Last night, March 25th, word came down that Congress had finally agreed upon the stimulus package that we have been referring to as the CARES Act. The Senate passed the act, and we expect the House to do the same on Friday.
Based on our feedback from our staff and client base, we would like to provide an update on the details of the SBA loans that are included in this bill, as well as the individual stimulus payments. There is quite a bit of information outside of these two items, and if you have questions or concerns regarding those please reach out to us.
Individual Stimulus Payments
The IRS is going to take a look at your 2019 tax return. Fear not, if your 2019 return has not yet been filed, the Service will grab your 2018 return instead. Once the IRS has either your 2019 return, 2018 return, or Social Security statement, it’s going to cut you a check for $1,200 (if single/$2,400 if married filing jointly) PLUS $500 for each child under the age of 17. Unlike the initial version of the bill, the payment is in no way limited to your tax liability or dependent on you having earned a minimum amount of “qualifying income.” Those on the higher end of the income scale will be shut out of the program because the payment phases out once your “adjusted gross income (AGI)” — think: total income minus a handful of deductions — exceeds $75,000 (if single, $150,000 if married). Once over those thresholds, you’ll lose $5 of your payment for every $100 your AGI exceeds those thresholds. These payments will be made between now and December 31st. If you have utilized the IRS’s direct deposit or electronic funds withdrawal features on prior tax returns, it appears that your funds will be delivered to you electronically.
Small Business Loans
In a move designed to keep small businesses afloat, the CARES Act provides that businesses with fewer than 500 employees — including sole proprietors and nonprofits— will have access to nearly $350 billion in loans under Section 7 of the Small Business Act during the “covered period,” which runs from February 15, 2020 through June 30, 2020. The loans, which are referred to as “paycheck protection loans” and are fully guaranteed by the federal government through December 31, 2020 (returning to an 85% guarantee for loans greater than $150,000 after that date), are generally limited to the LESSER OF:
- the sum of 1) average monthly “payroll costs” for the 1 year period ending on the date the loan was made (an alternative calculation is available for seasonal employers) multiplied by 2.5, and 2) any disaster loan (discussed below) taken out after January 31, 2020 that has been refinanced into a paycheck protection loan, and
- $10 million.
Payroll costs, in turn, are the sum of the following:
- wages, commissions, salary, or similar compensation to an employee or independent contractor,
- payment of a cash tip or equivalent,
- payment for vacation, parental, family, medical or sick leave,
- allowance for dismissal or separation,
- payment for group health care benefits, including premiums,
- payment of any retirement benefits, and
- payment of state or local tax assessed on the compensation of employees,
Payroll costs do not include, however:
- the compensation of any individual employee in excess of an annual salary of $100,000,
- payroll taxes,
- any compensation of an employee whose principal place of residence is outside the U.S., or
- any qualified sick leave or family medical leave for which a credit is allowed under the new Coronavirus Relief Act passed last week.
The loans will have a maximum maturity of 10 years and an interest rate not to exceed 4%. Proceeds may be used to cover payroll, mortgage payments, rent, utilities, and any other debt service requirements. The standard fees imposed under Section 7 of the Small Business Act are waived, and no personal guarantee is required by the business owner.
An additional provision in the CARES Act provides for possible deferment of repayment of the loans for a period of at least six months, but not to exceed a year.
Loan Forgiveness of Paycheck Protection Loans
This is the part of the CARES Act that should provide the greatest amount of relief, in our opinion, and should provide business owners with the cash flow to maintain their payrolls. This appears to be the biggest goal for the government, keeping employees employed and on payrolls.
A separate section of the CARES Act calls for a portion of the aforementioned paycheck protection loans to be forgiven on a tax-free basis. The amount to be forgiven is the sum of the following payments made by the borrower during the 8-week period beginning on the date of the loan:
- payroll costs (as defined above)
- mortgage interest,
- rent,
- certain utility payments.
Please also take special note of this provision as well.
To seek forgiveness, a borrower must submit to the lender an application that includes documentation verifying the number of employees and pay rates, and canceled checks showing mortgage, rent, or utility payments.
There is a provision, however, that reduces the amount that may be forgiven if the employer either:
- Reduces its workforce during the 8-week covered period when compared to other periods in either 2019 or 2020, or
- Reduces the salary or wages paid to an employee who had earned less than $100,000 in annualized salary by more than 25% during the covered period.
This reduction can be avoided, however, if the employer rehires or increases the employee’s pay within an allotted time period.
Again, this is still going to be voted on Friday, and none of this is set in stone until then. We aim to provide relevant details as we become aware of them, and are trying to target the information that is most helpful for you.
