The CARES Act provides relief to small business owners reeling from the economic consequences of the coronavirus outbreak
Late Friday, President Trump signed into law the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. The relief package provides support to individuals, businesses, hospitals, and state governments in response to the coronavirus outbreak.
The CARES Act represents the largest and most comprehensive stimulus bill ever enacted by the federal government. At nearly 900 pages, the law is a labyrinth of information. Given the lack of implementation details, this article highlights a few components that impact owners and executives of small businesses.
CARES is a unique opportunity for businesses to access capital that will ultimately be free or rolled into a long-term, low-interest, and potentially uncollateralized loan.
Paycheck Protection Program
The Paycheck Protection Program (PPP) is a $366 billion Small Business Administration (SBA) lending program that provides designated companies with fewer than 500 employees access to SBA loans. The financial assistance can cover payroll, benefits, insurance premiums, rent, and other similar operating expenses.
- Eligible companies may apply for a loan amount up to 250 percent of their average monthly payroll (capped at $10 million).
- “Payroll” has a broad definition and can include a variety of expenses (salary, commission, vacation or leave pay benefits, etc.). However, payroll does not include compensation above an annual salary of $100,000.
- The loan may not exceed a four percent interest rate, and the term of the loan is 10 years.
The program incentivizes companies to retain employees and rehire any employees laid off due to the coronavirus crisis. Loan forgiveness is dependent upon how much of the funds go toward payroll and approved operating expenses during the eight weeks immediately following the loan origination date. Regulations for loan forgiveness are pending, and the SBA or the Treasury Department may issue exemptions.
Closely Held Corporations
Additional considerations for closely held private companies include:
- In calculating the employee threshold, associated entities through common ownership may aggregate to exceed 500 employees.
- CARES stipulates that there will be limits on ownership distributions and stock buyback programs while loan balances are outstanding.
- As such, CARES may not provide relief for portfolio companies owned by private equity or venture capital firms.
The CARES Act includes several tax stipulations, in particular:
- Companies can defer payment on their portion of Social Security taxes through 2020 (half of the deferred taxes are due by December 31, 2021 and the other half by December 31, 2022).
- Companies are allowed a credit against employment taxes equal to 50 percent of qualifying wages up to $10,000 (i.e., a maximum credit of $5,000).
- The bill temporarily repeals the 80 percent income limitation for net operating loss deductions for years beginning before 2021 (a five-year carryback exists for losses arising in 2018, 2019, and 2020).
- The bill increases the limitation on the deductibility of interest expense that may be deducted for 2019 and 2020 from 30 percent to 50 percent of adjusted taxable income.
We continue to evaluate the new law, and will soon publish more details relevant to both individuals and companies.
Tyler Mayfield serves as a managing director and chief compliance officer at Brighton Jones.
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