Two recent pieces of legislation, the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contain provisions intended to provide assistance to small businesses affected by the COVID-19 pandemic. These relief provisions include:
- Paycheck Protection Program (PPP). Under the PPP, employers with up to 500 employees may apply for SBA loans in an amount up to 2.5 times their average monthly payroll costs, up to $10 million, to pay payroll costs, rent, utilities and other expenses. Employers in the restaurant and hospitality industry may be able to exceed the 500-employee limit. Most importantly, if the borrower maintains payroll at pre-crisis levels, up to the entire principal amount of the loan may be forgiven. Congress has allocated $349 billion for these loans, but demand will be extremely high. Lenders may begin accepting applications on April 3, 2020, and loans will be approved on a first-come, first-served basis.
- Employee Retention Credits (Retention Credits). In lieu of obtaining a forgivable loan under the PPP, an employer who has had to reduce or suspend operations due to COVID-19 can claim a refundable tax credit of 50 percent of the qualified wages paid to employees, up to $10,000 of wages per employee (for a maximum credit of $5,000 per employee). If the employer has 100 or fewer full-time employees in 2019, the credit can be claimed whether or not the employees are still providing services, but if the employer had more than 100 full-time employees in 2019, the credit is based on qualified wages paid to employees who are not providing services.
- Enhanced Unemployment Benefits. The federal government has added $600 per week to unemployment benefits. As a result, lower paid employees may make more money if they are laid off.
- FFCRA Credits for Emergency Sick Leave and Expanded Family Medical Leave. The FFCRA mandates that private employers with fewer than 500 employees (and public employers) provide paid sick leave and emergency family leave if employees are unable to work or telework due to COVID-19. Employers will receive refundable tax credits that pay for the paid leave provided, subject to dollar limitations.
- Payroll Tax Deferral. Payroll tax payments due in 2020 for the employer portion of Social Security tax may be deferred until 2021 and 2022.
- Tax Relief. Various tax provisions provide income tax relief for 2020 and, in some cases, prior years. This includes fixing the so-called “retail glitch,” permitting the carryback of net operating losses and expanding the deductibility of business interest expense.
- Other SBA Relief (Economic Disaster Loans). The CARES Act allocates an additional $10 billion for economic injury disaster loans and relaxes the requirements for obtaining economic injury disaster loans and emergency advances.
Paycheck Protection Program
Under the PPP eligible employers who are harmed by COVID-19 may obtain SBA loans for up to 2.5 times their average monthly payroll, up to a maximum of $10 million. Provided that the employers maintain their payroll, the entire principal of the loan may be forgiven.
Any business, nonprofit, veterans organization, or tribal business that has no more than 500 employees (with certain exceptions for certain industries) is eligible. Eligible businesses also include individuals who operate as sole proprietors, independent contractors and self-employed individuals.
Any business that has a NAICS code beginning with 72 (mostly, hospitality and food service businesses), which has multiple locations, and has fewer than 500 employees per location, is eligible even if in the aggregate it has more than 500 employees.
Note that the SBA’s general affiliation rules apply to PPP loans, which means that members of a controlled group will be counted together for purposes of determining the applicant’s number of employees. For example, companies that have a private equity and venture capital investor who has a control investment (either by maintaining a controlling percentage or through contractual rights) must include all of the employees from the portfolio companies of their control investor in determining whether they have fewer than 500 employees. The PPP affiliation rules have been relaxed, however, for purposes of:
- Businesses with a NAICS code beginning with 72 (mostly, hospitality and food service businesses);
- Some businesses operating as a franchise; and
- Any business which has received financial assistance under Section 301 of the Small Business Investment Act of 1958.
Good Faith Certification of Harm
An applicant for a PPP loan will need to certify that the loan is needed to support its ongoing operations in the uncertain current economic conditions, the proceeds will be used for eligible purposes, and that the applicant does not have another application pending for the same purpose and has not received another duplicative PPP loan.
Maximum Loan Amount
Each eligible recipient can receive a maximum loan equal to the lesser of $10 million or 2.5 times the average monthly payroll costs during the prior 12-month period. Payroll costs include: salary; wage; commissions; cash tips or equivalents; payments for vacation or parental, family or medical leave; group health care insurance premiums; retirement benefits; and state and local taxes on such compensation. For purposes of calculating salary, only amounts up to $100,000 per employee can be included, and compensation for individuals who reside outside the U.S. must be excluded. Companies who have a seasonal workforce can use a different measuring period for their average payroll costs.
