This blog is solely focused on what the CARES Act provides for small businesses.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27, 2020, is a $2.2 trillion package to provide relief from the pandemic-triggered economic problems. For small businesses, there are a lot of positive opportunities, from borrowing to tax relief.
The CARES Act is massive, so the following is merely the highlights to note. This blog does not include relief for individuals in the form of rebate checks (reflecting a refundable tax credit), increased unemployment benefits, and various tax breaks. And it doesn’t discuss industry supports, although some of this could benefit small businesses (such as those in the hospitality and dining industries). This blog is solely focused on what the CARES Act provides for small businesses.
Paycheck Protection Program
This program is an expansion of the SBA’s 7(a) loan program, which offer loans to small businesses that are made through SBA-certified lenders. The program makes it easier to get loans to cover payroll and other overhead. There are no fees, no credit checks, no personal guarantees, no collateral required. The maximum loan term is up to 10 years, with a low interest rate, all of which is deferred for the first year. How quickly this can get going and how quickly funds will get into the coffers of small businesses remains to be seen.
The key feature of the Paycheck Protection Program is the ability to obtain loan forgiveness to a certain extent. This applies to covered payroll costs (there are limits), interest on mortgage obligations (on pre-February 15, 2020, mortgages), rent (on leases in force by February 15, 2020), and utilities (for services that began before February 15, 2020). It is retroactive to costs from February 15, 2020. The amount of loan forgiveness is reduced if there’s a significant reduction in wages or the number of layoffs. But employees brought back on the payroll can be counted toward the loan forgiveness (a good thing).
Usually, income from the cancellation of debt is taxable. However, under the CARES Act, this loan forgiveness is not taxable.
In addition to the Paycheck Protection program, the CARES Act provides relief for outstanding SBA loans. There is 6 months of debt relief for outstanding SBA loans under 7(a), Community Advantage, 504, and Microloan programs.
Employee retention tax credit
If you keep employees on the payroll, you can claim a 50% credit for qualified wages paid after March 12, 2020, through December 31, 2020. These are wages paid by businesses that have been partially or fully suspended due to COVID-19, resulting in a significant decline in gross receipts (50% decline as compared to gross receipts in the same quarter last year). For employers with more than 100 employees, only wages paid to employees who are not providing services are counted. For small employers, wages of all employees—working or not—are counted. But wages taken into account for the credit are capped at $10,000 per employee during this period.
The credit is not an income tax credit; it’s an offset to the employer’s share of Social Security taxes (part of FICA). It’s similar to the employer credit for paid leave described in another blog.
Delayed payroll taxes
An employer can opt to delay the payment of all of the employer’s share of Social Security taxes (part of FICA) otherwise owed through December 31, 2020. You then pay 50% of the deferred taxes by December 31, 2021, and the other 50% by December 31, 2022.
Self-employed individuals can opt to defer 50% of the portion of self-employment that that would be viewed as the employer share. In other words, of the 15.3% self-employment tax, 6.2% represents the employer’s share of Social Security taxes and this is what can be deferred.
Net operating loss carrybacks
The Tax Cuts and Jobs Act had ended carrybacks for unused net operating losses (NOLs); that law also limited the use of carryforwards to an 80% offset against taxable income. The CARES Act changes these rules and then some. Instead of the old 2-year carryback prior to the old law change, there’s now a 5-year carryback for NOLs arising in 2018, 2019, and 2020. What’s more, these NOLs can offset 100% of taxable income.
If you had NOLs in 2018 or 2019, you can amend older returns to obtain tax refunds. If you have an NOL in 2020, you’ll be able to file for a quick refund (Form 1045) for individuals, including owners of pass-through entities that can take their share of the businesses’ NOLs on their personal returns; Form 4466 for C corporations) even before the 2020 return is filed. Let’s say you don’t have any NOLs prior to 2020 but this year’s losses are whoppers. You figure your net operating loss and then carry it back to 2015, the fifth prior year, to offset taxable income in that year. If it’s not fully used, then apply the remainder to 2016, and so on. Refunds from these NOL carrybacks can generate substantial cash to plough back in the business now. But be sure to track year-by-year NOLs (there are rules about how to apply them in a certain order).
Other tax-related changes
There is a slew of other business-related tax changes. These include:
- Qualified improvement property. The Act makes a technical correction to the Tax Cuts and Jobs Act which had failed to change the recovery period for qualified improvement property to 15 years (leaving it at 39 years). Because of this correction, qualified improvement property now is eligible to use 100% bonus depreciation. If you acquired and placed such property in service after September 27, 2017, you may be eligible for a tax refund (for 2017, 2018, or 2019, depending on the applicable year and whether you’ve already filed your 2019 return)—but you must file an amended return to claim it.
- Business interest expense limitation. Generally, businesses are subject to a limit on the amount of interest they can deduct (small businesses meeting a gross receipts test as well as farming and real estate businesses that elect not to be subject to the limit are exempt). The limitation usually is 30% of adjusted taxable income. However, under the CARES Act, for 2019 and 2020, it’s 50% of adjusted taxable income. And, in figuring the 2020 limit, businesses can elect to use 2019 adjusted taxable income to gain a higher limitation for deducting interest payments.
- Excess loss limitation. The limit imposed on noncorporate taxpayers by the Tax Cuts and Jobs Act that disallowed losses in excess of a set dollar amount has been repealed.
- Student loans paid by employers. Up to $5,250 of payments by employers to help employees pay off student loans won’t be treated as taxable wages; they are tax-free fringe benefits (no employment taxes on them).
- High deductible health plans. Usually high deductible health plans (HDHPs), which are a prerequisite to making deductible contributions to health savings accounts (HSAs) require the insurance deductible to be exhausted before the policy covers costs. However, the CARES Act allows HDHPs to pay for telehealth services with no deductible.
- Charitable contributions. The percentage of contributions that’s deductible has been increased. For individuals, cash contributions are fully deductible (the 50% of adjusted gross income (AGI) limit is waived for contributions made in 2020). For C corporations, the contribution limit is raised to 25% of taxable income (up from 10%). And contributions of food inventory are deductible up to 25% of AGI (up from 15%). Individuals who don’t itemize can take an above-the-line charitable contribution made in 2020 up to $300.
In total, how did small businesses fare under the CARES Act? Small businesses didn’t get direct cash payments like individuals. For the most part, they didn’t get industry support like the airlines. They did get some things. Whether this is enough to keep them going and return to profitability remains to be seen.