This is the third and final installment of our review of the CARES Act. This feature focuses on provisions applicable to small businesses.
There are 30.7 million small businesses in the United States (defined as having fewer than 500 employees. 5.9 million of these business had employees (SBA Office of Advocacy, September 2019 FAQ's). The provisions applicable to small businesses in the CARES Act are focused on helping these employers retain as many employees as possible.
Employee Retention Credit
The section (2301) provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose:
- operations were fully or partially suspended, due to a COVID-19-related shutdown order, or
- gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
In Lubbock, retailers deemed non-essential such as malls, restaurants (for in house dining), hair salons, nail salons, and massage therapists were ordered shut down. Restaurants would qualify under the "partially suspended definition, and clearly those businesses ordered to completely close would qualify.
The IRS clarifies the partially suspended rules as follows:
The operation of a trade or business may be partially suspended if an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the operation can still continue to operate but not at its normal capacity.
If your business was not shut down or ordered partially suspended, then you will have to determine eligibility under the gross receipts decline of more than 50%. This is a fairly big hurdle to clear, but I am sure many businesses will still qualify under this event test.
Employers with 100 or fewer employees
For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
Let's see how this works
Example 1 - Calculating the credit
Dave's Deli Shop maintains three employees while his business is only able to provide curbside delivery. Dave's Deli Shop qualifies for the employee retention credit since his municipality only allows restaurants to provide drive thru or curb side delivery (business was partially suspended).
Dave pays Employee A $6,000 in Q2 / Employee B $3000 Employee C $2000
Dave will receive a credit of $5,500 for the second quarter 2020 computed as follows:
($6,000+$3,000+$2,000) X .50 = $5,500
The credit of $5,500 is claimed on Form 941 as an offset to the employer share of Social Security taxes and any excess after offsetting other employment taxes on the return is refunded to the employer.
Example 2 - Limitation on the credit per employee
Dave's Deli Shop paid Employee A $6000 in Q2. Employee A was paid $6,000 again in Q3. What is Dave's credit for Employee A in Q3?
Remember, the wage limit is $10,000 per employee for all calendar quarters. So Employee A's wage limit for the third quarter is $4,000 ($10,000 Cap - $6,000 Q2 wages = $4,000 of eligible wages for Employee in the third quarter.
Dave will receive a credit for Employee A of $2,000 in the third quarter and is computed as follows: $4000 eligible wages X .50 = $2,000. Dave has received the maximum credit for Employee A of $5,000.
Employers with greater than 100 Employees
The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above.
No Double Dipping
An Eligible Employer may not receive the Employee Retention Credit if the Eligible Employer also receives a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act (“Paycheck Protection Loan”). An Eligible Employer that receives a paycheck protection loan should not claim Employee Retention Credits.
The amount of qualified wages for which an Eligible Employer may claim the Employee Retention Credit does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the Families First Coronavirus Act.
Delaying Employer Payment of Taxes
The section (2302) allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.
Net Operating Losses
The section (2303) relaxes the limitations on a company’s use of losses. Net operating losses (NOL) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns.
Carrying back a net operating loss allows the business to go back to positive net income years and reduce such income by the loss in the later year. This will result in a refund of tax to the business.
A related Section (2304) modifies the loss limitation applicable to pass-through businesses and sole proprietors.
Qualified Improvement Property
The section (2307) enables businesses to write off (bonus depreciation) immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. The provision, which corrects an error in the Tax Cuts and Jobs Act also allows business to amend prior year returns.
There is uncertainty as to how taxpayers who elected out of the interest expense limitations under 163(j) in 2018 will be impacted by this change since the election out requires the use of the ADS life (i.e., no 15 year life and no bonus depreciation).
Paycheck Protection Loan
The Paycheck Protection Program (“PPP”) authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. All loan terms will be the same for everyone. The loan amounts will be forgiven as long as:
- The loan proceeds are used to cover payroll costs, and mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and
- Employee and compensation levels are maintained.
And yes, your read that correctly. If you meet the requirements, then the loan will be forgiven.
To obtain the loan, you must confirm the following:
- Current economic uncertainty makes the loan necessary to support your ongoing operations.
- The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
- You have not and will not receive another loan under this program
- You will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.
Payroll costs are capped at $100,000 on an annualized basis for each employee.
Payroll Costs include:
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)
- Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for group health care benefits including insurance premiums
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
Loan amounts are typically 2.5 times your average monthly payroll for the preceding 12 months before the loan month (capped at $10 million).
You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan. You will also owe if you do not maintain staff and payroll as required. I highly recommend you talk to your lender about the levels of staff and payroll reductions that will result in you having to pay back part of the of the loan.
For more information about paycheck protection loans visit the Small Business Administration website.
So, this was our last article on various provisions of the CARES Act. We will update all three articles as new information is known, and we receive more information from the IRS, DOL, and the SBA.
Our offices are in Lubbock, TX, but we serve clients throughout Texas.