Use of Proceeds
The proceeds of a PPP loan can be used to pay payroll costs (as described above, including the $100,000 annual salary limitation), interest (but not principal) on mortgages, rent, utilities and interest incurred on debt incurred prior to February 15, 2020. To receive the maximum amount of loan forgiveness, payroll costs will need to be 75 percent or more of the loan amount.
Forgiveness of Principal Amount
A major attraction of PPP loans is that up to the entire principal amount may be forgiven. The amount of forgiven debt will not be considered income from the cancellation of indebtedness.
The amount eligible for forgiveness is based on the borrower’s payroll costs, mortgage interest, rent and eligible utility payments made during the eight-week period following receipt of the loan, provided that not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs. The amount eligible for forgiveness will be reduced if, during the eight-week period after receipt of the loan, the average number of full-time equivalent employees declines (compared to average monthly full-time equivalents for the period from February 15, 2019 to June 30, 2019), or if the salary and wages of employees who earn less than $100,000 is reduced by more than 25 percent. Reducing compensation of employees who earn more than $100,000 will not result in reduction in the amount forgiven.
Employers who terminated employees (or reduced their salaries or wages) after February 15, 2020, can rehire (or reinstate the salaries or wages of) those employees prior to June 30, 2020, and not have the initial termination or reduction affect the calculation of the amount eligible for forgiveness.
In order to be eligible for forgiveness of a PPP loan, a borrower must submit an application requesting forgiveness, together with:
- Documentation supporting the claimed payroll costs, mortgage interest payments, rent payments and eligible utility payments; and
- A certification from a representative of the borrower that:
- the documentation presented is true and correct, and
- the amount requested for forgiveness was used for eligible expenses.
Other Terms of PPP Loans
In addition to the potential forgiveness of principal, PPP loans have very favorable terms and conditions, including:
- Loan payments, if any, are deferred for six months;
- Interest rate of one percent (based on current SBA guidance);
- Maturity date, if the loan isn’t totally forgiven, of two years (based on current SBA guidance);
- No personal guarantees;
- No fee on the loans; and
No collateral required.
Interested parties can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Lenders may begin accepting applications on April 3, 2020, and we expect that this program will be in high demand. Most businesses will probably want to start with their existing bank, and the earlier that you can engage with your bank on this, the better, since the demand for PPP loans may exceed the $349 billion budgeted for these loans.
As noted above, the applicant will be required to make the good faith certification of harm and use of proceeds described above.
A sample of the application is available on the SBA’s website, at this link.
Further, the SBA has a very helpful guide on the PPP program, which can be accessed here.
Most lenders will have their own application forms.
Employee Retention Credits
The employee retention credit is a refundable tax credit equal to 50 percent of the qualifying wages paid by an eligible employer from March 13, 2020 through the end of 2020. As explained below, the retention credit is particularly favorable for eligible employers with 100 or fewer employees. The retention credit may not be claimed by a business that applies for and obtains a PPP Loan from the SBA.
The retention credit is available to (i) employers (including tax-exempt employers) that were operating in 2020, but have closed or reduced their operations due to orders from an appropriate governmental authority due to COVID-19, or (ii) employers (other than tax-exempt employers) if their gross receipts for any calendar quarter beginning after December 31, 2019 are less than 50 percent of their gross receipts for the same calendar quarter in the prior year. If the credit is based only on the reduction in gross receipts, the credit will discontinue with the first calendar quarter after the employer’s gross receipts are greater than 80 percent of the gross receipts in the same calendar quarter in the prior year. Governmental employers are not eligible.
Amount and Use of Retention Credit
Employers will receive a credit in the amount of 50 percent of the “qualified wages” (including health care costs) with respect to each employee, up to $10,000. The maximum credit is thus $5,000 per employee. The retention credit is applied against the employer’s share of Social Security taxes. If the amount of the credit exceeds the Social Security taxes paid by the employer, the remaining credit will be refundable.
The employee retention tax credits are different depending on whether the employer has more or less than 100 full-time employees (generally, employees who work 30 or more hours a week or 130 hours in a month, on average).
- For employers with up to 100 full-time employees in 2019, the credit is based on qualified wages paid to an employee during the calendar quarter for which the tax credit is claimed, whether or not the employee is providing services.
