Small and privately held businesses receive tax and financial assistance
The COVID-19 pandemic is changing the face of business operations. It has affected workers nationwide and has caused the enactment of what has been called the largest stimulus package in US history, the CARES Act, which is a $2 trillion measure that includes money for many of those affected. The total amount of money injected into the US economy is expected to far exceed $2 trillion and is offered in the form of new loans and grants, loan assistance, direct payments to families, expansion of unemployment insurance, as well as support for hospitals, veterans, education, and infrastructure projects. It is estimated that $290 billion of the benefits are delivered in the form of tax cuts. The CARES Act is formally known as the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748).
While most, if not all, of these benefits, will provide a positive impact on small businesses, there are a few tailored to keeping the lights on and employees compensated, even during periods of decreased productivity.
Which small businesses can benefit?
Businesses with operations suspended due to the COVID-19 or with a significant decline in gross receipts are eligible for an employee retention tax credit. Businesses can also defer the payment of the employer portion of payroll taxes.
Businesses with less than 500 employees are eligible for loans and grants. Businesses in the hospitality and food industry with more than one location could also be eligible at the individual store level if the facility employs less than 500 workers. Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards.
Liquidity is king. And the Federal government is taking steps to keep cash in the hands of business owners. Here are a few ways:
Tax incentives for small and privately-held businesses
Employee retention tax credit
Certain employers are eligible for a tax credit against their employment tax an amount equal to 50% of the qualified wages paid to each employee from March 13, 2020 to December 31, 2020. "Qualified wages" are limited to $10,000 per employee. The credit is available to employers carrying on a trade or business during the calendar year 2020 whose (i) operations are fully or partially suspended due to the COVID-19, or (ii) gross receipts declined by more than 50% when compared to the same quarter in the prior year. In the case of an employer that qualifies by virtue of the gross receipts test, eligibility ceases at the end of the calendar quarter in which gross receipts are greater than 80% of gross receipts for the same calendar quarter for the prior year. Tax-exempt entities are eligible if the operations are fully or partially suspended due to COVID-19. However, an employer receiving a loan through the Paycheck Protection Program (further described below) is not eligible for the employee retention tax credit.
For employers with more than 100 full-time employees, "qualified wages" are wages paid to employees when they are "not providing services" (which is not defined) due to the COVID-19-related circumstances. For businesses with 100 or fewer employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The average number of full-time employees is determined based on 2019 under Code section 4980H rules. Qualified wages cannot exceed the amount an employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period.
The 50% credit is capped at the first $10,000 of compensation, including health benefits paid to the employee, so the maximum credit per employee is $5,000. The credit is refundable to the extent it exceeds the employer portion of social security taxes (i.e., 6.2% of wages), subject to certain adjustments to prevent double-dipping.
Example: Business A has 50 employees and pays them a total of $2,500,000 in wages (e.g., $50,000 each). Employment taxes paid (using the 6.2% estimated rate for simplicity) equaled $155,000. As a result, Business A's credit limit under the CARES Act would be (50%$10,00050 =) $250,000. As a result, the entire $155,000 paid in employment taxes is creditable.
Example: Business B has 3 employees and pays them a total of $54,000 in wages (e.g., $18,000 each). Employment taxes paid equaled $3348. As a result, Business B's credit limit under the CARES Act would be (50% $10,0003 =) $15,000. As a result, Business B should expect a refund above the portion of employment taxes paid under the CARES Act.
It should be noted that in the real world, these determinations appear to be made employee-by-employee; for simplicity, we have assumed that each employee is paid the same.
Delay of payment of payroll taxes
Employers (for-profit and not-for-profit) and self-employed individuals can defer without interest the employer portion of payroll taxes with respect to their employees incurred between March 27, 2020 and December 31, 2020. Generally, the deferral relates to the employer portion of social security taxes (i.e., 6.2% of wages) or the equivalent for the self-employment tax. The payment for 50% of the deferred payroll taxes is due December 31, 2021; the payment for the remaining 50% is due December 31, 2022. However, any taxpayer who has obtained a loan through the Paycheck Protection Program and has had such indebtedness forgiven will not be eligible for the deferral.
Other tax cuts
Small and privately held businesses can also benefit from a series of other tax cuts, primarily relating to expanded use of net operating losses, allowance of excess business losses for flow-through business structures, AMT allowances, and expanded use of business interest tax deductions, each of which are being addressed in separate Withers Client Alerts. These tax cuts, in most cases, will not provide immediate financial relief other than by way of adjusting for required 2020 estimated tax payments.
