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Small businesses affected by the COVID-19 pandemic can take advantage of the unprecedented aids available under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was enacted on March 27, 2020. The CARES Act provides $2.2 trillion in emergency aid to ease the financial impact of the COVID-19 crisis on individuals and businesses.
Here are highlights of certain benefits available to small businesses under the CARES Act.
The Paycheck Protection Program
The Paycheck Protection Program (“PPP”) provides new loan opportunities for small businesses. A company which together with its affiliates has 500 or fewer employees and certain hospitality and restaurant businesses and franchisees that have more than 500 employees (but no more than 500 in any location) may qualify for a PPP Loan if they meet certain criteria and certify that the Loan is necessary for the business to maintain operations in the current economic climate, and will be used to maintain payroll, retain employees, or make mortgage, lease and utility payments. The maximum amount of the loan is the lesser of (i) $10,000,000 and (ii) the sum of (A) 2.5 times the average monthly payment of the borrower’s payroll costs during the one year period before the loan is made, and (B) the prior outstanding loan amount that was made beginning January 31, 2020.
Additionally, under the CARES Act, PPP Loans will be eligible for loan forgiveness in some circumstances. The maximum eligible amount for loan forgiveness is equal to the sum of (i) payroll costs, (ii) payment of interest on covered mortgage obligations and (iii) payments of any covered rent and utilities obligations, all incurred during the 8-week period beginning on the date of the origination of the loan. The loan forgiveness amount will be reduced if there is a reduction in (a) the number of employees in the workforce and/or (b) compensation in excess of 25% for individuals making less than $100,000 per year.
Borrowing under this section of the CARES Act disqualifies a small business from taking advantage of the employee retention tax credits, as described below. In addition, if the business’s loans are forgiven, the business will be disqualified from deferring its share of social security taxes, as detailed below. However, the amounts of PPP Loans forgiven will not be considered as gross income.
A more detailed explanation on PPP Loans and the related Small Business Administration (“SBA”) interim final rule can be found here and here. The U.S. treasury department has also issued guidance on the PPP, which can be found here. The PPP Loan Application has been made available by the SBA, who began accepting completed applications on Friday, April 3rd. With a large number of small businesses expecting to qualify for PPP Loans, we recommend that small businesses prepare and submit the application as soon as possible.
Economic Injury Disaster Loans
The Economic Injury Disaster Loan (“EIDL”) program is a financial assistance program run by the SBA. Traditionally, EIDLs have been reserved for businesses that suffer economic harm due to a natural disaster, such as a hurricane. The CARES Act expands the eligibility of EIDLs to small businesses who are struggling due to the COVID-19 crisis and allows up to $2 million of loans to help pay debts, accounts payable, payroll, and other bills that cannot be paid because of the impact of COVID-19. This expanded eligibility is available from January 31, 2020 to December 31, 2020. During this expanded eligibility period, the CARES Act waives the standard EIDL requirement of personal guarantees on advances and EIDLs under $200,000, and waives the requirements that the business commenced operations at least one year prior to the disaster and first sought credit from another source. In addition, the CARES Act also permits the SBA to approve and offer EIDLs based solely on the applicant’s credit score.
Unlike with a PPP Loan discussed above, a borrower receiving an EDIL may take advantage of the employee retention tax credits available under the CARES Act, as detailed below.
In addition, the CARES Act establishes an emergency grant for EIDL applicants harmed by the current COVID-19 pandemic, which allows eligible businesses to request up to a $10,000 advance against the EIDL. The SBA will approve the advance based on the business submitting a certification under penalty of perjury that the business is eligible for the advance. Importantly, if the business’s advance is approved, but the business is later denied the EIDL, the business will not be required to repay the advance. Furthermore, since the advance is meant to quickly provide cash to struggling businesses, the CARES Act requires the SBA to distribute the advance within three days of the business’s submission of its application. The EIDL application can be found here.
For small businesses who are struggling with current loan obligations, the CARES Act directs the SBA to provide relief on certain SBA “covered loans” in the form of subsidies. Covered loans include existing 7(a) loans (including loans under the Community Advantage Pilot Program), 504 loans, and microloan products. PPP Loans are not covered loans. The CARES Act requires the SBA to pay the principal, interest and any associated fees owed under covered loans made prior to March 27, 2020 for a six-month period, which begins on the next loan payment date. If a business’s covered loan was obtained prior to March 27, 2020 and is already on deferment, the SBA will make six months of payments beginning with the first payment due after the deferment period. Lastly, covered loans obtained between March 27, 2020 and September 27, 2020 will receive the full six months of the SBA payments, beginning with the first payment due.
The SBA must make payments no later than 30 days after the first loan payment date, and the borrower will be relieved of its obligation under the covered loan to pay the amounts paid by the SBA.
The CARES Act also creates multiple new tax benefits and modifies certain existing tax provisions applicable for small businesses. The tax benefits are in the form of tax deferrals, deductions and credits. An overview of relevant tax provisions from the CARES Act is found below. A more detailed explanation of the changes to the tax code can be found here.
Payroll Tax Deferral
The CARES Act provides small businesses and self-employed individuals (except those employers who have loans forgiven pursuant to the PPP) the ability to defer the employer's share of the social security tax payments due between March 27, 2020 and December 31, 2020. Depending on the business’s number of employees, this new deferral essentially operates as an interest free loan from the US federal government until the deferred payroll tax becomes due. Any deferred social security tax must be paid over the following two years, with 50% of the deferred tax payable by December 31, 2021, and the other 50% by December 31, 2022.
NOLs and Tax Deductions
While tax credits and tax deferrals created through the CARES Act will play an important role in small businesses operations going forward, there are significant tax deductions in the CARES Act which are also relevant to small businesses.