- For employers with more than 100 full-time employees in 2019, the tax credit is based on qualified wages paid to any employee who is not providing services during the calendar quarter for which the tax credit is claimed. If an employee is receiving full-time pay for working only part-time, the wages for which the employee is not performing services should be qualifying wages for purposes of the credit.
For purposes of determining if an employer has more than 100 full-time employees, entities under common control or in an affiliated service group will be treated as a single employer.
Claiming the Credit
Employers who pay qualified wages can reimburse themselves the amount of the credit by retaining amounts of federal employment taxes that would otherwise have been paid to the IRS on quarterly employment tax returns (Form 941) for wages paid between March 13, 2020 and December 31, 2020. If there are insufficient payroll deposits to cover the cost of qualified wages, employers will be able to file a request with the IRS (on IRS Form 7200) for an accelerated payment (the IRS anticipates it will process these requests within two weeks of receipt). IRS Guidance on the retention tax credits was issued on March 31, 2020, which can be accessed here.
Appropriate documentation must be retained by the employer to support the tax credit.
Enhanced Unemployment Benefits
The CARES Act greatly increased unemployment benefits by expanding eligibility, increasing the payments and lengthening the time the benefits are available. (Unemployment insurance is a state-level program with differing eligibility and benefits. The CARES Act induces states to accept the enhanced benefits by offering to pay for them.) Employees, independent contractors and self-employed individuals will now be eligible for the benefits if they are out of work for various COVID-19 related reasons, including that their employer has shut down. State-level benefits will be increased by $600 per week until July 31, 2020. Finally, the federal government will provide an additional 13 weeks of benefits on top of the state program, up to a cap of 39 weeks. Employers should discuss with their employees whether these enriched unemployment benefits might be more valuable than staying employed.
FFCRA Refundable Tax Credits for Emergency Sick Leave and Expanded Family Medical Leave
Mandatory Provision of Paid Leave
The FFCRA requires private employers with fewer than 500 employees and public employers with at least one employee to provide paid leave if employees are unable to work or telework due to COVID-19. The FFCRA also provides these “eligible employers” with refundable tax credits to reimburse all or part of the cost of providing such leave, for leave taken from April 1, 2020 through December 31, 2020. Here is a link to the Wage and Hour Guidance, regulations issued on April 1, 2020. Here is a link to the IRS Guidance that was issued April 1, 2020.
Credit for Qualified Sick Leave Wages
The tax credit for qualified sick leave wages is two weeks (80 hours) of either 100 percent or two-thirds of the participant’s regular rate of pay, depending on the reason for the leave related to COVID-19.
- The credit is 100 percent of the participant’s regular rate of pay for 80 hours, up to a maximum of $511 per day and $5,110 in the aggregate, if (i) the employee is on leave related to COVID-19 as a result of a quarantine or isolation order; (ii) the employee’s self-quarantine upon the advice of a health care provider; or (iii) the employee needs to obtain medical diagnosis or care due to experiencing COVID-19.
- The credit is two-thirds of the participant’s regular rate of pay for 80 hours, up to a maximum of $200 per day and $2,000 in the aggregate, if the employee is on leave related to COVID-19 (i) to care for a family member who is under a quarantine or isolation order; (ii) to care for or assist a family member who is under a quarantine or isolation order or who has been advised by a health care provider to self-quarantine; or (iii) to care for the child of an employee if their school or childcare facility is closed, or the childcare provider is unavailable; or (iv) under any other substantially similar condition specified by the Secretary of Health and Human Services.
Credit for Qualified Family Leave Wages
The tax credit for qualified family leave wages is two-thirds of the employee’s regular rate of pay for up to 10 weeks, with a maximum of $200 per day and $10,000 in the aggregate for each employee. The credit for qualified family leave wages applies if an employee is unable to work (including telework) because the employee is caring for the child of such employee if their school or place of care has been closed, or the childcare provider is unavailable, due to COVID-19 precautions.
Adjustments to Credits
The tax credits are increased by the qualified health plan expenses allocable to the qualified leave wages and by the employer’s share of Medicare tax on the qualified leave wages.
Tax Treatment of Credits
The amount of the credit is included in the employer’s gross income.
The FFCRA permits employers whose employees are health care providers or emergency responders not to provide qualified sick leave or qualified emergency leave. In addition, the Department of Labor may provide rules allowing a business with fewer than 50 employees to be excluded from these rules if providing qualified leave wages would jeopardize the viability of the business as a going concern.
