Must Read - How Will “CARES” Act Provide Benefits to Your Business?

/ Freidel & Associates, LLC/

As we detailed earlier today, the “Coronavirus Aid, Relief, and Economic Security Act” (also known as the “CARES” Act), was signed into law last Friday with massive implications for business owners. Please contact us with any questions you may have on this legislation.

There are a handful of absolutely urgent and critical benefits you need to be aware of and carefully evaluate:

  1. “Paycheck Protection Program” loans of 2.5X average monthly payroll, with the potential to be largely (or entirely) forgiven fully free of income tax

  2. “Employee Retention Credit” of up to $5,000 per eligible employee

  3. Emergency EIDL grants of up to $10,000 per business

  4. Expanded unemployment benefits, including to self-employed individuals – generally increased by $600/week over normal benefit levels

A brief summary of each of these provisions are outlined below. There are other important aspects to the legislation, including some huge tax law changes – this email is focused on the most urgent matters for you to understand:

Paycheck Protection Program (“PPP”)

We wrote first about this program. Simplistically, you may be able to obtain a loan of 2.5 times your average payroll costs for the previous twelve months as long as you are a “small business” (generally 500 or less employees, with certain aggregation of related businesses). “Payroll costs” include:

  1. Salaries, wages, etc. up to $100,000 per year per employee (i.e. $8,333 per month)

  2. Payment for vacation, parental, family, medical, or sick leave

  3. Severance or separation payments

  4. Group health insurance

  5. Retirement plan contributions

  6. State & local payroll taxes (think state unemployment)

  7. Certain independent contractor costs

This loan can then be fully or partially forgiven based on your spending in the 8 weeks after the loan is disbursed. Eligible costs to go towards loan forgiveness dollar-for-dollar include:

  1. Payroll costs (see list above)

  2. Interest on eligible business debts (incurred prior to 2/15/20)

  3. Rent (for leases in place prior to 2/15/20)

  4. Utilities (for service in place prior to 2/15/20)

As an extra benefit, you get to deduct your expenses paid with the loan proceeds, and then the loan forgiveness is non-taxable for income tax purposes!

Watch out though – there are adjustments to reduce loan forgiveness if you cut your employee headcount, or cut employee wages during the eight weeks after the loan occurs (with very specific measurement tests). The government is trying to incentivize employers to keep employees on the payroll through this program.

We are having many of our clients getting “EIDL” loan application forms from banks. You generally don’t want this if you are doing the PPP. Contact your bank or local SBA lender to get “in line”, and wait for the PPP loan application to come out – hopefully in the next few days.

If you are self-employed (do you file a Schedule C with your Form 1040?), you may also be eligible for this provision, even if you don’t have any employees. The law specifically includes earnings from self-employment up to $100,000 per year as “payroll costs” for purposes of the loans.

Employee Retention Credit

You can’t claim this credit if you take loan forgiveness with the PPP. You can claim this credit up to 50% of your payroll, with a cap of $10,000 per employee of payroll – or a $5,000 per employee credit. This credit is refundable and applied on your payroll tax returns.

Eligible businesses include businesses affected by government shutdowns (including governmental orders affecting commerce, travel, employees, group meetings, etc.), or with certain specified decreases in revenues.

Eligible compensation depends on whether your business has more or less than 100 employees. If you have less than 100 employees, generally eligible wages include all wages incurred during the relevant shut-down or revenue loss period. If you have more than 100 employees, then generally you may only obtain the credit on wages paid where the employee is not providing services in exchange for the compensation.

Emergency EIDL Grants

These are emergency disaster relief grants of up to $10,000 per eligible business. These are paid out in conjunction with an EIDL loan application with the SBA – but the grant is an amount that is paid up-front and does not need to be repaid even if the loan is ultimately denied. If you take an EIDL emergency grant and also apply for a PPP, your loan forgiveness will be reduced by the amount of the grant. You should apply directly with the SBA for an EIDL loan/grant.

Expanded Unemployment Benefits

If you are forced to lay employees off as a business, your employees should be able to capture enhanced COVID-19 unemployment benefits. Generally, these benefits are equal to the normal state unemployment benefits, plus $600 per week through 7/31/2020 (assuming your state opts into this program). Self-employed persons are newly eligible for unemployment assistance as well – unlike in times past.

When trying to assess the paths you may take as a business, make sure you account for these enhanced unemployment benefits for your employees. If you apply for a PPP loan however, make sure you account for the potential reduction in loan forgiveness that can occur if you lay employees off.

We will continue to post updates and more detailed summaries on a regular basis on this blog.