First, the CARES Act relaxes the rules governing a business’s ability to deduct its net operating losses (“NOLs”). Under current law, the deduction of NOLs arising in taxable years beginning after December 31, 2017, generally is limited to 80% of the taxpayer’s taxable income. In addition, a taxpayer is not allowed to carry back NOLs to reduce income in a prior tax year, but could rather only carry forward such NOLs indefinitely to future taxable years.
The CARES Act temporarily suspends the existing taxable income limitations on NOLs, allowing NOLs to offset the business’s full taxable income for taxable years beginning before January 1, 2021. Additionally, the CARES Act enables NOLs arising in 2018, 2019 or 2020 tax year to be carried back five years. These modified carryback rules provide taxpayers with an increased benefit, by allowing them to potentially utilize their NOLs to offset income that would otherwise be subject to a higher tax rate in prior years (e.g., 35% corporate tax rate in taxable years prior to 2018 vs. the current 21% corporate tax rate).
Second, the CARES Act temporarily increases the amount of the net interest expense limitation, applicable for some businesses, from 30% of their annual “adjusted taxable income” to 50%. This temporary increase is for taxable years 2019 and 2020. In addition, recognizing that taxpayers will likely have significantly reduced taxable income (or even net losses) in 2020, the CARES Act allows taxpayers to use their greater 2019 “adjusted taxable income” as the base for calculating their net interest deductions for 2020. Partnerships, however, are not eligible for the increased 50% limitation, but rather each partner would be able to deduct half of its allocable share of the partnership’s excess business interest expense without limitation in the partner’s first taxable year beginning in 2020 (the other half of the partner’s allocable share of excess business interest expense would be subject to the general rule and be carried forward until the partnership produces excess adjusted taxable income or excess business interest income).
The CARES Act also temporarily suspends, for pass-through businesses and sole proprietors, the excess business losses limitation for taxable years beginning before January 1, 2021 (i.e., losses in excess of $250,000 or in the case of a joint return $500,000). This change allows for the offset of business losses arising during such years against nonbusiness income, which may allow non-corporate taxpayers with previously limited excess business losses to obtain refunds of 2018 and 2019 taxes. Non-corporate taxpayers with business losses arising in 2018, 2019, and 2020 can further enjoy the five-year carryback without regard to the excess business loss rules.
Finally, to encourage charitable donations, the CARES Act increases, or eliminates in certain cases, the limitations on charitable deductions by a small business that itemizes its tax deductions (rather than taking the standard deduction). Such current limitation for corporations is increased from 10% to 25% of the corporation’s taxable income for deductions for certain cash charitable contributions for 2020. For sole proprietor small businesses who itemize their deductions, the 60% of adjusted gross income limitation is suspended for 2020 for cash contributions to qualified charities. It is also relevant to note that, for small businesses, the limitations for contributions of food inventory is increased for the 2020 tax year from 15% to 25% of its taxable income.
Employee Retention Tax Credits
The CARES Act creates an employee retention tax credit for businesses negatively affected by the coronavirus pandemic (other than those businesses that received a PPP Loan). If a business has (i) operations that were fully or partially suspended due to a COVID-19 related governmental shutdown order, or (ii) gross receipts for the calendar quarter (beginning with the first calendar quarter after December 31, 2019) that are less than 50% of gross receipts for the same calendar quarter in the prior year (until gross receipts exceed 80% of gross receipts for the same calendar quarter in the prior year), the business is eligible for a tax credit against its applicable employment taxes. The credit is equal to 50% of qualified wages (which includes health benefits and certain additional allowances related to the business’s cost of maintaining a group health plan paid) and is capped at $10,000 of compensation per employee per quarter (i.e., such credit cannot exceed $5,000 per employee per quarter). Under this provision, the CARES Act has different rules for what qualified wages are based on the number of full-time employees.
For businesses with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to a COVID-19 shutdown order. In contrast, for businesses with 100 or less full-time employees, all employee wages qualify for the credit, regardless of whether the business is open or closed due to a shutdown order. Additionally, regardless of employee count, qualified wages will not include wages taken into account for the purposes of payroll tax credits corresponding to paid family leave or paid sick leave under the Response Act (for further discussion on the Response Act, please click here). The credit is only available for wages paid or incurred from March 12, 2020 through December 31, 2020.
The CARES Act accelerates the refundable “alternative minimum tax” or “AMT” credit recovery schedule for small businesses and provides that the remaining balance of the business’s unused AMT credits may be fully recovered by a refund claim either with respect to its taxable year beginning in 2019 or (at the business’s election) with respect to its taxable year beginning in 2018.
Once the business submits the AMT Credit refund application, the Secretary of the Treasury must, within a 90-day period, review the application, determine the overpayment amount, and if there is an overpayment amount, credit or refund the amount to the business.
White & Case has partnered with Lawyers for Good Government Foundation, a US network of non-profits, in its recent launch of the Small Business Remote Legal Clinic, a virtual clinic offering pro bono legal consultations for small business owners to help them understand and act upon the options available under the CARES Act and other grant and loan programs.
As part of this program, qualifying small businesses – those with 25 or fewer employees – will receive guidance regarding available federal, state, and local programs which may offer grants and/or loans, through telephonic pro bono legal consultations, intended to help small business owners dealing with diminished revenues or closures due to COVID-19.
The pilot program will launch in New York City in partnership with the City Bar Justice Center, and will expand to additional major cities across the country in the weeks ahead.
To learn more about Global Citizenship at White & Case and our Global Pro Bono Practice, please visit www.whitecase.com/global-citizenship.
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