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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.