Claiming the Credit
Employers who pay emergency sick leave or emergency family leave can reimburse themselves the amount of the credit by retaining amounts of payroll taxes (including income taxes withheld from employees and the employer’s share of Social Security and Medicare Taxes) that would otherwise have been paid to the IRS on quarterly employment tax returns (Form 941) for wages paid between April 1, 2020 and December 31, 2020. If there are insufficient payroll deposits to cover the cost of the emergency sick leave or emergency family leave, employers will be able to file a request with the IRS (on IRS Form 7200) for an accelerated payment (the IRS anticipates it will process these requests within two weeks of receipt). IRS Guidance on the FFCRA tax credits was issued on April 1, 2020 and can be found here.
Appropriate documentation must be retained by the employer to support the tax credit (including employee’s name, date of leave requested, a statement of COVID-19 reason for requesting the leave and written support of such reason, and a statement that the employee is unable to work, including telework, for such reason). Documentation showing how the employer determined the amount of the leave paid and the amount of health care costs claimed is also necessary.
Payroll Tax Deferral
Employers and self-employed individuals will be able to conserve some cash by deferring the required deposit of the employer portion of the social security tax (6.2 percent) for 2020. In general, an employer must make at least monthly deposits of its portion of the social security tax (with similar rules for self-employed individuals). The CARES Act allows employers to defer any payments that would have been made from March 27, 2020 until December 31, 2020 until a later date. Half of the total amount deferred is due on December 31, 2021 and the other half is due on December 31, 2022. It is important to note that the payroll tax deferral cannot be used in conjunction with the PPP loans that are intended to be forgiven.
To provide businesses with more cash, the CARES Act has modified a number of existing tax provisions, some with retroactive effect. A significant number of the provisions were changes to the 2017 Tax Cuts and Jobs Act (TCJA). The retroactivity of the changes will allow some business to file amended returns and receive refunds.
- Retail Glitch. An error in the TCJA limited the ability of taxpayers to expense “qualified improvement property” (QIP). Retroactive to 2018, QIP placed in service from the 2018 taxable year and going forward can be expensed, thus reducing the business’s tax burden.
- NOLs. The TCJA eliminated the ability to carry back a net operating loss (NOL) to prior years and limited NOL carryforwards to 80 percent of taxable income. The CARES Act allows NOLs created in 2018, 2019 or 2020 to be carried back five years and suspends the 80 percent limitation until 2021. Corporations that had tax losses in 2019 but taxable income in prior years generally should file 2019 returns as soon as possible to take advantage of this expanded carryback and get cash refunds in hand.
- Excess Business Losses. NOLs generated by noncorporate taxpayers were limited by the TCJA to a cap of $250,000 ($500,000 if filing a joint return). The limitation is suspended for 2018, 2019 and 2020.
- Deductibility of Business Interest Expense. The deduction for business interest expense was limited by the TCJA to 30 percent of a taxpayer’s “adjusted taxable income.” This limitation was raised to 50 percent for 2019 and 2020 (with special rules for partnerships). Additionally, the 2020 limitation can be based off of the taxpayer’s 2019 adjusted taxable income (since the 2020 number may be significantly lower).
- AMT. The corporate alternative minimum tax (AMT) was repealed by the TCJA which left some taxpayers with AMT credit carryforwards. The CARES Act accelerates any remaining credit carryforwards.
Other SBA Relief (Economic Disaster Loans)
The CARES Act allocates an additional $10 billion for economic injury disaster loans. While such loans are part of an existing SBA loan program (primarily for regions hit by natural disasters), the CARES Act treats the entire country as being under an emergency because of COVID-19. The CARES Act also relaxes several of the requirements for obtaining economic injury disaster loans, including: no personal guarantees on loans of up to $200,000; the applicant doesn’t have to be in business for at least a year prior to obtaining the loan (although must have been in business on January 31, 2020); no requirement to prove inability to obtain credit from another source; and no requirement to provide tax returns as part of the application (the lender may rely on the applicant’s credit score). Applicants are also eligible for a $10,000 advance on their loan, which would be paid within three days of applying for the loan, and is forgivable even if the loan is not awarded. Economic disaster loans (other than the $10,000 advance), require repayment, but on generally favorable terms (2.75-3.75 percent interest, with up to a 30-year term).