Highlights of the CARES Act for Small Business Owners
The Coronavirus Aid, Relief and Economic Security – the CARES Act – was signed into law on March 27, 2020. It provides assistance to small business owners who have been directly and indirectly affected by COVID-19. The assistance comes in various forms including loans, postponement of tax payments, expansion of unemployment and additional tax deductions.
Your advisor is available to help you understand what provisions are most relevant to you and can help you understand how provisions from the act may relate to your financial situation. In summary, the bill provides relief for:
Paycheck Protection Program
The law makes available nearly $349 billion in loans and grants to small businesses, with additional funding subsequently approved. The loans under this program will be backed with a 100% government guarantee.
- Covered Loan Period – Retroactive to February 15, 2020, through June 30, 2020.
- Application Period
- April 3: Small businesses and sole proprietorships can start applying for paycheck protection loans from existing SBA lenders.
- April 10: Independent contractors and self-employed individuals can start applying for paycheck protection loans from existing SBA lenders.
- June 30, 2020: The program application window closes.
- While Payroll Protection Program loans are available through June 30, the total amount available under the loan program is limited. If you are interested in this loan, you should act quickly.
Small businesses with up to 500 employees are eligible for this program. In addition, businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.
Non-profits, sole proprietorships, self-employed individuals, and independent contractors with fewer than 500 employees are also eligible for this program.
The Small Business Administration’s (SBA) standard “no credit elsewhere” test is waived. Approved SBA lenders and non-SBA lenders approved by Treasury will be authorized to offer loans to eligible small businesses. The maximum guaranteed loan amounts are the lesser of $10 million and 2.5 times average monthly payroll costs during the 12 months prior to loan disbursement. The Treasury’s loan application suggests this calculation will be based on 2019 payroll costs.
For an independent contractor or sole proprietor, payroll costs are wages, commissions, income, or net earnings from self-employment or similar compensation. However, payroll costs exclude compensation of any individual employee in excess of $100,000 in one year, as prorated for the period between February 15, 2020 and June 30, 2020.
An employer will be required to certify that they will maintain their average full-time equivalent employment, with incentives to re-hire if employees have been furloughed.
Under the law, the borrower may have a portion of their loan forgiven in the amount equal to their payroll costs, and interest payments on mortgages (incurred pre-February 15, 2020), rent payments (in force pre-February 15, 2020), and utility payments (for services pre-February 15, 2020) for an 8 week period, beginning on the date of the origination of the loan.
No more than 25% of the forgiven amount may be for non-payroll costs. Forgiven amounts would not be taxable.
Loan forgiveness will be reduced if a borrower reduces salaries and wages by more than 25% or reduces their number of employees during the 8 week period. Small businesses that may have reduced their workforce between February 15 and April 26, 2020 may still be eligible for loan forgiveness if they bring back those employees or restore their wages by June 30, 2020.
The CARES Act also provides for an increase in the SBA Express Loan program to a maximum $1,000,000 through December 31, 2020. An Economic Injury Disaster Loan provides emergency assistance of up to $10,000 available through an expedited process for eligible small businesses.
Further details about processes and requirements are still being developed by the U.S. Treasury Department and the SBA. As more details are released, Ameriprise will provide updated information.
Tax relief for employers
Delayed payment of employer 6.2% Social Security tax
Effective with the signing of the CARES Act, employers and self-employed individuals can generally defer payment of the 6.2% employer share of Social Security tax (and corresponding one-half portion of self-employment tax) for the remainder of 2020.
The deferred tax for the period beginning March 27 through December 31, 2020 is instead payable in the following two years: 50% is due by December 31, 2021, and the remaining 50% is due by December 31, 2022. The Medicare tax portion of payroll taxes, as well as the employee share of Social Security tax, are not impacted by this deferral provision. The deferral is not available to companies that have loans forgiven under certain provisions of the CARES Act.
Increased ability to deduct Net Operating Losses (NOLs)
The 2017 tax reform bill eliminated the carryback of NOLs under prior law and limited the NOL deduction to 80% of taxable income. The CARES Act provides a 5-year carryback of NOLs arising in 2018, 2019, and 2020, and also retroactively defers the 80% limitation to 2021 which allows the entire NOL to offset taxable income in those years. Businesses with NOLs in 2018, 2019, and/or 2020 may be able to obtain refunds of taxes paid in those years and/or prior years.
Increased ability of noncorporate taxpayer to deduct NOLs
The 2017 tax reform bill added temporary rules (for 2018-2025) that limited NOL deductions for noncorporate businesses, such as sole proprietors and pass-through businesses (partnerships and S corporations).
The CARES Act retroactively defers the application of those rules until 2021 and makes certain technical corrections to those rules (also retroactive), which means that this limitation does not apply to tax years 2018, 2019, and 2020. Business owners whose deductions were previously limited by this rule may be able to obtain refunds for tax paid in those years.
Workforce retention tax credits
The law creates a refundable payroll tax credit for 50% of certain wages (up to $10,000) paid by employers during this public health emergency. The credit is available to employers who retain employees and whose operations were fully or partially suspended due to a COVID-19-related government order, or if gross receipts declined by more than 50% when compared to the same quarter in the prior year. The credit is not available to employers who take loans under the Paycheck Protection Program.
Acceleration of recovery of alternative minimum tax (AMT) credits
The 2017 tax reform bill repealed the corporate AMT and allowed corporate taxpayers to recover certain AMT taxes paid prior to the repeal as refundable credits against their regular tax liability, but only over four years beginning in 2018. The law accelerates the ability of corporations to recover these credits entirely into 2018.
Qualified Improvement Property (QIP)
The law fixes an error in the 2017 tax reform law, and now permits taxpayers to immediately write off costs associated with improving their facilities rather than having to depreciate such improvements over 39 years. This provision is retroactive to the enactment of the 2017 tax reform law.
Relaxation of limits on business interest deductions
The law increases the limitation on the ability to deduct business interest expense from 30% to 50% of adjusted taxable income for 2019 and 2020. It also permits a taxpayer to elect to determine its deductible interest expense for 2020 based on its adjusted taxable income for 2019.
We are here to help you
An Ameriprise advisor can help you understand what the CARES Act means for you and your financial situation. We are here to help you navigate any short-term financial needs while we continue to support your long-term financial goals.