The Coronavirus Aid, Relief, and Economic Security (CARES) Act is monumental legislation, in size, cost, and scope. Benefits to individuals have been widely publicized, and previous articles from our firm summarize many of the Act’s other provisions, including the changes affecting employee benefits offered in retirement and health and welfare plans.[1] This article will focus on programs that may provide significant benefits to small businesses.
The most important of these new programs is the Paycheck Protection Program, authorizing loans to businesses with fewer than 500 employees, including sole proprietorships.[2] Borrowers must certify that they intend to use the money to retain workers, maintain payroll or make mortgage, lease or utility payments, and that the uncertainty of current economic conditions makes the loan necessary.
The most obvious economic benefit of these loans is that they will enable the borrower to continue operations. Another important benefit is that some or all of the loan can be forgiven. The tax sweetener for this program is that the forgiven loan is not subject to tax as a discharge of indebtedness. These benefits are so significant that all eligible businesses should consider applying for the loans.
The allowed amount of the loan is 2.5 times the monthly average payroll costs of the business during the previous year, with a maximum of $10 million. Payroll costs include health and retirement benefits and include the self-employment earnings of owners, all subject to a maximum of $100,000 per person. The forgiveness amount is based on the total payroll costs, mortgage interest, rent and utilities over the eight-week period beginning with the date of the loan. The actual forgiveness is reduced by any reductions in employee wages in excess of 25% for any employee, and by a reduction in the number of employees based on the average employment in periods before the COVID-19 crises compared to the average employment between February 15, 2020 and June 30, 2020. If the business is back to full staffing by June 30, it is eligible for forgiveness of the entire loan amount. If the loan is not forgiven, it is payable within two years, with payments to begin after six months, at 0.5% interest.
Although the program is available to sole proprietorships, it is not clear how partnerships and LLCs will be treated. Partnerships and LLCs are eligible for the loan itself; the loan application form makes that clear.[3] But it is uncertain whether the distributions or distributable income (i.e., self-employment income) for partners or LLC members would qualify as “payroll” for purposes of calculating the eligible loan amount. The legislation does not call out partnerships and LLCs in the way it does sole proprietorships. On the other hand, it seems there is a good faith argument that partners may be “other self-employed persons” within the meaning of the Act. The SBA is required to issue regulations within 30 days of the March 27 enactment of the legislation, and hopefully will provide further guidance.
One reason to act quickly on this program is that if the business is able to operate without a loan during the period prior the loan application, it would be harder to certify that the loan is necessary because of the uncertainty of economic conditions.
Another important program available to all businesses which do not obtain loan forgiveness under the CARES Act is the ability to defer payment of employment taxes during 2020. This applies to the 6.2% employer portion of employment taxes, as well as 50% of the taxes on self-employed persons. One-half of the deferred taxes is payable on December 31, 2021, with the balance due on December 31, 2022.
Another program gives a credit against employment taxes of 50% of the wages of an employee. The credit is available for wages paid to employees who are being paid due to the full or partial suspension of the employer’s business. For businesses with more than 100 employees, the credit is available with respect to employees who are not performing services. For businesses with less than 100 employees, there is no such requirement. The maximum credit is $5,000 per employee. The program covers the period from March 12, 2020 to January 1, 2021. This credit could be important for retention of employees.
The CARES Act contains other tax provisions that may be important to certain taxpayers, including a change in the net operating loss rules that will now allow taxpayers to carry back losses for five years that were incurred in 2018, 2019 and 2020. (Carrybacks had been eliminated in the Tax Cut and Jobs Act.) The limitations on deductibility of business interest were also relaxed, and the bonus depreciation rules were amended to allow the 100% depreciation benefit applicable to “improvement property,” which will especially benefit restaurants and retailers.
Idaho has not yet enacted any special tax incentives or relief measures except to delay the April 15 filing and payment deadlines, and is not likely to since the legislative session has concluded. If your business operates outside of Idaho, there are resources available to assist in learning how each state is addressing the COVID-19 crisis.[4]
Hawley Troxell stands ready to help our clients navigate these difficult issues as the landscape continues to evolve. Please contact Rick Smith or another Hawley Troxell tax attorney with any questions. We are here to help (even if some of us are teleworking).
[1] Our web site includes the full text of those articles: https://hawleytroxell.com/
[2] There are some businesses eligible with over 500 employees, including franchised locations.
[3] https://www.sba.gov/sites/default/files/2020-03/Borrower%20Paycheck%20Protection%20Program%20Application_0.pdf. It is noteworthy that the application also notes that because the program may be oversubscribed for the funding available, loan forgiveness may be limited such that not more than 25% of the loan eligible for forgiveness may be for non-payroll costs. Another non-statutory feature of the application is that the borrower is asked to make a representation that the borrower will purchase only American-made products.
[4] The Tax Foundation is one such resource:
https://taxfoundation.org/state-tax-coronavirus-covid19/
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