monthly payroll costs (e.g., roughly 10 weeks of payroll expenses) or $10 million, whichever is less. Payroll costs are defined broadly to include wages, salaries, retirement contributions, healthcare benefits, covered leave, and other expenses. 

The program includes a number of beneficial features for borrowers, including six months to one year of deferred repayment, fee waivers, and streamlined application requirements. Most importantly, borrowers are eligible for loan forgiveness equivalent to the sum spent on covered expenses during the eight-week period after the loan is originated. Those covered expenses include the bulk of a typical business’s fixed operating costs: payroll, rent, utilities, and mortgage interest obligations. The forgivable nature of these loans in effect turns them into grants, meaning that qualifying businesses will not see a significant increase in their debt burden. But to qualify for forgiveness, employers must maintain their pre-crisis level of full-time equivalent employees, or else face a reduction in forgiveness proportional to the reduction in headcount. Since many businesses have already been forced to make staffing reductions in response to vanishing customers and lost revenues, the legislation includes a clause that allows them to qualify for loan forgiveness if they have re-hired back to pre-crisis levels by June 30, 2020.

Congress made the terms generous and the barriers to entry low so that resources would be made available as quickly as possible to needy businesses. Borrowers do not need to demonstrate actual economic harm in order to qualify. Instead, they simply need to make a series of good faith certifications, principally that current economic conditions necessitate the loan to support ongoing business operations, and that the funds will be used to maintain payroll and address other covered expenses.

These loans will be underwritten by the SBA, but the application process will be driven by local banks.  

The Treasury Department expects most FDIC-insured banks to be able to make these loans, and the SBA is in the process of providing banking guidelines.  They hope to have this process ready by the end of the week, but it will likely take two weeks for local banks to begin processing applications. To apply for Paycheck Protection Program loans, contact your bank.  Even if they cannot currently process these loans, many banks will have sign up lists for businesses to be notified when the bank is ready to process loan applications.

For FAQs and detailed information on the plan, follow this link to U.S. Senate Committee on Small Business and Entrepreneurship.

Other helpful provisions of the CARES Act:

Employee Retention Credit - The CARES Act grants eligible employers a credit against employment taxes equal to 50 percent of qualified wages paid to employees who are not working due to the employer's full or partial cessation of business or a significant decline in gross receipts. This is similar to the paid leave credits granted to employers under the Families First Coronavirus Response Act, with some changes to the requirements. Most significantly, neither the employee nor the employer have to be directly impacted by infection. The amount of wages, including health benefits, for which the credit can be claimed is limited to $10,000 in aggregate per employee for all quarters. The provision contains several requirements defining qualified wages, qualified employees, and qualified employers. The credit applies to wages paid after March 12, 2020, and before January 1, 2021.

Payroll Tax Deferral - In order to free up employers' cash flow and retain employees during times of quarantine or shutdown, the CARES Act defers the payment of payroll taxes. Payroll taxes due from the period beginning on the date of the enactment of the Act (signed the evening of March 27, 2020), and ending on December 31, 2020, are deferred. The entirety of payroll taxes incurred by employers, and 50 percent of payroll taxes incurred by self-employed persons qualify for the deferral. Half of the deferred payroll taxes are due on December 31, 2021, with the remainder due on December 31, 2022. 

Retirement Withdrawal Penalty Waived - Eligible individuals who have been adversely affected by the virus (illness, job loss, reduced hours etc.) can withdraw up to $100,000 from qualified retirement plans without having to pay the 10% penalty. 

Suspension of Required Minimum Distributions (RMD) for 2020 - The bill also waives all required minimum distributions for 2020, regardless of whether the taxpayer has been impacted by the pandemic, and allows individuals who have already taken their RMD to return them to their retirement account. Brightworth advisors are standing by to help you with the complexities of this decision.

Net Operating Losses - The bill allows for a five-year carryback of net operating losses (NOLs) arising in 2018, 2019, or 2020 by a business. Businesses will be able to amend or modify tax returns for tax years dating back to 2013 in order to take advantage of the carryback.  In addition, net operating losses incurred in 2018, 2019 and 2020 will be fully deductible without the 80% limitation otherwise imposed by the Tax Cuts and Jobs Act of 2017.

The Brightworth Business Exit & Transition Services Team (BETS) are standing by to assist you with navigating through the COVID-19 health crisis, achieving your exit objectives and maintaining your exit and transition timeline.

 

This information was derived from sources believed to be factual and reliable.  It is being provided is for informational purposes only and should not be construed as tax or legal advice.  Please consult a tax or financial advisor with questions about your specific situation.