Latest Developments on COVID-19 Pandemic

The latest developments on the COVID-19 pandemic as of March 27th, 2020:

The House passed and President Trump signed today the Coronavirus Aid, Relief, and Economic Security Act, or “CARES Act.” The $2.2 trillion bill establishes a $349 billion lending program for small businesses, increases unemployment insurance payments, and includes benefits for those who are unemployed because of the virus and normally would not qualify. Below is a summary of the landmark legislation:

• SBA 7(a) Loan Program
  • SBA §7(a) Paycheck Protection Program (Loans to Small Businesses under Section 1102 of Act)
    • Loans must be made between February 15 and June 30, 2020.
    • Eligible recipients include:
      • Businesses
      • 501(c)(3) nonprofit organizations, veterans organizations, or Tribal businesses
      • Self-employed individuals
    • Employers are eligible if they have 500 or fewer employees
      • Number of employees can be higher based on NAICS Code of business
      • If NAICS code begins with 72, then number of employees is per physical location
      • Number of employees is not on FTE basis. Each employee is counted no matter how many hours they work.
    • Borrower Requirements
      • Borrower must certify that the uncertainty of current economic conditions makes the loan request necessary to support its ongoing operations
      • Borrower must acknowledge that the funds will be used to retain worker and maintain payroll or make mortgage payments, lease payments, and utility payments
      • Borrower can only have one loan for these purposes.
    • Maximum Loan Amount
      • 2.5 times the sum of monthly average payroll costs incurred for 1 year period before the date on which the loan is made
        • Seasonal employers can elect to use average from 12 week period beginning either February 15, 2019 or March 1, 2019.
      • Maximum loan amount is $10 million
      • Payroll costs include amounts paid up to a prorated amount of $100,000 per individual per year:
        • Salaries and wages
        • Cash tips or equivalent
        • PTO
        • Payments of group healthcare benefits
        • Payments of retirement benefits
        • State and local taxes on compensation (I presume this is only employer taxes)
        • Income of a sole proprietor or independent contractor
          • Self-employment earnings
          • Or wage, commission, income, or similar compensation (this seems a little vague)
      • Loan proceeds can be used to pay the following:
        • Payroll costs including group health care benefits
        • Interest on mortgage obligations
        • Rent
        • Utilities
        • Interest on other loan obligations incurred before February 15, 2020
    • Loans are non-recourse and do not require collateral
    • Maximum term is 10 years from the date that the borrower applies for loan forgiveness (see below)
    • Maximum interest rate is 4%
    • Payments on the loan are deferred for a minimum of 6 months and a maximum of 1 year.
    • There are no prepayment penalties on the loan
  • Loan Forgiveness (Section 1106 of CARES Act)
    • Covered period is the 8-week period beginning on the loan origination date
    • Amount forgiven is payments of the following during the covered period:
      • Payroll costs
      • Interest payments on mortgages
      • Rent
      • Utilities
    • Forgiveness is reduced by the reduction in FTE employees from a base period
      • Base period is either February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020
      • Reduction does not apply to the extent that the employer rehires FTE employees by June 30, 2020
    • Forgiveness is also reduced by any wage reductions of 25% or greater for any employee from the most recent full payroll quarter
      • Reduction does not apply to any employee who received an annualized pay greater than $100,000 for any pay period in 2019
      • Reduction does not apply to the extent that the employer eliminates the reduction in pay by June 30, 2020
    • Forgiveness cannot exceed the principal amount of loan
    • The loan forgiveness amount is excluded from the recipient’s gross income.
• Employee Retention Credit (Section 2301 of CARES Act)
  • Employers receiving an SBA §7(a) loan are ineligible.
  • Credit applies for periods that a trade or business is fully or partially suspended during the calendar quarters due to orders from an appropriate governmental authority and during the time period when has a significant decline in gross revenue
    • The time period begins with the first calendar quarter beginning after 2019 for which gross receipts are less than 50% of the same quarter in the prior year.
    • The time period ends at the end of the first calendar quarter when the revenues return to over 80% of the same quarter for the prior year.
  • Credit is 50% of qualified wages (including qualified health plan expenses) for each employee
    • Only the first $10,000 of wages for each employee is eligible for the credit.
    • Credit is against the employer payroll taxes but any excess credit is refundable.
    • Credit is reduced by the payroll credit for required paid sick leave
• Delay of Payment of Employer Payroll Taxes (§2302 of CARES Act)
  • Employers receive loan forgiveness on an SBA §7(a) loan are ineligible
  • Covers employer FICA taxes from date of enactment through December 31, 2020
  • Payment is deferred until
    • December 31, 2021 for 50% of the amount deferred
    • December 31, 2021 for the remaining 50%
  • If an employer directs a PEO or payroll processing firm to defer the payments that PEO or payroll processing firm is not liable for the taxes. Only the employer is liable.
• Modifications to Net Operating Losses (§2303 of CARES Act)
  • The law allows a five-year carryback of losses generated in 2018, 2019, and 2020.
    • A taxpayer can elect not to apply the five year carryback period. The election is to be made on the 2020 return and is irrevocable
  • For years through 2020, 100% of income can be offset by NOL carryover or carrybacks
  • Income in years after 2020 can be offset by
    • 100% of NOLS generated 2016 or prior
      • If there are income amounts not offset by 2016 and prior NOLs, that income can be offset 80% by NOLs generated 2017 and later.
• Qualified Improvement Property (§2307 of CARES Act)
  • Changes qualified improvement property to 15 year property
  • As a result qualified improvement property is eligible for bonus depreciation
  • Change is retroactive to the adoption of the 2017 tax act
  • Prior returns can be amended to claim the depreciation

Let us know if you have any questions regarding today’s developments. We will continue to keep you up to date regularly.