Loans and grants to small businesses
With a budget of $349 billion, the CARES Act expands the current Section 7(a) Loan Program administered by the Small Business Administration (“SBA”) by introducing the Paycheck Protection Program (the “PPP”). The CARES Act also expands and provides $10 billion of additional funding for the SBA to expand the existing Section 7(b) Economic Injury Disaster Loan Program (the “EIDL Program”).
Small business concerns (“SBCs”), defined to include US businesses that are independently owned and operated, not dominant in its field of operations and within the SBA’s relevant small business size standard, are eligible to apply for loans under the PPP. Passive real estate businesses are excluded. The CARES Act expands the definition of SBCs to include any other business that employs not more than the greater of 500 employees or the number of employees in the size standard designation for the industry in which the applicant operates. Businesses in the accommodation and food service businesses that do not employ more than 500 employees per physical location are also eligible applicants for loans under the CARES Act. Furthermore, under the PPP, the applicant no longer needs to prove its inability to obtain funding from other sources without undue hardship.
Pursuant to the PPP, an applicant may apply to a bank for a loan in the amount of the lesser of $10 million or 2.5 times its average monthly payroll (measured over the one-year period prior to the date the loan is made). Also, the maximum amount of an express loan available under the existing Section 7(a) loan program is increased from $350,000 to $1 million. A PPP loan has an interest rate capped at a maximum of 4% (with a current rate now set at 1%), and a maturity date capped at a maximum of ten (10) years. However, under an SBA Interim Final Rule (IFR) released on April 2, the loan term will now be fixed at 2 years for principal and interest not forgiven as provided below. All personal guarantee, collateral, and other fee requirements that typically apply to Section 7(a) loans are temporarily waived under the PPP.
Loans obtained under the PPP may be used for: payroll costs; insurance premiums and the continuation of group health care benefits during periods of paid sick, medical, or family leave; employee compensation; rent; utilities; and interest on any other debt incurred prior to February 15, 2020. The IFR indicates that no more than 25% of the funds borrowed may be used for non-payroll costs.
Borrowers under the PPP may be eligible for loan forgiveness up to the aggregate amount spent during the 8-week period after the origination date on payroll costs, additional wages paid to tipped employees, and rent payments, among others, subject to a detailed application and documentation requirement.
Amounts that have been forgiven will be considered canceled indebtedness by a lender; however, any amount which (but for the CARES Act) would be includible in the gross income of the recipient by reason of forgiveness is excluded from gross income.
The IRS appears to have begun with the basic existing SBA loan framework and provided additional flexibility. For instance, many of the standard SBA lending requirements are waived (such as personal guarantees and/or collateral), interest is capped at 4% (although, given current interest rates, this provision appears less than helpful), fee, interest, and amortization deferrals, and lack of prepayment penalties.
Given the short time frame to apply for these loans, eligible clients should begin paperwork immediately.
Like most SBA products, the eligibility requirements for PPP loans require running a gauntlet of hurdles, including employee number (which varies by industry), affiliation rules, and payroll numbers. For more information about eligibility, please contact your Withers team.
In addition to the current eligible entities (i.e., SBCs, private non-profits), the expanded group of eligible applicants under the EIDL Program includes businesses of not more than 500 employees; any individual who operates under a sole proprietorship (with or without employees) or as an independent contractor; a cooperative with not less than 500 employees; employee stock ownership plans with fewer than 500 employees; and tribal small business concerns with not more than 500 employees. Like the PPP, EIDL Program applicants do not need to prove an inability to obtain funding from other sources without undue hardship.
Available directly from the SBA, EIDL loans are based on a company’s actual economic injury as determined by the SBA (less any recoveries such as insurance proceeds) up to $2 million. The interest on EIDL loans is a fixed rate of 3.75% and 2.75% for non-profits. The maturity for EIDL loans is a maximum 30-year term with amortization, to be determined on a case-by-case basis.
Similar to loans under the PPP, EDIL program loans can be used to meet financial obligations and operating expenses that could have been met had the disaster not occurred, including working capital necessary to carry out the business until the resumption of normal operations (i.e., payroll, rent, utilities, etc.). While personal guaranties under certain circumstances are waived, the SBA will place a UCC lien against the assets of the borrower’s business once it issues a loan under the EDIL program.
The SBA has released a sample form loan application for the PPP, and lenders can begin processing loan applications immediately. Applications for the EIDL program can be submitted on the SBA's website.
Given the first-come-first-served nature for these loans and grants, eligible clients should begin paperwork immediately.
If you have any questions or would like further information, please contact your regular Withers attorney or any of the contacts listed on this page.